Updated: Jan 9
Many passive investors who are looking at investment opportunities, often look to commercial and multifamily investment properties. But it’s a well-known fact that every type of commercial property comes with its own set of benefits and risks.
Approaching commercial real estate investments with the thought of “how much profit will I make” is not the proper approach. Instead, you need to answer the question of, “how much risk am I willing to take.” And even though you may consider yourself a “passive” investor, you still need to be a well-informed one. That includes educating yourself about multifamily investing, attending meetings and participating in calls with the syndicator. Most importantly, ask questions whenever you have any. Here is a more detailed look at how a passive investor should manage their investments.
So what is a value add deal?
Unlike a turnkey property, which usually has investment grade “class A”, which is a new building or a building that has been built in the past 10 years and that is in top condition, value add properties require improvements and other strategies to bring out their value. On the other hand, they also offer an opportunity for investors to make greater profits compared to turnkey investments. The reason that some properties are referred to as “turnkey investments” is because nothing really needs to be done to the property in terms of improvements.
Value add properties achieve greater value by either increasing income or by reducing and optimizing expenses. The investors involved in a value-add property often work to increase the cash flow as fast as possible, while keeping costs at a minimum. Value add properties are consistently attractive to multifamily property investors for obvious reasons.
Here are the three main tactics to increase the property’s income:
Tactic #1: Increasing rents
Part of the equation to increase income is achieved by increasing rents. To justify the increase, syndicators raise rents by improving the property. Often, the rents are below market rates, but improving the property is how most value add deals work, since syndicators need to justify the new rents, which they can do by renovating the property.
Improvements run the gamut from exterior renovation to upgrading the interiors and can cosmetic or heavy. Exterior renovation often includes exterior paint, renovating the clubhouse and the gym and resurface the parking lot. Interior renovation usually includes stainless steel appliances, granite countertops, decorative backsplashes, paint, new vinyl or hardwood floors, lighting packages and hardware. The cost per unit can run as low as $2,500 and as high as $9,000, with $6,000 being the average cost in many cases. The exterior and interior renovations and improvements help to attract higher quality tenants who are able to afford the increased rent.
Another strategy includes adding washers and dryers for tenants’ use, as it’s the number one amenity sought out by renters. The premium (rent increase) from washer and dryer in units ranges between $30-$45 a month.
An additional upgrade tactic is to offer storage units to tenants for additional fees. Even simple storage closets that can hold a bike and some boxes go for up to $30 per month on top of the monthly rent.