Reviving Real Estate: The Profitable Path of Value-Add Investing

What is value-add real estate investing?

I’ve heard agents scoff at the term as if it’s a trendy, made-up term or a unicorn.

It sounds complicated.

It’s not. This is our primary investment strategy.

The easiest way to think of value-add opportunities is this: Are current rents for a property substantially below market rates?

If they are, there is a value-add opportunity.

It’s that simple.

But, here’s where it gets a bit more difficult.

Why are the rents low? And what will it cost to obtain market rents?

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There are two main reasons that rents are lower than surrounding market rents.

1) Poor management

2) Poor property condition

Poor management is my favorite and it’s the most profitable value-add opportunity. It takes minimal capital to improve the operations and increase the rents.

Examples of poor management include:

-not screening tenants well, causing nuisance tenants to alienate good tenants, driving rents down.

-poor response time to maintenance and other issues.

-poor understanding of current maintenance costs and rents, thinking that low rents are sustainable.

A quick side note: Often, a property owner with low rents becomes an inadvertent slumlord, simply because they aren’t collecting enough rent to afford properly maintaining the building.

It you have good management practices, you can often stabilize a building and obtain market rents with minimal cost.

Unless poor management has lead to poor building conditions as well.

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Value-add opportunities from poor building conditions can be lucrative, but they have to be considered carefully.

You will need to know the renovation budget needed to get the property into market-rent condition, and factor that into your purchase price.

It could simply be a matter of upgrading the kitchen and bathroom because they bring back fond memories of your grandmother‘s house.

Grandma may have loved that décor – in the 90s. Tenants do not. Hence, low rents.

Beware. The renovations could require very expensive upgrades. New roof, windows, wiring, plumbing.

You will have to know your budget before purchasing and consider whether you are prepared to tackle the project.

We’ll discuss renovation budgets in more detail another time.

For now, understand that value-add investing is not a complicated concept.

In a hot market, like we are experiencing at the time of this writing, finding a value-add investment priced at a profitable level can be the true unicorn.

Keep looking and be creative. Opportunities are out there.

Happy Investing!