8 Tips to Buy Money-Making Value-Add Multifamily BuildingsOct 31, 2023
To become a great real estate investor, you need a viable investment growth strategy. If your goal is to create generational wealth, your investment strategy should revolve around acquiring and maintaining multifamily real estate properties. Particularly, look for value-add multifamily properties to unlock massive returns on your initial investments.
What are value-add multifamily properties?
Before committing your time and capital to value-add properties, you should first understand the basics of these types of investments.
Value-add multifamily properties are any buildings where investors have the opportunity to increase cash flow. Essentially, anything you can do to increase revenue flowing through your building is an example of a value-add investment.
Are value-add investments just in the commercial space?
Commercial property owners have plenty of opportunities to enhance the value of their buildings with value-add additions. Prime examples of these add-ons include things like:
- Installing an on-site gym for office workers to attend
- Leasing lobby space to an established restaurant or cafe
- Opening a convenience store near a secondary building entrance
What’s the commonality amongst each of those examples? In all three instances — and there are many more examples to choose from — the value-add addition is generating more cash from the prime users of the building. In the commercial sector, the prime users are office workers who travel in and out of the building every day for work.
Each business earns money and pays you, as the building owner, a fixed amount of rent every month to lease out the available space. You can even negotiate a percentage of top-line sales from each business — break out those top negotiating skills!
As a commercial building owner, you already earn monthly rental income from each business leasing office space on the property. Value-add additions generate supplemental income on top of the money you already earn from commercial tenants.
What are value-adds in residential multifamily real estate?
Value-add multifamily properties aren’t exclusive to the commercial sector. In fact, many residential multifamily buildings lease space to commercial businesses directly on the property.
If you live in one of Canada’s big cities — particularly near major public transit routes — think about how many buildings you’ve seen with cafes or restaurants situated on the ground floor. Building owners earn steady streams of cash by leasing available spaces to those businesses.
But value-adds aren’t solely about leasing out available space to paying tenants. Some of the easiest value-add improvements to a building are basic renovations. Fresh coats of paint, new doorknobs, or energy-retrofitted windows all boost the value of the property over and above your acquisition price.
New appliances are also excellent value-adds to your multifamily property. Replacing the public washer and dryer with newer models is a great way to boost property value. Additionally, look for other open space where you can install a second washer and dryer. Multiple appliances give tenants greater flexibility, and these basic investments go a long way toward lifting future property assessments to even higher values.
8 tips to help you identify a value-add property
Now that you understand the money-making potential of value-add properties, you’re ready to start hunting for these lucrative investment opportunities. But how do you identify a value-add property? What are some of the secrets to finding a hidden diamond in the proverbial rough?
Here are 8 secrets to help your search for value-add real estate investment properties.
1. Lower rental prices compared to similar properties
One of the first signs a real estate acquisition process is moving forward is when the books are opened for your inspection. Before you invest in a multifamily property, book a session with the current building owner(s) to review the financial statements. Specifically, look into how much tenants are paying for rent each month.
With this information in hand, do a little legwork into the surrounding neighbourhood. Look for multifamily buildings of similar sizes and styles, and then ascertain what tenants in those buildings pay for rent.
Are rents in your prospective building below market average? The answer to that question should be a resounding “yes.” Why is this important? It suggests that there’s more money to be made over and above current cash flow. Value-add improvements to the building will help boost the property value, enabling you to increase rents charged to tenants.
2. Upgrades/improvements to current units
During your assessment of a for-sale property, ask about current renovations. Are there units undergoing construction or renovations that will make them more valuable than comparable units in the building?
Once you have that information, run the numbers on monthly rental income. Determine how much of a lift in rental prices is feasible with a few simple upgrades to the unit. Then, multiply that calculation by the number of units in the building. This will give you a benchmark of how much you can earn from steady rental income through simple building improvements.
3. Is there room to lease space to another business?
Remember that one of the best value-add additions to any multi-unit building — residential or commercial — is by leasing space to other businesses. Look at the current property and determine if there’s room to welcome new commercial tenants into the building.
A simple cafe or small restaurant on the ground floor is a great addition to any building. Tenants will have a local watering hole to go to in their very own community, driving up revenue for the business and value for your building. You’ll also collect a healthy stream of rental income at higher commercial rates from those willing business partners.
4. Opportunities to improve property management efficiencies
No matter how well anyone does a job, there’s always room for improvement. Property managers are a prime area for real estate investors to identify efficiencies.
Assess the current property management team and their operations. Make a list and calculate ways to improve operations with more efficient workflows. Any cost reduction means you keep more revenue, improving your bottom line and increasing ROI on your investment.
5. Opportunities to reduce costs incurred by vendor partners
Leasing space to a viable business is a great way to boost cash flow and increase property value. These vendors operate on your property, and pay for the space, lighting, and power used to run their respective businesses.
Look into the expenses of these businesses and identify ways to trim down costs. Again, anything you can do to reduce building expenditures is extra money remaining in your pocket each and every month.
6. Security measures to install throughout the building
Safety and security help tenants feel at peace when they come home to their rented units each day. But buildings that are deemed safe and secure are also considered more valuable than their less secure counterparts.
Assess the current security measures on the property you wish to acquire. Are there sufficient cameras, gates, and protocols in place? Is there a hired security team to help control who comes and goes into the building? If any of these attributes are lacking, that’s a straightforward value-add to boost property value.
7. Chance to rebrand the building name/identity
Many residential and commercial buildings have official names that are emblazoned on doors, sidings, or awnings positioned above the front doors. These names add a little character to the building, helping it stand out from others in the community.
Investigate that name in your assessment, and consider the cost-benefit analysis of a rebrand. Would a fresh name reinvigorate your building’s reputation and attract newer, higher paying tenants? If the benefits outweigh the costs, a rebrand could be an excellent value-add change to the current building.
8. Touch-ups to the building and amenities
One of the easiest value-adds to a newly acquired building is either a fresh coat of paint or new wallpaper, depending on your preference. These little touch-ups give a gentle face-lift to the current look and feel of the building, potentially boosting its value to align with other high-valued properties in the community.
Similarly, consider what new furniture in the common areas will do to boost sentiment and value. You can also invest in some fresh landscaping to improve the exterior of the property.
Join the ultimate real estate education platform for more multifamily tips
Multifamily real estate pays healthy dividends to investors, and value-add multifamily buildings offer low-hanging fruit that yields juicy returns. These are just some of the viable investment tactics used by multifamily investors to boost cash flow and create generational wealth.
Want more reasonable multifamily investment tips? Join the ultimate real estate education platform and learn the trade secrets from some of Canada’s most accomplished real estate investors. Multifamily strategies, value-add investments, and more helpful insights await when you become part of the fastest growing real estate investment community.
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