If you’re in the market to purchase real estate you’ve probably heard the term “value add property”.  A value add property is the idea of purchasing a building or other piece or real estate with the idea of renovating or redeveloping the unit to bring it to a higher price point. It’s often considered a higher risk investment, but can often have a high pay off! 

What Makes a Property a “Value Add” Opportunity?

Value add opportunities come from increasing revenue and lowering expenses to see a value gain based on increased net operating income. Real estate companies typically purchase, develop, and restore the property, while an individual will try to repair the property for “better” user. 

Improvements to a value add property will often lead to turning the property into a different type of building. For example, bringing in potential tenants, which can lead to high occupancy rates, increased rental prices, and even reduced expenses. 

The Risks of Value Add Properties

A value add property is considered a mid to high risk opportunity. There are a few factors that contribute to this high risk factor. 

  • Value add properties are often caused by the construction risk associated with the properties. Renovations can include things like enlargement to the property, new roof, interior refinishing, structural repairs, or even complete conversion of the property. An example of this would be a warehouse into apartments, etc. 
  • Construction risks include high costs like financing, materials, labor, etc. It also leaves many factors to chance – will the market rate support the completed cost?
  • Will tenants want to move into the building once it is complete? Will renters be available and find the price acceptable? 

How to Turn a Profit with a Value Add Property

If you are interested in making a profit by purchasing a property, it is important to keep the above risks in mind. There are also a few things to consider that will help you be successful in your endeavor as well. 

  • Do your research. Deep market knowledge is something that all value add investors have in common. They understand how to execute business plans and know the ins and outs of real estate. 
  • Work to understand what tenants will pay for rental properties within the property. You want to attract tenants and a property management team can help with the details. 
  • Understand what improvements will bring the biggest return.

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