How to add value to your apartment building

If you already own apartments and have been investing you’ve heard of “value-add.” You might have even invested in a few value-add deals yourself.

However, if you are new to the world of commercial real estate investing, value-add is a type of investing strategy. Just like investing in turn-key properties, distressed properties, and ground up construction these are all different types of investing strategies. Each strategy has its own pros and cons. It just depends on the type of return you are looking for and how much risk as an investor you are willing to take.

For value-add deals an investor is usually looking at Class B or Class C property with upside potential. That is to say an apartment complex that has outdated interiors and is below market rents. The property is usually at 85% occupancy or higher. (Below 85% occupancy and the deal is more distressed than value-add). What makes the deal great is the ability of the individual investor to see how he or she can add value. Could a valet trash service be implemented? Could low flow toilets and low flow faucets be installed? Could empty garages be converted to storage units to bring in additional income? These are all great examples of how an investor can add value and ultimately add to the bottom line or the Net Operating Income [NOI].

Often times with value-add deals the most common example seen is renovations. That is because this usually has the biggest pay off and results in tremendous upside. Let’s say there is an apartment complex with 50 units. To make this example simple let’s say the purchase price is $7.5M. All of the 50 units have not been renovated in over 10 years and the property is currently at 85% occupancy. The property also is around $400 below market rent as a result. This property just hasn’t been taken care of. Maybe the current owner is neglecting or failed to realize it, or just has a property management company that doesn’t take care of the property like it should. These properties actually exist today. For this example let’s say it is going to cost $500,000 to renovate all 50 units or $10,000 per unit. Currently the monthly rent is $1,400.

Fast forward 24 months all the renovations have been completed and the property is now at 90% occupancy or 45 of the 50 units are rented. The rents have also increased $400 on average now renting at $1,800. What happen? Well, essentially we spent the cost to purchase the apartment plus another $500K in renovations. The result we have added an additional $216,000 a year in income or cash flow!! 

What is the property worth now? Assuming we bought the property at a 4 CAP. We added an additional $5.4M in value so the property is now worth $12.9M! 

This is the beauty and power of investing in value-add deals. We are paid each month in cash flow while we wait for the forced appreciation through renovations and other improvements in the operational budget. 

Have questions about this?

These types of deals exist and happen all the time. Feel free to email me at sean@jamesonassetmgmt.com I look forward to speaking with you.

The best investment on earth is earth!

~ Sean

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