What Is Value-Add Investing In Real Estate?
In the real estate market, there are plenty of ways in which you can spend your money. Different people take different approaches to invest in properties, but have you ever heard of the term 'value-add investing'?
It's a popular term that's thrown around the industry, but what exactly does it mean? More to the point, after finding out what it means, is this a beneficial approach to take? All shall be explained in this short guide!
What is Value-Add Investing?
Effectively, this approach is when you take properties that have yet to reach their full potential and help them reach it. There are many reasons a property might not be at its proper market value, but your job is to make improvements that can add value to it. Thus, the property finally reaches its potential and you make a profit.
It differs from property flipping as value-add investments tend to only be commercial, and they require more work over - potentially - a longer period than a simple flip would.
How do you add value to properties like this?
Creating value is easier said than done, but it depends on the type of property you're looking at. Generally, there are a few common ways in which you can add value to properties in this category. As real estate expert Jason Cohen writes, making a series of structural and organizational improvements can be used to boost commercial properties. This can include property renovations, as well as improvements to property management.
In essence, it's all about creating a property that delivers a better living experience for those inside it. Improved management means the service is better, which can help you increase the rental value and make it worth the money. Of course, the interior and exterior design of the property will always help, so these things all come together to make the property as good as it can be.
What are the pros and cons of value-add investments?
As you can tell, there are some advantages and disadvantages to this investment tactic. The advantage is that you can usually purchase properties for a very low price. After all, they are not at their true market value, so a bargain can be found.
To go alongside this, you can also make a sizable profit if you manage to add value to your investment. This can boost the resale price if you choose to sell it on, but the value you add should also increase rental prices and desirability, meaning you can generate a steady cash flow from the investment.
The only downside is that this is a high-risk endeavor. There's no guarantee that you will be able to add enough value to the property for it to be profitable. So, it becomes a case of weighing up the risks and seeing if it is worth making this investment or not.
At the end of the day, this is just another method in which you can invest in real estate. Don't rush into an investment like this; spend time analyzing the market and identifying the perfect value-add investment opportunities.
