NEW PERSPECTIVE ON VALUE-ADD COMPARED TO BUY-AND-HOLD INVESTMENT STRATEGY
Creating a positive revenue stream from real estate investing all comes down to understanding the ins-and-outs of your market sector and how it influences the specific piece of property you buy into. Approaches vary significantly among investors—some follow the classic buy-and-hold strategy, looking to create income from long-term tenants; whereas others look to resell a property in a ‘value-add’ approach as soon as appreciation trends upwards after they’ve made significant improvements.
While both investment strategies have their pros and cons, the value-add play is becoming more and more popular amongst new and experienced real estate investors alike. Here’s a quick overview of the value-add approach, plus a market spotlight of the New Jersey real estate scene to give you the inside scoop of finding the perfect property to add to your investment portfolio.
Understanding the Real Value in a Value-Add Play
Buying and holding a property necessitates consistent—and not to mention costly—maintenance to keep both existing tenants satisfied and make the space attractive for new renters. What’s more, investors may need to fork over even more money to add business amenities to cater to a specific business or industry.
These two necessities—regular maintenance and significant improvements—drastically impact investors’ profit margins. That’s why value-add moves are becoming an increasingly attractive option in the real estate investment sector. The key is to find properties where the improvement expenditures can be largely mitigated by the subsequent rise in rent cost from current and prospective tenants—a factor which also ramps up the future going rate when an investor eventually opts to sell the property. Done the right way, multiple value-add moves enable investors to diversify and expand their property portfolio while maximizing their profitability.
Sizing Up Potential Value-Add Properties
The ideal value-add properties are underpriced to similar properties, or ‘comps, in the same market. This typically translates to dated real estate that has fallen into a state of relative disrepair.
After identifying a property, successful investors need to put in some sweat equity prior to pulling the trigger on purchasing. If the investment is a multi-tenant residential property, research what the current rent rates are, tour the individual units in person to decide what improvements are needed, and chat with the tenants to get their input as to what they are looking for in terms of updates and features.
The analysis doesn’t end just with the target property—sizing up the market comps is a key aspect of the value-add strategy. If the selected property has a lower rental rate than the competition, identify what’s dragging the asking price down and address those shortcomings when it comes time for making repairs.
Doing this homework up-front may be time consuming, but it will pay dividends down the road when it comes time to maxing out the ultimate return on investment because investors can focus their improvement funds on aspects that will equate to a healthier bottom line for the given industry or market tenants the investor wishes to target.
Is the Value-Add Approach a Match for You?
Generally speaking, value-add plays are perfect for investors dealing with commercial properties that aren’t looking to keep retail real estate on their books for long spans of time. While there is a plethora of investors who apply this approach to residential properties, the same investment tenets carry over for commercial investors as well. Similar to a residential value-add play, commercial investors need to balance keeping current tenants happy while simultaneously finding ways to elevate the collective resale value of the property and minimizing operating costs. If the property isn’t fully occupied at the time of acquisition, investors will need to improve the property to bring in new high-paying tenants that will flourish long-term in the given market.
If you would like more insights about the real estate market, real estate loans, or need a hard money options to fund your next investment there, then don’t hesitate to contact Park Rock Capital.