“Value-add” is a trendy topic in today’s real estate market. This is an industry term, meaning that the property has a way to increase its value manually. This is usually done by renovating the units and increasing the rents.
There is an old saying… “when all you have is a hammer, everything looks like a nail”.
Renovating and raising rents is NOT the only way to create value on a multifamily asset. To be successful in apartment investing you need to be able to see multiple strategies to create value in a property. Renovating the units is just one.
I remember calling an apartment seller up once and told him he needed to fix his plumbing leak. He asked how I knew he had a leak. I said “I saw it in the financials”. The water utility cost was slowing rising each month.
The key is to find an owner who is not operating the property to its fullest potential. This could be anything from under market rents to high expenses that can be cut.
Here is a basic system to follow.
- Consistently analyze deals in your market
- Start tracking some data each time you analyze a deal
- Make note of the sellers operating expense per door (OpEx). This is found by taking the total expenses for 1 year and dividing by the total number of units.
- Keep a record of average OpEx in your market.
- Now that you know what the average apartment complex operates for in terms of OpEx you can look for sellers who have high expenses compared to other operators in the market.
- When you find that a seller does have high expenses, go through each expense to see what is out of line.
- Can it be fixed? Some expenses can easily be lowered but some (repairs on an old building) may not be so easy to lower. Look for expenses that can easily be cut, like overstaffing, high management fees, overpaying contractors for labor, etc.
- Create a proforma for the property that shows the net operating income (NOI) after you correct the high expenses.
- Is it a good deal now?
Keep in mind that a property with distressed operations may be difficult to get financed. You may have to use a creative financing technique like seller financing or a master lease option (MLO) to get it closed.
Renovating and increasing revenue is a great model but its not the only one. Add the skill of finding “valuation through operation” will increase the possibility of finding a deal that works!
