Tech professionals and managers interested in real estate fund investment should be familiar with the term “value-add”, a strategy that allows investors to increase the value of a property or portfolio through specific improvements, enhancements, or operational changes.
Value-add strategies tend to involve a higher level of risk than their conservative counterparts, but they also have the potential for higher returns, assuming those operational changes can successfully increase the property’s value and investors’ returns.
Let’s explore how value-add works in the investment world, and how understanding its elements will help you succeed in your own capital ventures as an investor.
What is value-add strategy for multifamily real estate investment?
Value-add strategy is ideal for experts in attention-to-detail, as it requires your fund manager to easily identify areas that are underperforming or undervalued in your fund. The strategy centers on increasing a property’s net operating income (NOI) and cash flow, which works to boost the property’s overall value and generates higher returns for you, the investor.
The key elements of a value-add strategy in real estate fund investment:
- Property Improvements
With value-add, fund managers can identify underperforming or distressed properties and implement renovations, upgrades, or expansions to beautify the physical condition and appeal.
- Operational Enhancements
Fund managers might implement better management practices, cost-saving measures, or other operational improvements that increase the property’s efficiency and overall performance.
- Repositioning
Some fund managers add value by repositioning a property in the market to attract a different tenant demographic or to meet changing market demands, like converting hotels into residential units or transforming a retail property into a mixed-use development.
- Lease-Up Strategies
Your GP might add value to your property by improving tenant occupancy rates: actively managing leases, attracting new tenants, and negotiating favorable lease terms.
This might also include offering unique amenities to tenants, like:
- Keyless entry
- Smart thermostats
- In-unit Wi-Fi
- In-unit washers and dryers
- Pet-friendly policies
- VIP parking
- Decreasing Vacancies and Increasing Occupancy
This is a crucial strategy for increasing rental income, and can be achieved by improving the property’s marketing efforts, offering competitive rents, and providing excellent tenant service.
- Embracing Green Initiatives
Implementing green initiatives can also add significant value to a multifamily property, especially in cities or suburbs that tend to be highly eco-conscious. Your GP might install solar panels, implement water-saving tactics, or promote property recycling to decrease your fund’s expenses and attract an eco-friendly audience.
- Asset Management
Employing active asset management strategies to monitor and enhance the overall performance of the fund’s assets is another way to access value-add.
- Market Timing
Timing the acquisition and disposition of assets based on market conditions also adds value, as it allows you to maximize your returns.
How does value-add strategy work for me, an investor?
Now that you understand how a fund manager might work to add value to a real estate fund you’ve invested in, let’s explore why this added value is so beneficial to you as an investor.
- Higher Returns
Value-add strategies aim to enhance a property’s performance, which might lead to increased rental income, improved occupancy rates, and higher property values—a win-win-win for the whole fund.
- Risk Mitigation
While value-add strategies can involve some level of risk, they also offer the potential to mitigate it. By actively managing and improving properties, fund managers are able to adapt to market conditions and tenant preferences, making the assets more resilient to fluctuation.
- Active Management Opportunities
Value-add strategies often require very active management from your fund manager, which in turn leads to more responsible decision-making, quicker adaptation to market changes, and the ability to capitalize on emerging trends. It also means you have less to stress about on your end as an investor: you just collect your returns while your GP stays on top of the day-to-day.
- Alignment of Interests
Finally, the value-add strategy is a powerful way to marry the ambitions of the fund manager and the investor.
As your fund manager actively works to add value to the property, they typically receive a share of the profits generated, which further incentivizes them to strategize effectively and maximize returns for involved investors.
Continuing the conversation on value-add strategy
Value-add strategies can offer attractive opportunities for real estate funds, especially if you’re an investor looking for a balanced risk level, high-return investment designed to adapt.
To ensure you understand how value-add strategy brings you benefit as an investor, contact us today.
