The concept of the “Value Addition” property is central to success as Commercial Property Investor. “Value Addition” means a property that allows you to increase the Net Operating Income.
You “Add Value” to the property
This drives up the Net Operating Income by adding the price of the property at the sale.
The Added Value is imitated in your Returns over the life of the project.
If you look at these three points carefully you will see they follow the age-old rule: “You must sow before you reap, which means you have to put Value In before to pull Value Out.
And there are two MAJOR keys to success with a Value-Addition Property.
1. The Property Has to Have Problems You Can Fix.
Classic Value Add Properties are ones with Problems. The bigger the problems the larger the opportunity for adding value & making profits. The obvious example is the abandoned, half-burned plaza of a 60-unit apartment complex. You will take it zero profit-making property at lower rates. After the makeover, you will realize a major profit at the sale. More typical examples are the old & most used building with a 25% vacancy rate in serious need of a makeover.
In every case, the problems in the property must have to be ones you can fix. An inexpensive property with lots of areas to maintain will lose you money. It can risk even your investment if you and your property manager can’t fix the issues.
2. You Must Buy at The Right Price.
In this world where every seller & agent wants your purchase price to be based on proforma – what the property’s Net Operational Income would be if it were fully occupied – the biggest danger in Value-Addition Investing is overpaying for the property. It can reduce your profit rate. Therefore, you always must have always bought on actual numbers. No matter how much the seller points out to you this property’s Net Operational Income would be 100lacs/monthly if it were fully rented. if the Net Operational Income is now just 60lac/monthly. that is what you have to focus on while purchasing.
Just think… If you overpay for the property you would have to add value just to get your money back sale. Drive a bargain & Use Due Diligence to black-footed ferret out every issue that will cost money to address and use this information to drive the price down or get other favorable terms.
Your Secret Weapon here is … Your Property Manager you choose. Top-notch local Property Managers know what problems they can fix. And what it will cost in terms of money and time too. They may also know the particular property you choose and its historical issues. If you don’t have a Local Property Manager on board who can deal with it confidently… Then Don’t Do the Deal!
Also, remember two more things to make Value Addition in your properties
1) You can add value to ANY Property. Just think about the ways you can probably increase the Net Operational Income. So, what would you have to do is;
Raising rents
Raising occupancy
Developing additional sources of income
Bringing in higher quality renters and lessening turnover
Lowering expenses (Utilities, concessions)
2) Value Add Properties have Sellers in Distress as most of the Seller’s are not selling for a profit. They are in need and can be very flexible. This is the property where you can often get a seller who carries favorable terms on the purchase.
Here’s to your investing success.
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