A polished strategy is a pre-requisite for investing your capital in any real-estate deal. To find the right strategy, is this what you need to ask yourself? –
How much profit will I make?
No, the right question to reach a winning strategy is- What is my risk-taking capacity?
With every investment and its various strategies, comes Benefit and Risk. But what matters is, how much are you willing to put at stake?
Value added deal is when some real value/ worth is inflated into a property to make it suitable for the residents, which in turn increases the expected return. Value add properties are usually class B or C properties with a need of repairs and renovations. These properties are entitled to a greater value achieved either by increasing rents or by cutting down the expenses. Asset managers should look at a property as a whole and use various combinations to determine the justifiable higher rent possibility.
How is value added?
Improvements and renewals go a long way in putting a property out at a rate higher than the market value. Among the hustle-bustle of life, residents/buyers preferably go with a property which has been lately refurnished and has additional amenities, so that they don’t have to look around. Offering one thing is not enough now, additional benefits and plus-on are what attracts income, and a key part of it, is increasing rents through valuable additions. You can either have the exterior renovated or the interior upgraded or both. From repainting the unit to installing a washer, from resurfacing the pavement to chic furniture, from decorative window panes to modern lighting packages; there are tons of renovations options you can opt for. Being a multifamily property, you also get to take advantage of economies of scale. A collective renovation costs runs down to almost $4000, but the collectible rent is set on each unit. Thus, increasing the per unit profit.
Finding an underrated non-yielding property that can be transferred into a beautiful high rent grossing unit can be quite a task. The syndicator is supposed to not only find the right location, but a market where renovations can be carried out at a discounted price with a future possibility of a boom. A market where there is a sure shot at growth- growth in rent, growth in acquisitions, growth in income. High-End class A properties leave a little to no room for appreciation, therefore sponsors/syndicators aim for hidden class B and C units. A classic class C unit is offered at a lower price due to its basic layout and outdated interiors. A buyer will be interested in a certain increase in rent if he/she can get a cheap housing with moderate or little spiked rent amount, considering the improved quality of the unit.
Sometimes the holding period on value added properties can be significant but besides the stated benefit of increased cash-flow, there lies an opportunity for Appreciation. For multifamily deals the payable amount is determined by the Captilization Rate. Cap Rate is the purchase price divided by net operation income. NOI is the income earned after all expenses are paid off. The property with higher NOI, at a given location, will sell at a higher price generating even higher amounts of Return on Income.
It is easy to get lost among the plethora of strategies that can be opted for a single real-estate investment. That is where we come in! This is a blog which will help you get a clearer understanding on the Value-Added Investment Strategy, although you should always make a choice for yourself. Schedule an appointment with Mr. Prashant Kumar to discuss your investment goals and aspirations.