You may have recently seen a number of investors flocking to invest in run-down apartment buildings with little to no tenants visible, only to turn these properties around into some of the nicest and hipist apartment buildings on the block.
These types of turnaround investments are what the CRE industry calls “value-add” investing and it has really taken the commercial real estate investing world by storm ever since 2014.
The very act of improving these properties, generally helps increase its value and appeal to future tenants, allowing landlords/investors the ability to increase rental rates and lower vacancy rates.
Unfortunately there are some challenges that come with these types of investments, more recently, the number of properties available that haven’t yet been renovated by investors. This trend is extremely attractive to investors given that these types of properties come at a more reasonable price in areas that show great promise for growth.
According to Origin Investments, in order to succeed in add-value investing an investor needs to really understand “the property’s physical condition, it’s competitive positioning with the marketplace, cash flow and leasing prospects, as well as acumen about the underlying risks and rewards improvements will have on the overall investment performance.” Which means essentially doing all your homework, not only on the property in question but most importantly the market area. Large metropolitan areas like Baltimore, Miami and Newark show the greatest popularity, but we can’t forget to pay attention to smaller areas in states like Texas, Oklahoma and the Southeast.
Really assess the market and its surrounding properties for comparables. Look for other properties that have been renovated and investigate whether or not they are performing reasonably for the area. Also take into consideration the building itself, how old is the building?
According to National Real Estate Investor, properties built in the 1990s can work, but anything older has a tendency to bare a number of problems. Anything from low ceilings to awkward floor plans that not only take much more time to fix, but can also take a great amount of finances to improve.