What is Value-Add Real Estate?

Within the business of real estate syndications, there are a number of investment strategies that sponsors and investors have at their disposal. Each investment strategy comes with its own set of characteristics, benefits, and risks. Which route an investor chooses depends largely on the amount of risk they are looking to take on, whether or not they want to receive cash flow, and how long they want their money invested in the asset. At Lark Capital, we focus mainly on what is called a value-add strategy, as it provides a reasonable benefit and risk balance. Value-add real estate investing consists of finding a property that has a stabilized occupancy rate of 85% or higher (usually but could be lower in heavy value add) and an opportunity to make improvements to the property that will increase its value. An increase in value can be accomplished by improving both the physical and operational features of the asset. The goal is to reposition the property so that rents can be increased, vacancies filled by quality tenants, and expenses reduced, all of which result in an increase in value.

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Physical improvements can be broken down into interior and exterior improvements. Interior improvements we have performed, include upgrades to the units such as new paint, appliances, cabinets, flooring, countertops, plumbing, light fixtures, and the addition of washer/dryer connections. Our recent updates to the exterior of our properties include new siding, paint, roofs, landscaping, parking lot resurfacing, upgraded amenities, and common area improvements.

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In addition to improving the property itself, improving the operation of the property is an important component that should not be overlooked.  An improperly managed asset can result in the loss of large amounts of money over time. Operational improvements include reducing expenses like utilities, maintenance, and repairs. A first step in improving operations often includes replacing the property management team. An ideal team consists of individuals that will maintain communication with problematic tenants to collect rent, prioritize filling vacancies, and stay on top of issues with the property itself. In addition, a strong marketing strategy is a key to attracting new tenants and filling any vacancies quickly.

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Value-add investments give sponsors a unique opportunity to enhance a property's value and rebrand it with the intention of maximizing the returns their investors will receive. Finding the right sponsors with experience and a strong business plan is perhaps the most important step an investor can take before investing in a multifamily syndication.

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Disclaimer: The information provided in this post is for educational purposes only and should not be considered as advice. Always consult with a qualified professional before making any financial decisions.