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The term “value-add” appears to be trending everywhere you turn. Understanding what that concept really entails is crucial to establishing sound projections and return on investment for any multifamily investment (and for the vast majority of other types of deals). Just as important is understanding what not to get to hung up on and realizing what will maximize your dollars.
You have run all your critical numbers, and the deal looks good. You’re happy with the price and the loan, and your due diligence has come back clean enough to start considering your value-add opportunities. Where to start? The following are some sound value-add practices to consider, as well as a few that multifamily investors may want to avoid.
Interior
There is nothing like a fresh coat of paint to change the entire feel of a property. Brighten up as many areas of the unit as you can, and consider adding an accent wall or two. Paint is one of the cheapest components of any value-add project and can bring a major appeal to the property. From reviving dated schemes to bringing light to dingy and dark hallways, focusing on your paint makes a big impact.
Flooring is the next major interior value-add item you should prepare to invest in. Whether it’s carpet, tile, wood or laminate, having clean and uniform flooring helps bring the interior of a property together. If your budget permits, remodeling your kitchen or bathrooms in addition to painting and upgrading flooring is the ideal objective to maximize your values and raise your rents.
If after the paint and flooring you are tight on capital, make sure all electrical outlets and light switches are new and uniform, and change out all the hardware (doorknobs, hinges, locks, drawer and cabinet hardware, etc.). These touches go a really long way visually and economically.
Exterior And Curb Appeal
How high this is on the list may surprise people, but no matter how new, modern or warm and fuzzy you think your interior is, without an attractive exterior and clean curb appeal, you risk not maximizing your value-adds. Painting and rebranding a building can go a long way. A long-standing perception of a property can be quickly changed by just repainting or changing the façade, and this can bring in a whole other market or tap into an existing market that was just looking for some modern touches.
Landscaping also plays an important role. If you’re in a climate where water is not scarce and that is conducive to green and lush landscaping, then by all means, make sure you take that opportunity. Colors and attractive plants add life and beauty to any community and draw in positive attention. If you are limited to a dryer climate or a denser urban area, focus on a clean xeriscape or creative art décor, such as mural paintings or artificial replicas (artificial turf, bark, industrial metal art, etc.) as strong alternatives.
Security And Cleanliness
At the end of the day, most tenants want a clean, safe and secure community to live in. Do not minimize this value-add opportunity. Functional security gates, fencing, covered or gated parking, and patrolling security are huge value-adds.
As well as budgeting for regular interior cleaning, landscaping, pest control and other detailed items must be top of mind. When tenants feel they have all of these items as a standard part of their community, the likelihood of lease renewals tends to increase, and this demand leads to justifying consistent rent increases. Both the tenant and owner win when all of these items are factored into the value-add formulas.
What To Avoid
When making decisions in the value-add process, it’s easy to get carried away. Making sure you keep things functional and as impersonal as possible is key. It’s not to say there is anything wrong with adding some of your style or preferences to the procedure; just make sure it’s within the budget and not something impractical. Examples of that could be installing granite countertops when resurfacing would suffice, or replacing cabinets when repainting and adding new hardware would suit the situation.
Each property and each situation is different, but the faster you realize that there is only so much money you can squeeze out of certain value-add situations, the better your chances to maximize your bottom line.
The last thing any value-add analysis should be is a shortcut. This type of approach is bad practice and, in the long term, causes many more issues for both owners and tenants alike. If you are looking at an investment that has you spread too thin, rather than cut corners, it is much better for you to focus on what you can allocate the right way. It also may be a clear indicator that this particular investment is over your ability. The liabilities for misrepresentation are quite severe, and the consequences of subpar work to save a dollar could end up costing you much more.
Value-add is a key ingredient to every investor’s strategy when evaluating multifamily properties. Ensuring the improvements are in line with the price, demographics and location is key. Also key is knowing when to take your foot off the gas while spending. Although there is no formula to a successful value-add outcome, using common sense and applying quality work is a step in the right direction during this phase.