Value-Add Real Estate
MOST BUYERS DON’T REALLY WANT VALUE-ADD REAL ESTATE
When investing in property, commercial real estate investors tell us they want to look for a “value-add” investment. A value-add real estate investment is when the property is under-performing in some way and the investor can improve the property in order to improve the value.
In reality though, many newer investors don’t truly understand what a value-add real estate investment actually means, or they simply don’t recognize one when they see it.
If a commercial property is under-performing, in need of repairs, showing negative cashflow, or has poor bookkeeping records, most self-proclaimed value-add investors will immediately walk away with nothing more than a glance.
Value-Add Real Estate or Turnkey?
While the truly experienced value-add investors don’t operate under these faulty ideals, we’ve seen a trend among newer investors saying they want value-add but actually expecting turnkey.
The whole point of value-add investments, however, is that the property has obstacles. Without any negative circumstances, the property is not value-add real estate.
A true value-add investor doesn’t evaluate a commercial real estate investment on where it is but where it could be.
Negative cashflow, for example, is likely the result of some other underlying issues. Perhaps the owner-occupant is undercharging rents to themselves and other tenants. Perhaps the property is in bad condition and can’t bring in market rents. But simply glancing at the rent rolls, determining that the cashflow is poor and walking away will bring you no closer to a value-add investment property. Why? Because it is within these difficulties that value-add investments are found.
An experienced value-add commercial real estate investor sees opportunity where others only see headaches. An experienced investor will dig into the numbers with a treasure-hunter mentality, rather than expecting treasure to be lying around on the beach.
Buying a property that needs little to no repairs, has positive cashflow, organized books, and an excellent marketing presentation is not a value-add investment, it’s a turnkey investment.
There is nothing wrong with turnkey investing. It’s an equally valuable investment strategy. But you can save yourself and your broker a lot of frustration by realizing that you expect turnkey bookkeeping, condition, location, and cashflow rather than a value-add situation.
To be clear, simply being a value-add property doesn’t make it a good investment. Negative cashflow, poor condition, etc, is certainly a problem that needs to be investigated. Sometimes the investigation is worthwhile, sometimes not. You may see how terrible the situation is and decide it’s not worth digging.
What to Do with Value-Add Investments
But if you really want a value-add investment and the property meets at least some of your initial criteria, determining that a property has problems is not the time to walk away. It’s the time for true value-add investors to dig in and see if there is opportunity others may have missed.
While striking gold when you dig is uncommon, we are certain you won’t strike gold if you never dig below the surface.
Interested in learning more about value-add real estate for your own investment portfolio? Call us today to see how we can help.
