How You Can Profit from Value-Add Investments in Multi-Family Real Estate
Published by Trey Stone on
Sep 20, 2020 5:04:00 PM
Value-add investments are extremely popular in multi-family real estate. When done properly, you can see a solid return on these types of investments.
What is a Value-Add Investment?
A value-add investment is exactly what it sounds like. It's applying this basic principle to real estate: fixing something up = increased value. Value-add investors seek deals where they can create this increased value through property upgrades. This is most successful in multi-family real estate where renters are willing to pay significantly more for an upgraded apartment.
These types of deals really require an investment into the property to improve the lives of renters in order to make a profit from the deal. Value-add investments are good for the community including all those who live there and also the surrounding areas.
Choose the Right Market for This Investment Type
Finding the right deal for this type of investment is crucial. You have to choose a property that makes sense for a value-add investment. You have to consider the competition in the area and what they are and are not doing. If you’re fixing up your property and no one else in the area is doing the same thing then it won’t attract people to live there. It’s not because your property isn’t nice but because the neighbor’s isn’t or the entire neighborhood isn’t.
Real estate investing is a supply and demand business and you want the competition doing well because that means the area is doing well. If you can add value to a property and you’ve seen it happening in that same market then the market will sustain it. It’s also important to look at other parts of the area. If retail centers in that market are empty, that doesn’t bode well for the market. You want to see that the apartments are in a thriving area and that there are jobs. If people are working and there are jobs, everyone does well.
Choose the Right Location for This Investment Type
Choosing a location for your investment is equally as important as choosing the right market. Houston, Texas is an ideal location for this type of investment strategy. Houston provides the opportunity to invest in Class B & C properties without the threat of increased competition. The B & C asset classification means they are older apartments, typically from the 1970s or 1980s.
If you invest in these older properties and freshen them up, you can easily increase rents. If anyone builds new apartment complexes, they won’t be classified as B & C properties and therefore, they won’t directly compete with you because the target customer will be different for a Class a property.
Upgrades for Multi-Family Properties
“Improving the quality of the tenants life, that’s what allows you to increase the rent.” -Trey Stone
To make a property more appealing, add value, and command a higher price than what you paid for a property, you have to do some basic things to upgrade that property. When you upgrade apartments in this type of investment you have to be careful because you still have to make it work for the market the apartments are in. You have to ensure you can collect enough rent to see your return on the investment. If you over do it and spend too much on the upgrades, you might not get enough increase in the rents to cover the expenses.
These improvements are certain to add value to your multi-family property:
Upgrade the Leasing Office
Refresh the pool and other prime community areas
Replace electrical fixtures
Upgrade plumbing fixtures
Investing with a Partner or Group
If you are new to real estate investing or even to this type of investing, it’s always best to choose an experienced partner or group. There is risk involved in any investment but with value-add investments you have to truly invest to see a return. To eliminate as much risk as possible you want to work with a lead investor who knows the area, has an established track record, and who understands the multi-family real estate industry.