Value-add real estate investing involves buying undervalued properties and improving them to increase their value. Cherif Medawar calls that “taking a property to its highest and best use.” This can include renovating or updating the property, increasing its income potential, repositioning it, enhancing its location, or adding amenities. By making these improvements, investors can increase the property’s value and sell it for a higher price, or charge higher rent, than they paid.
What are Some Examples of Value-Add Improvements?
Examples of value-add improvements can include renovating a property to make it more attractive to tenants, adding additional rental units, changing or repositioning the use of the property from office space to residential or retail space, improving the surrounding area or increasing accessibility, or adding amenities such as a gym, café, or co-working space.
Why Do Investors Use Value Add?
Value-added real estate investing has become popular with investors because it allows them to have control and make money on their investments without waiting for years or even decades before seeing a profit. For example, if you purchase a property that needs work, you can sell it much sooner than if it were in pristine condition when purchased.
How Does Value-Add Real Estate Investing Work?
Value add investing is a strategy that focuses on buying properties below market value, improving them, and selling them for more money or tenant improvements to increase the rents. If you’re investing in value-added real estate, it’s important to understand how it works.
- Identify a property that has value-add potential. The key to successful value-add investing is finding a property with a potential improvement. The type of property you buy will determine how much potential there is for increasing its value.
- Conduct due diligence on the property to assess its condition and potential for improvement. This includes conducting a property inspection, reviewing financial statements and market data, and researching zoning and other regulations that may affect the property.
- Develop a plan for improving the property. List all possible improvements that can increase the value of the property. Use a spreadsheet or other tool to track them as you go along. This will help you prioritize what needs to be done first and track your progress as you reach your goal.
- Obtain financing for the property, if necessary. This may include obtaining a mortgage or other funding to cover the cost of improvements. Like structuring a syndication or real estate fund.
- Implement the plan for improving the property. Once you have decided on the property and secured financing, start your renovations by choosing the right contractor. Consider hiring someone with experience renovating homes in the area and ask for references from other homeowners who have used their services. Once you have chosen your contractor, discuss your renovation plans with them and ensure they are realistic and within budget, so there are no surprises along the way.
- Sell the property or hold onto it and collect higher rents. Once the property has been improved, the investor can choose to sell it for a higher price or hold onto it and collect higher rents from the improved property.
What Are Some Benefits of Value Add Investing?
Some benefits of value-add investing include the following:
- The potential for higher returns. Investors can earn higher investment returns by improving a property and increasing its value.
- The ability to create value. Value-add investing allows investors to take a property that may be underperforming or need upgrades and turn it into a more valuable and attractive asset.
- The potential for income growth. Investors can increase their rental income or value by making improvements to a property, leading to higher returns over time.
- Flexibility in terms of property type and location. Value-add investing can be applied to many property types and locations, from residential to commercial and urban to suburban.
- The potential for tax advantages. In some cases, the costs of improving a property can be tax-deductible, providing additional benefits to investors.
One of the most overlooked things with real estate is the value added. It allows you to buy cheap and sell for more. It’s one of the most excellent methods for creating wealth through real estate. This guide will teach you all about value add investing, the benefits of doing so, and how you can do it yourself. If you would like to get in more detail on how to take each type of commercial real estate (13 types) to their highest and best use, check out Cherif Medawar CRE Round Table online training. He has an entire section devoted in each module for 20+ ideas per property type. You can also get information on syndications, partnerships and JVs with the Secrets to Syndication course. Check it out! cherifmedawar.com.