Value-add multifamily investments are widely popular. Especially among investors in today’s low-yield market environment of commercial real estate.
Modern real estate investors choose value-add commercial real estate investments over stable assets due to their potential to gain more after renovations and infrastructure upgrades; the concept of value-add apartment investing strikes a balance between steady cash flow and capital appreciation. Consider value-add investments in secondary markets to provide commercial real estate investors a low risk-adjusted return. And, do inquire about your depreciation advantages through direct investment vs a REIT.
Multifamily Investment Strategy: Value-add
Three commercial real estate investment strategies are pivotal to understand: core, value-add, and opportunistic.
- Core multifamily properties are Class A properties in the best conditions and locations and offer lower risk and lower returns.
- Value-add multifamily properties hold a moderate status in the risk-reward spectrum; a sweet spot of balance for investors.
- Opportunistic multifamily properties are distressed assets that need complete renovations, making these riskier investments.
Once you understand these strategies, as a potential commercial real estate investor, you can then execute a general asset stabilization strategy.
A value-add strategy involves purchasing a property at a reasonable price and investing money in its physical improvements to bring it up to the market standards. Investors focus on maximizing the value of the property before exiting. Therefore, multifamily value-add investment opportunities have higher levels of risk. Such strategies can involve significant capital funding for property upgrades.
Consequently, working with investment professionals who are active in the field of finding the best multifamily value-add opportunity is essential to securing a healthy income yield.
Investing in Value-Add Multifamily Properties
The foremost advantage of value-add multifamily investments is their strategic acquisition costs. Compared to newer properties in city centers, value-add multifamily buildings in secondary markets are more cost-efficient investments for investors.
Besides generating a healthy cash flow, value-add multifamily properties undergo a significant amount of value appreciation during the hold period.
Stable core assets gradually compound their rate of appreciation annually. Value-add multifamily properties boost the investors’ return on investment (ROI) compared to core properties. Although the initial cash flow may not be adequately high compared to the Class A assets, operators can eventually balance the operating expenses of the property with increased rental returns. Typically, value-add investors aim for a steady cash flow after the stabilization of the property. Then, the investor may choose to hold it or sell it. Investors can expect 90-95% occupancy rates, especially when the property is in a strategic location.
Consider value-add multifamily investment as a means of receiving and providing a higher return than core assets.
Finding the Right Market for a Value-Add Multifamily Investment
The multifamily value-add investment strategy generates attractive risk-adjusted returns for investors. When an investor strategically performs property upgrades, they can capture untapped revenue streams in addition to significant rent increases. Indeed, the property gains value, produces the highest returns, and compensates for upgrade expenditures with more profits. However, investors must also carefully select the right market to map out a realistic ROI for a value-add multifamily project. Selecting the right investment partner is key to bringing value to your investment.
Year after year, the rental demand for multifamily properties increases in regions realizing surges in population growth and home prices; these recession-resistant properties generate higher rents with increased occupancy rates.
Investing in value-add multifamily projects in secondary markets with the right investment partner can be very profitable. With long-term and short-term asset holding periods, commercial real estate investors can realize increased appreciation, high ROI, and lower cap rates post-renovation. Reach out to Colony Hills for more information.