Value-add is a commonly used, powerful real estate investing strategy. It’s the concept of taking something old and making it attractive again. Our focus is on executing value-add and opportunistic design renovations on large scale, premium real estate to accelerate growth and returns for our investors.
With built-in architecture and design expertise, construction management experience, premium property management, and realty efficiency, we’re able to successfully transform otherwise overlooked properties.
As we put our vertically integrated stack of expertise and proven track record to use on each property within the fund – transforming it from unusable to highly desirable – we’re harnessing the impressive power of value-add.
A High-Level Overview of Value-Add Real Estate
You’re likely familiar with fix-and-flip real estate investing. This is the strategy used in many single-family home rental properties. You simply buy a run-down property, remodel it, and then sell it at a profit. Your sweat equity and ability to see a diamond in the rough is rewarded monetarily, and the new owner gets an updated, move-in ready home.
Value-add commercial real estate deals follow a similar model, but on a massive scale. In this article, we’ll focus on the example of multifamily assets, although any type of property can be strategically developed into a timeless beauty.
The value-add process of an apartment complex is generally where hundreds of units get renovated over years at a time instead of just one single-family home over a few months. This puts investor capital to work and carries the potential to generate millions in rent each year rather than just tens of thousands as would a residential real estate investment.
At Premium Property Trust, our value-add properties focus on new urbanism. We purchase commercial properties that are currently under performing in a competitive market. We completely overhaul the architecture, using our award-winning designs, to create sustainable mixed-use assets. New interest is ignited, in not only the property, but the whole community at large.
A traditional value-add property may have peeling paint, outdated appliances, or overgrown landscaping, all which affect the curb appeal and the initial impression that a potential renter will form. Simple cosmetic upgrades can attract more qualified renters and increase the income the property produces. In our case, we take updates to the extreme. For instance, we may purchase an overlooked industrial building and transform it into luxury apartment units with a high-end commercial workspace.
All value-add improvements have two goals:
- To improve the unit, therefore positively impacting both the tenants and the communityTo increase the bottom line, positively impacting the investors.
Common value-add renovations can include individual unit upgrades, such as:
- Fresh paint
- New cabinetry
- New countertops
- Upgraded appliances
- New flooring
- Upgraded fixtures
In addition, adding value to exteriors and shared spaces often helps to increase the sense of community:
- Fresh paint on building exteriors
- New signage
- Dog parks
- Covered parking
- Shared workspaces
On top of all that, adding value can also take the form of increasing efficiencies:
- Green initiatives to decrease utility costs
- Shared cable and internet
- Reducing expenses
Why We Love Investing in Value-Add Properties
When done well, value-add strategies benefit all parties involved. Through renovations, we provide tenants and the surrounding community a more aesthetically pleasing property. With updated architecture and more attractive community spaces, the property becomes much more valuable, allowing higher rental rates and increased equity, which greatly impacts investor satisfaction.While the property-beautification process and the fact that renovated property is more attractive to tenants is straightforward, let’s dive into why value-add investing is a great strategy for investors.
Understanding Yield Plays
To fully appreciate value-add investments, we must first understand how yield plays work. In a yield play, investors buy a stabilized property and hold it for the monthly cash flow and potential future profits.
Yield play investments are when a property is purchased that’s in decent condition and it’s currently cash-flowing. The property provides a recurring stream of income from the rents collected, that’s the yield. Of course there’s a hope to sell it at some point for a small profit, but there is no business plan to renovate, force appreciation, or improve the asset to gain larger profit at the sale. Yield play investors simply hold property in anticipation of potential market increases. The problem is, there’s always the chance of experiencing a flat or down market instead.
The Potential of Value-Adds
You can see value plays and yield plays are quite different. In a value-add investment, Our vertically integrated teams transform an asset with creative design and efficiency improvements to substantially increase the value of the property. This level of renovations, however, does carry an increased level of risk.
The potential upside of value-add deals are attractive to investors, since renovations are an opportunity to make a prestigious investment in the community. By taking physical action steps that improve the property and increase its value, value-add investors don’t just hold the asset hoping for market increases. They diligently create vibrant and imaginative places for residents to work, live and play, forcing increases through improving the asset and raising rents.
Since commercial properties are valued based on how much income they generate, making property improvements increases the income of the asset, which increases investors’ equity in the deal.
A hybrid yield + value-add investment is ideal. This is where an asset gets improved, cash on cash yields are high and the market increases simultaneously. Investors’ capital fuels the value-add renovation portion and the market growth adds appreciation.
Even in the case of hybrid investment, there are increased risks associated with any value-add deal.
Examples of Risk in Value-Add Investments
In multifamily value-add investments, common risks include:
- Not being able to achieve target rents
- Higher vacancy rates than expected
- Renovations running behind schedule
- Renovation costs exceeding initial estimates
How To Mitigate Risk
When evaluating potential commercial real estate investments, seek an opportunity with capital preservation as a top priority. The plan should have a number of risk mitigation strategies in place. Our risk mitigation strategies include:
- Conservative underwriting
- Proven business model
- Experienced, vertically integrated team
- Multiple exit strategies
- An open fund means capital is raised on an ongoing basis
Value-add investments can be a powerful strategy to build your wealth. Just understand that these investments also come with serious risks. Risk mitigation strategies are crucial in protecting investor capital.
Leveraging Value-Add Investments
As you know, no investment is risk-free. The most fulfilling investment opportunities will, despite the risks, provide great benefits to the community and investors.
By properly leveraging investor capital, value-add investments allow drastic improvements to be made in commercial properties. These improvements create cleaner, safer, more imaginative places to work, live, and play.
As a discerning investor, you’re concerned with your capital being used efficiently, receiving transparency into each deal, and positively impacting a community with environmentally-responsible and resource-efficient designs.
Rather than relying solely on market appreciation, our partnership provides excellent opportunities to passively participate in intentional development and capital growth. With the PPT pre-REIT, you have many more options when it comes to safeguarding capital and maximizing your returns.