Investing Education

What Is a Value-Add Real Estate Investment?

Core real estate investments

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.

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.

This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.