The What, Why and How of Value-Adds
In commercial real estate, many turn to multi-family properties as their source of income, as you can collect rent from as many tenants as there are in the building. But at the beginning of this journey lay a choice, how do you choose which properties to invest in? Today we’d like to focus on one of the answers to this question: value-add investing.
The definition of value-add investing is “purchasing underperforming assets at a discount and seeking to capture hidden value through property upgrades and renovations”, according to Equity Multiple. Once these properties have been upgraded, you can then charge the appropriate amount of rent to reflect the upgraded features and amenities of that property. The article also mentions that in the end the investor may exit the investment and sell the property to a different buyer, although that is not a mandatory requirement of the value-add strategy.
If you can find a decent multifamily unit (as in, no structural issues that could pose a problem through either massive costs or dangers to health and safety, or both) in a good area that people generally want to be in, there are a myriad of upgrades you can add to the property to add value.
The first upgrade to consider is what exists inside the units themselves. Do they look outdated? Do they have the “must have” appliances such as in-unit washer/dryer? How old are the AC units, and are they reliable? Then there’s things like reliable internet and cell reception, which in the age of work from home, are considered invaluable.
Something else to consider would be to upgrade the communal amenities that are offered. Is there a gym space? Or a room dedicated to exercise, with equipment available to use or to rent? Or how about indoor or outdoor communal areas where people can sit to work, study, or just eat their lunch? Is there a coffee shop/cafe located within the building, possibly with a discount for residents, as an incentive for them to use it? These things might not seem like dealbreakers, but they are definitely enhancements that can put your property above someone else’s on a tenant’s list when they’re shopping around for housing.
Another enhancement would be to incorporate technology wherever you can. Forbes speaks to how the everyday consumer now wants everything as fast as they can get it, be it food for delivery or “concierge” services within their building. They also give a helpful reminder to take deliveries into consideration, in their example, “...the property manager explained that the room holds 400 packages, yet they receive triple that number per day.”
With upgrades/enhancements such as the ones mentioned above, any investor can add value to their multifamily property, be it one they already own, or are looking to purchase and enhance themselves. Always remember to choose the upgrades or enhancements that make the most sense for your building, your area, and your desired clientele, to attract the type of tenants you want.