According to real estate investment professionals like Steven Taylor Landlord, one of the more popular and profitable ways of deciding what apartment building to purchase is to identify value-add opportunities. A value-add situation occurs when an investor locates a property that could benefit from repairs or upgrading of amenities. These repairs or upgrades are completed with the intention of the ability to increase rents or an increase in property value that exceeds the cost of any improvements. Here are three things to look for when identifying a value-add apartment building investment opportunity.
Does the Property Need Updating?
Many apartment buildings have gone for decades without significant upgrades. They may have owners that have chosen to defer maintenance for extended periods of time. When these types of buildings come on the market, they can be significant opportunities for the sophisticated investor.
Ultimately, the investor must be savvy enough to know that the amount they invest in upgrades is going to be less than the expected value of the property after the updates have been completed. The increase in property value could come from greater appraised value or the ability to increase rents.
Are Current Tenants Paying Less Than Market Rates?
Oftentimes, apartment building owners or managers do not increase rents for current tenants in keeping with the market. When a building with low rents comes up for sale, it may be a great opportunity.
Raising rents may be easy in some localities or a serious challenge in rent-controlled areas.
Is the Property Currently at Its Highest and Best Use?
Many properties come on the market without their value being maximized through its highest and best use. A simple example of this is an older single family home on a large lot zoned for multi-family housing.
This type of opportunity takes skill as a developer, but can lead to outstanding gains.
Finding a great value-add opportunity takes patience, but the good ones are certainly worth the wait.