How to place value strategy addition in real estate investing ?
Although investing in real estate has the expectations of buying a home, getting the cash flow as required from the rents, and later selling the house at a higher value, the equity can be increased in either multi-family or single-family homes through the renovation of the amenities. These strategies help in adding value and offering revenue to investors.
So, what exactly is this strategy? To help you understand the intricacies of value-addition, its advantages, and its risk, the team from Sapphire Capital Investment LLC has put together this article.
What is Value-addition in real estate investing?
Whereas value-add real estate properties refer to the properties that have not reached their full-heightened potential, value addition investing basically refers to identifying these properties and renovating them by taking corrective action to ensure they produce the expected results.
Some of the factors that may lead property to be unable to reach the expected market value include; Incompetent management, capital-intensive repair requirements, and deteriorating demand for what the property has to offer renters among others.
These properties are riskier than common characteristics, but they provide better returns. Deferred maintenance, below-market occupancy, lease rates below the area norm, and poor facilities and equipment in need of repair or improvement are prevalent problems for this category.
However, to ensure these properties generate the required Return on Investment (ROI), the investors have a lot to put into play, including sweat equity, capital, or both.
Value-addition of properties can be done by renovations both inside and outside the property, restructuring management, marketing efforts, and changing how a property generates income, making the property more attractive to the willing tenants.
What are the advantages of Value addition strategy in Real estate investing?
The main advantage of investing in value-add property is that they generate a relatively high Return on Investment compared to the core property investments. This is because they pose a greater risk hence obeying the rule of higher returns on high-risk investments.
Place value addition strategy involves the renovation of the property. This, in return, means that the property will most probably appreciate gaining a higher value. Appreciation of property means that the property will bring in profits in terms of a long-term cash inflow from rents or increased value.
What are the risks associated with Value addition strategy in Real Estate Investing?
Value addition strategy usually involves constructions to achieve the desired look of the property. This means that they need to utilize more leverage than ideal real estate investments. This, therefore, implies higher risk.
Another risk is that when the renovation of the property is being done, the rental units in the property will remain vacant. This means that no capital will be yielded in terms of property appreciation or terms of rent from tenants.
If you decide to grow your tenant base, there are dangers involved. Raising rents or enrolling new tenants may prove to be more challenging than anticipated, resulting in cost overruns and decreased cash flow. However, this may be a short-term problem and can be solved over time.
Are you looking to invest in the real estate industry? The Tucson market is hot right now; a potential investment target by individuals, households, and corporations. However, to enjoy the benefits of real estate investment, you need to make the right moves.
You will need an experienced and reputable partner by your side. Sapphire Capital Investment LLC is the property company to rely on. We are dedicated to offering sound and professional advice to real estate investors.