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.
Market Insight—The Three Best New Jersey Investment Property Markets
Weehawken: Talk about a hidden gem. While property values continue to skyrocket and price potential buyers out of the market in the NYC commuter-desired areas surrounding Hoboken and Jersey City, the Weehawken market is beginning to see increased demand due to spillover from buyers looking for a better bank for their buck. From an investor’s perspective, cap rates are favorable in comparison to Hoboken and a recent property tax revaluation in bordering Jersey City is expected to increase the number of sellers in the market—meaning investors could snag a great deal in this already upward-trending community.
Bayonne: Looking to south Jersey, the property values in Bayonne have risen consistently for the past eight years and the area is attracting prospective renters and buyers with an eye for value buys. This influx is attributable to the many new construction projects in both the commercial and residential sectors taking place across Bayonne. Add to that a wave of attractive municipal upgrades including a Rte. 44 west spur and ferry service connecting the Jersey peninsula with Staten Island and Manhattan, and you get the perfect recipe for successful real estate investing well into the future.
Sparta: Focusing in the northwest region of the state, where New Jersey natives rub shoulders with retiree and commuter transplants looking for an escape from the hustle and bustle—and most importantly the high real estate prices—of neighboring New York City, the lake-strewn Sparta commune offers affordable, rustic living. Elevated property tax rates in New York City and the eastern portion of New Jersey have seen a migration of residents into the Sparta area. And while the average house prices are still about half of neighboring Bergen and Monmouth, the up-and-coming infrastructure and improved schools is putting Sparta on the radar of potential buyers and could be an ideal market for investors to get a foot in early to maximize their profit margin.
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 New Jersey market, or need a hard money lender to fund your next investment there, then don’t hesitate to contact Park Rock Capital.