Origin Principal David Scherer explains the five pillars of a value-add real estate investment and who should consider investing in them. Value-add assets need extensive capital investment, but carry great growth potential when executed properly.
1) Location
Value-add assets should be located in cities and submarkets with strong liquidity. They should be located near or within areas of strong growth where investors can make a quick exit when necessary.
2) Vintage
Value-add assets have flexibility when it comes to vintage. Older buildings with strong bones can be brought up to compete with new construction through extensive capital injection, which is the trademark of value-add investments. However, generally, a value-add building will be less than 30 years old.
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3) Cash Flow
A value-add asset should achieve its maximum cashflow around four to five years after initial improvements have been initiated. Investors shouldn’t expect strong dividends in years one and two, as the property will be undergoing large-scale renovations during this time.
4) Debt to Equity
A value-add asset can be anywhere from 60-75% leveraged.
5) Expected Returns
Returns are dependent on larger market trends but, generally, a return between 11-15% should be expected with value-add investments.
Who Should Invest in Value-Add Real Estate?
Investors who tend towards growth stocks when looking at the public markets should consider investing in value-add real estate. Value-add real estate investing requires a tolerance for moderate risk, but the potential returns justifies any increase in overall investment risk.
