Why is Value-Add a Great Strategy

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Why is Value-Add a Great Strategy

By Christopher Starr

So, why IS value-add such a great strategy?  Well, for some it may not be the strategy of choice.  In fact, there are three other common investment strategies in commercial real estate besides value-add and there are many investors in each.  

The Four Types of Investment Strategies

  1. Starting with the least riskiest is Core, which offers a lower return compared to the other strategies, but has reduced risk because the assets are often newer and higher quality with ”A” credit tenants.  

  2. As we move up the risk scale, next is Core-Plus. This strategy is similar to a Core asset in many ways, however there is a small value-add component which allows for a bit higher return and carries a slight increase in risk.  

  3. Our favorite strategy, Value-Add, ranges from a minor updating of a property to a repositioning where an asset is completely renovated and re-stabilized.

  4. The fourth, and highest risk strategy is Opportunistic. A development project or adaptive re-use falls into this category and has the opportunity for greatest return but comes with the greatest risks.  

Benefits of Value-Add

Although the risk level is higher compared to a Core or Core-Plus asset, we lessen the risk by acquiring assets in strong growth markets, where positive economic drivers exist, and there is current cash flow to service the debt and pay investors an acceptable return.  Then the fun begins! The opportunities that are waiting in a value-add deal are amazing. We are able to force appreciation by modernizing the unit interiors, adding new amenities that tenants love, and updating the exterior of the property. We often have the opportunity to improve the operations, and increase overall revenues which can significantly increase the value of a property.  

We love Value-Add because the strategy allow us to be a real estate entrepreneur.  The property provides income, but we can be creative in our strategy to improve the asset’s performance and gain more value overall, and this is exciting.

Which of the four strategies do you prefer?  Share your thoughts in the comments below!

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