When choosing a real estate investment, it’s not just the location you need to pick – you also need to determine what type of property you want to invest in.
Value-add multifamily properties are widely popular, especially among savvy investors looking for opportunities to maximize their chances of appreciation and passive income. The concept of value-add apartment investing strikes a balance between steady cash flow and capital appreciation.
Read on as we break down why value-add real estate is such a good investment, and how to select the right market and firm to invest with.
What Does “Value-Add Real Estate” Mean?
There are three types of commercial real estate opportunities to pick from:
- Core multifamily properties: Class A properties in the best conditions and locations and offer lower risk and lower returns.
- Value-add multifamily properties: These hold a moderate status in the risk-reward spectrum; a sweet spot of balance for investors.
- Opportunistic multifamily properties: Distressed assets that need complete renovations, making these riskier investments.
Value-add real estate is a type of investment strategy that involves purchasing a property with the intention of improving its value through renovations, upgrades, or operational improvements.
The goal is to increase the property’s income potential and overall value.
Multifamily value-add investment opportunities do carry 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.
How Does Value-Add Real Estate Investing Work?
In many cases, a value add real estate investment strategy would involve the following phases:
- Acquire the property: The firm you invest with will seek out the best value-add investment opportunities to acquire.
- Make improvements: The firm will then make a series of value-add improvements, such as new appliances; new HVAC systems; updated windows; improved common areas; enhanced landscaping and curb appeal; and on-site services like gyms, pools, or daycare.
- Re-brand the property: Now that the property has been enhanced, the firm may elect to reposition it in the market and even raise rents to increase the income it generates.
By investing with an experienced firm, you stand a chance to benefit from the increased income and appreciation potential that value-add real estate brings.
Is Value-Add Real Estate a Good Investment Strategy?
Value-add real estate can be an excellent investment for those seeking to maximize returns and build wealth through real estate. By improving a property and increasing its value, investors can benefit from higher rental income, increased equity, and strong appreciation potential.
Value-add real estate does come with a few risks to be aware of though:
- It requires upfront capital for acquisitions and renovations
- It involves a higher level of involvement and expertise
- It relies on the ability to execute the improvement plan and attract higher-paying tenants
While value-add real estate can be an excellent investment strategy, it’s best to invest with an experienced team with a plan for a return on the property.
The Advantages of Investing in Value-Add Multifamily Real Estate
There are many benefits to investing in value-add real estate, some of the most prominent we’ve seen over the years are:
- Cost-effective to acquire: Compared to newer properties in city centers, value-add multifamily buildings in secondary markets are more cost-efficient investments for investors.
- Forced appreciation: By making improvements to the property, investors can proactively increase its value, rather than relying solely on market appreciation. 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.
- Higher rental income: Upgrading units and amenities allows investors to charge higher rents, resulting in increased cash flow.
- Improved occupancy rates: Enhancing a property’s appeal can attract more tenants and reduce vacancy rates, further boosting income. Investors can expect 90-95% occupancy rates, especially when the property is in a strategic location.
- Potential for substantial returns: Successful value-add investments can generate strong returns through a combination of rental income, forced appreciation, and eventual sale profits.
Thanks to these benefits, value-add multifamily real estate presents an attractive opportunity when compared to other options.
How We Find the Right Market for a Value-Add Multifamily Investment
Value-add real estate carries many potential benefits with it, 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.
Ready to Invest in Value-Add Multifamily Real Estate?
If you’re ready to reap the many benefits of investing in a Co-GP Fund then take the next step to invest in the Catalyst Fund III by Colony Hills Capital. Colony Hills Capital has previously sponsored two multifamily Co-GP Funds: Catalyst Real Estate Fund and Catalyst Real Estate Fund II.
Investors are welcome from September 2023 to February 2025, this is a unique opportunity that you will not want to miss. Learn more about Catalyst Real Estate Fund III and take the next step to join today.