How do I define a value-add opportunity in a multifamily building?
There are several different strategies available when it comes to purchasing an apartment complex. The most common one is so-called “Value Add” strategy. Let me start by clarifying what is “value add”. It is actually as simple as it sounds: the building(s) has areas for improvement that can increase its value due to the building’s current physical or economic condition. “How can value add be achieved?”, you ask.
Well, improvements can be achieved by either increasing income, decreasing expenses, or by doing both! While this is a very smart strategy, adding a value to an apartment complex will take time.
The more improvements you’d like to make, the more it will take to achieve them. But at the end of the day, it is all worth it!
There are several criteria that may be utilized to further refine a value add opportunity, so let’s review them one by one:
1. Interior & exterior renovations – If a building was constructed over fifteen years ago, and has not been well maintained then there is definitely opportunity to increase the building’s value by updating the exterior and the grounds. Similarly, the apartments in this building may also be outdated and require some work. This work may range from minor cosmetic updates like changing the carpeting or painting the walls to major ones like replacing bathroom and/or kitchen. Either way, whether you modernize the property inside or out, this is a good way to indirectly increase its value.
2. Low rents – If the previous building owner kept the rents lower than other similar property owners in the area, then there is a possibility of increasing the rents after completing some or all of the units’ upgrades. By increasing the rents, not only would you increase the Operating Income for the investment, but you also increase the value of the building overall by default.
3. Extra facilities – Let’s say an apartment complex consists of multiple buildings that are spread around on several acres of land with free space in between the buildings. you can potentially utilize some of that free space, for example by adding a pet park on it. While for the most part, a pet park will require minimal expenses, such as installing a fence around the territory and maybe adding a bench inside the park; the income it will bring could be tremendous since it will attract pet owners to the building who will gladly pay pet fees on top of the rent.
4. On-site management for larger properties – When a building consists of around a hundred units or more, it makes sense to provide an in-house property management company. Farming out property management is a significant saving, and in addition you do not have to establish your own best practices for property management.
While these are just some of the primary examples of value add opportunities, there are definitely many more that may be applicable on case-by-case basis. I wanted to use the examples above to show my readers how a few small changes can add up, and increase the value of your investment.
