When investing in any kind of commercial real estate, the number one rule is: expect risks. Yes, there are rewards, and depending on where and how you invest, they are substantial But there is always an element of risk, and it is critical that we keep this at the forefront. Not so we shy away from opportunity, but so we seize it with a clear understanding of all the factors that can drive or derail success. That said, value-add real estate investments represent significant benefits. Why is this an advantageous avenue to explore?
What Is Value-Add Property?
First, what is a value-add property not? It is not turnkey. Plug-and-play real estate property is typically categorized as Class A, meaning it has been built in the last ten years and is in great condition. A value-add property is going to need some work! It requires some level of improvement to grow its value. A property, for example, may be rundown or neglected. While the “bones” may be solid, you will need to rehab, renovate, or revamp elements in order to realize your goal of a strong return on investment.
Here, the risk, of course, is the financial strain that a value-add property can bring, depending on its condition. This is why asset selection is so critical. The reward is that when done strategically, you can increase income and/or reduce and optimize expenses to generate cash flow relatively quickly. How?
- Increase Rents
With value-add property investments, you need to add value before you can recoup value. In other words, to justify rent increases, you need to make strategic improvements. The good news here is that rents are often under-market, and even small updates and renovations can have a big impact. For example, repainting, resurfacing the parking lot, updating appliances, or installing modern hardware allow you to attract quality tenants and legitimately correct rental rates.
For example, simply replacing old washers and dryers with new, energy-efficient models can result in a rent increase of $30-$45 a month per unit. It does not take long to recoup the investment and to begin profiting.
- Developing New Sources of Income
Think beyond rent. How can you add property amenities that will generate revenue? Gyms, storage units, reserved parking, bike racks, and other value-adds can increase income on a regular basis – and again, you will be able to attract higher quality tenants who are willing to pay for these extras.
- Using a Ratio Utility Billing System
Instead of charging tenants a uniform flat rate for utilities, this system allows you to bill back for utility usage based on the number of occupants in a unit and the size of their unit. This accomplishes two goals: reducing expenses and generating more income.
- Optimize Operations
Conduct a line-by-line review and analysis of your expenses. Every bit of fat you can trim is income. For example, if you have model units that prospective tenants can tour, you’re taking them off the market. Reducing the number of model units puts that money back in your pocket.
Payroll is often another area ripe for optimization. Are you fully utilizing each employee? Is there redundancy? Can you right-size operations to cut costs without sacrificing quality or responsiveness?
- Anticipate and Counter Risks
As mentioned, there is risk involved in any commercial real estate investment, and value-add properties are no exception. Consider the risks carefully. For example, there will need to be some construction work done in order to increase value. But this can also mean an onerous expense and cost overruns. You can counter this risk by careful property selection and analysis, as well as strategically planning improvements and vetting contractors/subcontractors.
Another effective way to mitigate risk, and optimize reward, is to work with a trusted partner. For over three decades, CGI Strategies has been tirelessly, aggressively committed to acquiring value-add properties and reimaging them to provide maximum benefit for our investors and our communities.