If you’re browsing real estate listings looking to buy an investment property, you might see the term “value-add opportunity” thrown around a lot. This is a phrase often used by sellers and agents to incentivize investors to buy. But the last thing you should do is take their word for it. It’s important to determine yourself whether it’s really a value-add opportunity. Here’s what you need to know about this common marketing term for investment properties.
What Does “Value-Add Opportunity” Mean?
When used by a real estate agent or a seller, a value-add property means that the buyer could add value by improving the structure or operations. This could mean upgrading, enhancing, or adapting the property to charge higher rent or improving operational efficiency in a variety of ways.
How to Tell Whether a Property Has Real Potential
The idea of a value-add property sounds great, but the problem is, not all the properties advertised as such are going to provide value-add potential. False advertising is an unfortunate reality even in the real estate investing world.
For instance, if you’re looking at an apartment building that is only five years old or it’s had extensive renovations in the past few years, you’re probably not going to be able to get higher monthly rent from tenants. Or if it’s in an undesirable area, you’re not going to be able to get significantly higher-paying tenants no matter how much you upgrade the structure.
Here are the steps to telling whether a property is truly value-add or not.
First, learn about the property and its performance and do some market research.
What is the current owner charging for rent? Is it below market, at market, or above?
If they’re charging below market for rent, what is the reason for that? Is it because it needs cosmetic upgrades and better management (solvable problems) or is it because of an undesirable location (not easily solvable)
Consider the market. Does the building have what tenants are looking for in that particular area in terms of unit size, price range, etc.?
Consider the work needed and do the math. Figure out how much renovations could cost, how much revenue could increase, how much the value of the asset could increase, and the payback time for the investment. Are there potentially major issues that will cost more to fix than what it’s worth?
Does the Investment Make Sense?
In a nutshell: Are there issues with the property that are causing it to not reach its full potential? Furthermore, do you have the ability and the finances to solve these issues? If so, it’s likely that the property is truly value-add. Get some work done on the property, hire a great property manager, and problem solved! You’ve successfully improved your asset.
If not, it doesn’t mean that it isn’t a viable investment opportunity. It may still be a great option for you. If you’re happy with how the property is performing for its current owner and you want to keep that going, go for it! But if you’re looking for a diamond in the rough that you can polish, keep searching for the ideal value-add investment property.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.