Commercial Property "Value Add" Investing Secrets
The concept 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 allows you to increase 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 three bullet points carefully you will see they follow the age old rule: "You must sow before you reap." You have to put Value In before you can pull Value Out.
And there are two MAJOR keys to success with a Value Add Property.
1) The Property Has To Have Problems You Can Fix.
Classic Value Add Properties are ones with Problems. The bigger the problems the larger the opportunity 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 looking good ... you will realize a major profit at sale.
More typical examples are the 1980's complex with a 25% vacancy rate in serious need of a makeover.
In every case the problems have to be ones you can fix. An inexpensive property with lots of opportunity to add value will lose you money if you and your property manager can't fix the issues that beat down the previous owner.
2) You Must Buy At The Right Price.
In this world where every agent and seller wants your purchase price to be based on on proforma - what the property's NOI would be if it were fully occupied - the biggest danger in Value Add Investing is overpaying for the property.
Remember to always buy on actual numbers.
No matter how much the seller points out to you that this property's NOI would be $100K/month if it were fully rented ... if the NOI is now just$60K/month ... that is what you pay for AND you get an additional discount from Market Cap because of the amount of rehab needed.
Just think... If you overpay for the property you have to add value just to get your money back at the sale. Drive a hard bargain. Use Due Diligence to ferret out every issue that will cost money to address and use this information 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 problems they can fix and what it will cost in time and dollars. They may even know this particular property and its historical issues.
If you don't have a Local Property Manager on board who is confident in your ability to address the property's problems and make a profit ... Don't Do the Deal !
And remember two more things about the concept of "Value Add"
1) You can add value to ANY Property.
Just think of all the ways 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 additional sources of income (RUBS, etc.)
- Bringing in higher 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 very flexible. This is the property where you can often get an Owner Carry or other favorable terms on the purchase.
Here's to your investing success.
(ArticlesBase SC #742843)
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