Updated: Jan 9
Passive investors know that there are two ways to generate income from a multifamily property investment: the first one is net operating income, or “NOI” (which is the income you have left from rent and additional fees after you deduct all expenses, but before you paid the debt on the property). The second one is property appreciation. For most, property appreciation is the “icing on the cake,” because investors enjoy appreciation when the property is ultimately sold.
Experienced investors tend to buy value-add deals, because those deals offer more potential appreciation than a core property - one that is in excellent condition and doesn’t require any upgrades or repairs. And for properties that undergo a full renovation plan, there is even more potential for appreciation.
Start with an Underperforming Asset
The best properties for value add are those that are underperforming. Their rents are below the average market rents their competitors charge, or perhaps they have above average vacancy rates. Some additional sources of revenues are overlooked, from laundry facilities to reserved parking, for example. Perhaps there has been poor property management in place, which operates the property at a much higher budget than needed. Whatever the reason, the property is underperforming.
Another strategic approach is to look for Class-C properties that are located in B areas and can be repositioned to a Class-B property. The results would be the ability to attract a better class of tenants as well as higher rents. This would be the ideal repositioning strategy. There is one caveat, however: don’t expect a Class-C property built in the 1960’s to be easily repositioned into a Class-B multifamily property - especially if it’s located in a Class-C area. It is possible, however, takes a lot of time and money to do so. I personally prefer light to moderate renovation over a full repositioning, since it is much less risky strategy. Also, be aware that a major repositioning may require relocating tenants while work is underway. These costs can be significant, so be sure you know what the costs involved will be and how long the project will take to complete.
Conduct A Market Analysis
The cornerstone of any repositioning attempt is to do a comprehensive market analysis of all comparable units within a 3-mile radius of the property. This will provide a good overview of rent potential in the competitive areas. A good comp is one that has similar vintage (is 5 years older or younger than the subject property), has similar size category (has more or less similar unit count. You cannot compare a 20-unit building to a 200-unit building, but 100-unit can be compared to a 200-unit building), and similar amenities. Generally speaking, you want to compare assets that share the same class and in proximity to one another. It’s also a good idea to view competitors’ websites or visit the properties to see their curb appeal. We use Yardi Matrix, but there are many other paid services that provide that information, such as CoStar and the affordable reonomy. Craigslist is another source of comparable rents in the market.
Analyze Prior Marketing Efforts