Commercial investors have their choice of investment strategies, including core, core plus, opportunistic and value add. Many prudent investors choose this last option as it provides an effective way to invest in a property and realize returns quickly. If you are considering supplementing your investment portfolio with commercial real estate, real estate expert Arthur Nachman can assist you. Here is everything you need to know about value-add investments.
What Is a Value-Add Investment?
A value-add investment is one in which an investor renovates or redevelops real estate to reposition the property at a higher price point. This often involves making significant improvements to a property in order to yield a higher rent from tenants. This strategy focuses on increasing the net operating income associated with a project and focuses on acquiring properties that already have a built-in cash flow from existing tenants but increases this cash flow by making the property more attractive.
What Are the Characteristics of Value-Add Properties?
The focus on this investment is to find ways to improve the property or decrease operating expenses. Value-add properties may possess a variety of characteristics, such as:
- Currently have management or operational problems
- Require physical improvements
- Have problems with capital constraints
- May be poorly leased or about to turn over leases
- Leased at below market rents
- Not be properly maintained or managed
How Is Value Added?
Investors may make improvements to the property that enhance its quality so that it appeals to other types of tenants. Some ways that value is added to these properties include:
- Making physical improvements
- Increasing efforts to lease vacant space in the property
- Improving property management
These improvements may spur:
- Higher rental rates
- Better quality tenants
- Greater occupancy rates
- Greater tenant satisfaction
- Reduced operating expenses
- Refinanced at more favorable rates so that equity holders can receive returns
Advantages of Value-Add Investments
Value-add investments have the potential for higher returns due to their appreciation in value. Making investments in these properties can allow property to be regraded and appeal to a new set of commercial tenants and increased revenue. In this way, investors can select properties that do not currently yield the highest commercial rents in the city but improve the property so that the rates become competitive with these markets. This ultimately involves less capital investment than investing in a property that is already fully developed. Additionally, investors have greater control over their investment because they decide how much money to put into the property and for what purpose. They can create targeted strategies that are focused on increasing potential cash flow.
Additionally, investors can realize significant tax advantages. Using pass-through investment vehicles like LLC equity investments can help them avoid double taxation and allow investors to obtain the full benefit of any available tax incentives. Members of the LLC can receive flow-through and periodic distributions while minimizing tax liability.
Investors may opt to sell the property once they have increased the property’s net operating income and may receive a significant increase on their original investment due to the better positioned property.
For more information, contact Arthur Nachman at Arthur.Nachman@lnf.com or call (703) 864-2900