Photo:
Getty
A question I frequently hear is, “Is there still a market for value-add construction?”
The real estate market is ever-changing. New builds are popping up all over the United States and abroad, and there is concern that value-add construction investors will not be able to compete.
The factors below can help investors ensure that they are making smart investments into properties with potential.
Location, Location, Location
Aside from looking in major metropolitan markets, investors are smart to expand their search into secondary and tertiary markets. Properties in the outlying markets tend to offer excellent returns on investment once value-added updates are put into place.
Exterior unit renovations create the perfect first impression, welcoming potential tenants into the community. Once prospects are inside the community and touring the units, the interior renovations help to gain signatures on leases at higher price points, expanding the investor’s net operating income (NOI) and overall return on asset.
Demographic Data
It is imperative that, when evaluating an asset, due diligence is completed to identify the areas to best deploy capital to optimize rent lift, absorption and overall return.
There has been a shift in the target market for multifamily housing over the past few years. The high cost of capital and restrictive covenants for new homebuyers continue to make it difficult for younger generations to have a place to call their own and will continue driving demand. At the same time, many longtime homeowners and baby boomers are looking to downsize. They are seeking a more maintenance-free lifestyle with specific amenities and an overall well-maintained apartment community.
More popular unit interior upgrades across the board include kitchens and bathrooms with plank flooring, new cabinetry and washer and dryer installs.
Amenity Overhaul
There are many factors to take into consideration when it comes to upgrading and/or adding amenities to your asset. First and foremost, as mentioned above, proper due diligence will aid in determining your next steps. Clearly thought-out amenities will add to the appeal and stability of the asset.
Renters in Dallas may be looking for something entirely different than tenants in the South Florida market. Is there an amenity currently in the community that is rarely used? If so, asset owners should consider replacing it with something more attractive for that market.
Relationships
We always say that you are only as good as your vendors, and we mean it. Fostering a strong vendor relationship will remove the headaches from your value-add project.
It is helpful to research potential vendors via a vendor credentialing tool. The tool will help determine if all professional licenses, business requirements and insurance documents are up to date.
Quality Over Quantity
It is always best to do a value-add correctly from the get-go. You will be much more likely to achieve the maximum rent bump and contribution to the underlying value of the asset based on the quality of work performed.
By doing the requisite research to learn about the target market’s demographics and selecting the appropriate upgrades and finishes as well as amenities, the asset owner will garner the largest possible rent bump and quickest absorption by the local demographic.