A value-add property can be an excellent investment for those looking for a substantial return on their investment. Still, as with any strategy promising high profits, it also comes with a certain amount of risk and effort.
Value-add properties require significant maintenance in order to achieve their total potential value. As a result, these properties are riskier than ordinary real estate investment opportunities but can also provide better rewards. Issues often associated with value-add properties include:
Investors in this type of real estate must be ready to put in additional money and work to create a positive return on their investment. They may need to commit to making property improvements—both inside and outside. In addition to physical improvements, investors may also need to rethink the property’s management and marketing strategies to generate increased income.
The main advantage of investing in value-add real estate is the high probability of a higher return compared to other property investments. An experienced investor can identify properties with high potential, put in the time and funds, and then determine if they will keep the property for its positive cash flow or turn around and sell the property at a significant profit.
Because value-add properties tend to need improvements and are not reaching their potential for income generation, they may require more “cash down” on any loan arrangements for the property or renovation costs. This can be particularly true with relatively large-scale overhaul projects such as converting an industrial building to residential lofts.
Even with value-add projects that don’t require full-on construction, the investor should still be prepared for a period of declining rents and profits during the renovation phase. If several units are being worked on, they can’t be rented. On the plus side, once renovations are complete, units have the potential to earn more than they had before.
It’s all about balancing expectations with effort.
Because the IRS sets the depreciation schedule at 27.5 years, this lets investors deduct 1/27.5 from their taxes each year on property deprecation. In addition, value-add property investors can also deduct costs associated with maintenance, general repairs, utilities, and other expenses for managing and maintaining an investment property. There are also benefits available related to new construction and renovations costs and any loans associated with them.
While anyone can invest in value-add properties, you have to be the sort of investor willing to put in time and funds to make it work. If you’re new to property investments, you may want to start smaller and wait until you’ve had more experience before delving into this type of real estate investment.
Value-add property investment can be highly profitable. You don’t have to approach this type of investment by yourself. Instead, you can consult with experts to guide you through the process, answer questions, and advise how to make the most of your investment.