Why “Value-Add” Multifamily Investing is the Way to Go

by | May 4, 2018 | Passive Income

Most people are under the impression that real estate investing involves purchasing apartments, houses, or land parcels in strategic locations and waiting for them to appreciate for a good return on investment. However, if you were to explore the real estate arena, you’d find that this investment avenue has a much more widespread scope. And, “Value-add” multifamily investment is one of the most interesting options. Read ahead to understand everything you need to know about how to go about making money with this channel.

Understanding Value-Add Multifamily Investing

The concept of value-add is actually very simple. Here’s how:

  1. You identify multifamily apartment complexes that are already earning a good return on investment (ROI), but have extensive potential for appreciation.
  2. Next, you explore the factors that are holding back the property value from rising to meet expectations.
  3. You zero in on the improvements you can make in the property so that the units attract tenants who will be interested in paying higher rents.
  4. Having identified such multifamily complexes, you invest time and funds in them to make the necessary improvements.
  5. Soon the property will start to generate a higher return on investment with more tenants moving into the vacant apartments and willing to pay higher rents.
  6. You may also find that the property has appreciated in value thanks to the renovations you’ve made.

By the time you’re ready to sell the apartments, you will have created an impressive profit margin.

Existing Tenants Can Help You Assess the Value of Your Improvements

If you’re considering stepping into the value-add multifamily investing arena, know that the process may take a several months to complete since renovations take time and you can only work on vacant units. Further, you may want to experiment with different areas for improvement to test the kind of response your receive from tenants.
Experts in value-add multifamily investing recommend that you consider putting in new countertops for the kitchens or renovating the bathrooms completely. Adding hardwood floors to replace worn out flooring or fresh coats of paint can go a long way in upgrading the units and giving tenants more value for the rent they’re paying.

Begin by making improvements in a few units and invite existing tenants to check them out. Chances are that they like what they see and would be interested in paying higher rents. You could also contact tenants that are have indicated their intentions of moving out. The newly-renovated units might just entice them to stay. In this way, you can retain existing tenants and avoid incurring the costs of marketing your multifamily apartments to attract new residents.

Why Multifamily Apartment Owners Sell

You may have questions that if the multifamily complex has so much potential, why would the current owners want to sell? Several factors can influence the decision of the owners to cash in on the investment. Here are some of them:

  • The value-add processes could need the investment of substantial funds if the property needs extensive rehabilitation. If the owners have already taken a large mortgage, they may not be interested in raising and sinking more funds into the investment.
  • Loans need to be paid off within a fixed time frame. If the owners cannot keep up with the payments or cannot get refinancing, they may opt to sell off the multifamily apartment complex.
  • Further, not all owners are willing to divert the operating profits towards remodeling the units.
  • Renovations and upgrades are possible only with apartment units that are vacant. Owners need to be able to sustain the down time that can last up to several months when the apartment units are not generating an income.
  • Renovations and remodeling need dedication, time, effort, and expertise that not all owners are willing to devote.

Do keep in mind that in an attempt to attract investors, current owners may choose to renovate a few units to project the potential of the entire complex in an attempt to push the selling price of the property higher.

Remodeling Investing is Directed towards the Appropriate Targets

If you’re considering buying a multifamily complex and remodeling the units, targeting the right features of the units is highly essential. For instance, investing in the roofing, siding, gardens, landscaping, and other cosmetic improvements may not necessarily attract more residents. Tenants are more concerned with the actual facilities and conveniences available in the complex where they could live.
Accordingly, you may want to invest in improvements that make paying higher rents worthwhile. Here are a few upgrades that prospective and current tenants are sure to appreciate.

  • Investing around $700 to $800 in a laundromat with a collection of washers and dryers in the apartment building can push up rents by $50. You’ll also earn an income from the charges tenants pay to use the facility.
  • Allocating parking spaces for a small charge of around $20 is another convenience renters love, especially if the space is just outside their homes.
  • Trash collection services is yet another facility that residents will welcome. You could hire the services of third party companies that carry away trash and also keep the neighborhood clean. Each unit would generate a charge of $25 per month of which you could pay the services $12 leaving you with a profit of $13.

These are only a few examples, but they should suffice to show you how value-add multifamily investing can help you generate an additional income simply by making conveniences available to the tenants. Of course, you always have the added advantage of the property rising in value because of the facilities available within the apartment complex.

Is Value-Add Multifamily Investment Worth It?

On an average, investing in a value-add multifamily complex should earn a passive investor around 9% cash on cash yearly return and an IRR over a 5 year exit strategy of 15% yearly return or better on your investment. You’ll generate profits from various channels such as:

  • Cash flow or profits from the rent left over after paying off the operating costs and mortgage
  • Rise in value of the property thanks to the remodeling and other improvements
  • Higher rents received from tenants
  • Earnings from the facilities and amenities you provide to the tenants

Does value-add multifamily passive investing sound like something you would like to do? The most attractive part of this investment avenue is that you don’t need the expertise to undertake the project on your own. All you need to do is look for the experts who are well-versed in this form of real estate investing. Simply make the funds available to them and they’ll take care of the rest.

Would you like more information about how value-add investing works? Contact us at CAMBE Capital and talk to our expert consultants. We also welcome queries at this number: (715) 797-2557.