The idea of the “Value Add” property is central to success as an individual Commercial Property Investor.
“Value Add” means a property where you can do something as the Property Owner that enables you to boost the Net Operating Income (NOI).
- You “Add Value” to the property
- This drives up the NOI
- Which serves to “Add Value” to the price of the property at the sale.
The Added Value is reflected in your Profits over the life of the project.
If you look at these 3 bullet points carefully you will see they follow the age old rule: “You must sow prior to you reap.” You have to put Value In before you can pull Value Out.
And there are two Significant keys to success with a Value Add Property.
1) The Property Has To Have Issues You Can Fix.
Classic Value Add Properties are ones with Issues. The bigger the troubles the larger the chance for adding value and realizing profits.
The obvious example is the abandoned, half burned down wreck of an 80 unit apartment complex. When you take it from zero NOI to 80% occupied and searching excellent … you will recognize a main profit at sale.
More typical examples are the 1980′s complex with a 25% vacancy rate in severe require of a makeover.
In each case the troubles have to be ones you can fix. An inexpensive property with lots of opportunity to add value will lose you cash if you and your property manager can’t fix the issues that beat down the previous owner.
2) You Must Get At The Appropriate Price.
In this world where each agent and seller wants your buy price to be based on on proforma – what the property’s NOI would be if it had been fully occupied – the biggest danger in Value Add Investing is overpaying for the property.
Remember to often purchase on actual numbers.
No matter how significantly the seller points out to you that this property’s NOI would be 0K/month if it were fully rented … if the NOI is now justK/month … that is what you pay for AND you get an extra discount from Marketplace Cap simply because of the amount of rehab required.
Just think… If you overpay for the property you have to add value just to get your funds back at the sale. Drive a challenging bargain. Use Due Diligence to ferret out each and every problem that will cost money to address and use this info to drive the price down or get other favorable terms.
Your Secret Weapon here is … Your Property Manager
A top notch local Property Manager knows what issues they can fix and what it will price in time and dollars. They may well even know this particular property and its historical problems.
If you don’t have a Local Property Manager on board who is confident in your ability to address the property’s difficulties and make a profit … Don’t Do the Deal !
And remember two far more things about the concept of “Value Add”
ƒ) You can add value to ANY Property.
Just believe of all the techniques you could possibly increase the NOI. What would you have to do to the property to give you a high probability of …
- Raising rents
- Raising occupancy
- Developing extra sources of income (RUBS, etc.)
- Bringing in higher top quality tenants and decreasing turnover
- Lowering expenses (Utility contract, lower concessions)
2) Value Add Properties have Sellers in Distress.
These Seller’s are not selling for a profit. They are in pain and wanting out and can be extremely flexible. This is the property where you can typically get an Owner Carry or other favorable terms on the buy.
Here’s to your investing success.