The value of multifamily properties is determined by multiple factors. You have to consider the aestethics, quality and long-term potential of the property. If you want to maximize your value-add investment, you must learn how to raise its market value.
Value-add multifamily properties are both a high-return and high-risk investment because they haven’t yet reached their full potential. On one hand, strategic improvements and updates can yield a great market price. On the other, the amount of time, money and energy needed for renovating a multifamily property can end up costing you more than you gain.
Investing in a value-add property requires more energy and resources than other types of multifamily investments, and it comes with different risks. It’s significantly more labor-intensive and will require more expertise, so do your research before taking the plunge on a value-add multifamily investment.
What is a value-add property?
Value-add properties are real estate that needs corrective action. These properties may be worn or dilapidated, or simply do not meet the market’s contemporary set of standards. They may be suffering from multiple issues like maintenance problems, low lease rates, below-market occupancy and substandard facilities. In short, value-add properties are the least desirable types of housing in the market. Oftentimes, they’re valued at a much cheaper price compared to other properties.
As an investment, value-add properties have great potential for high returns, especially if it’s a rental property. Deals in multifamily properties have significantly increased throughout the years, especially for value-add apartments. Real Capital Analytics reported a total of $32 billion in sales for value-add apartments in 2018.
In 2020, even with the COVID-19 pandemic disruption, the demand for rental properties still increased significantly. Multifamily properties, in particular, are becoming popular in urban areas with limited space. Apartments, townhouses and condominiums are being favored over traditional homes. However, the construction of these units is more costly, which is why value-add properties are a better option.
Transforming underperforming multifamily properties
One investment strategy is to fix up a value-add property and offer it as a rental unit with a higher net operating income (NOI). This is cheaper than building a unit from scratch and would be a smaller project to tackle. Once improved, the investor can package and resell the property to another investor looking for a steady income stream.
When choosing a value-add multifamily property, you’ll be focusing more on the amount of construction or renovation it needs. The less intensive the renovation project, the lower risk the investment will carry. Examples of easy projects include expansion of the property, replacing fixtures or systems, or upgrading the design.
Increase the value of underperforming multifamily properties
Value-add real estate has a lot of potential in ROI compared to core properties. However, it will take serious commitment and hard work to get those returns. Here are some tips on how to maximize value-add investments:
Find out what needs fixing
The bigger the change, the more cost it incurs. Before you decide on drastic renovations, do some research on the property first to avoid unnecessary spending and to solely focus only on necessary work.
First, what is the property’s After-Repair-Value (ARV)? This will give you a clear idea of the upgrades you have to do to boost its value. The ARV formula simply sums up the property’s current value and the estimated cost of renovations. Take the time to study and formulate a financial strategy.
This also applies when the property has already been underperforming in the past. Assess the current NOI to pinpoint where you’re losing money. If there’s a high vacancy rate or tenant turnover, then clearly something is turning off prospective renters from the place. Investigate what’s causing the poor performance and try to resolve the issue.
Analyze the market
On top of figuring out what needs to be fixed, also consider the factors surrounding it. These external factors include the neighborhood, the competition and customer behavior, and they can dramatically affect the performance of your property.
Conduct a market analysis, and compare how you fare among nearby properties. This will help you determine if your property is within a healthy range in terms of price, vacancy and rental rate. With a market study, you can better strategize on the upgrades.
Upgrade the aesthetics
One big tip on property renovation is to maximize the curb appeal of the property. Nowadays, exterior aesthetics play a major role in the marketability of a property. Upgrade the exterior and the common areas to capture the attention of prospective buyers. The curb appeal sets the entire tone for the threshold, which greatly impacts how buyers perceive it.
Improving the curb appeal may include enhancing the landscape, repainting the walls, and adding amenities like a pool or patio. A prettier property will appeal to target renters and incentivize current renters to stay longer.
Spice up the marketing efforts
In this modern age, branch out your marketing campaign to take advantage of many platforms and reach a wider audience. You can tap into modern digital marketing platforms and combine them with traditional practices, like word-of-mouth, which still go a long way. Referrals from previous clients and networks are also helpful.
Sometimes all it takes to sell a property is to simply make it visible, whether it’s through the Internet or a good old real estate sign. Invest in a good marketing campaign and you’ll surely generate good returns on the property.
Change how the property generates income
If nothing seems to be working, perhaps it’s time to revise the original plans. Look for alternative ways to generate income on the property. Although renting is a popular choice, it’s not the only one. Perhaps there’s more profit in leasing the property or selling it to other investors. Explore all other options when the current operation isn’t working.
Invest in multifamily properties
Property investing is challenging and requires a lot of time and energy to browse through various properties and filter out those with the most potential to yield a high ROI.
Acquiring multifamily housing loans is also a long and often tedious process. You’ll need multifamily financing to build your real estate portfolio, and the best path to success is to find a way to make the financing process quick, efficient and convenient.
Whether you’re looking to purchase multifamily properties or planning to renovate a value-add property, MultifamilyDebt.com can help! We offer a wide variety of loan options for investors, and can match you with loan options that are right for you in just a few minutes. Complete our quick online application to see what you qualify for, or reach out to us at email@example.com for your inquiries.