There are always 100’s of factors to consider when investing in commercial or residential real estate, but to many savvy investors, value-add opportunities have become one of the most important factors in their analysis.
While value-add opportunities can shrink a property’s vacancy’s and improve a tenant’s quality of life, it also tends to boost the owners NOI and COC. Most owners who pursue value-add opportunities experience an IRR of 12%-18% compared to the 9%-12% IRR that core-plus investors (individuals who invest in properties that need little to no renovations) yield. Some of the more popular value-add opportunities over the last 4 years have been low-cost options. For example, installing covered parking or building payed parking spaces, as well as remodeling a property’s interior.
In our current housing climate, homebuyer interest has predictably slowed down during COVID-19, however around 48% of potential homebuyers indicated that they would put their plans to buy on hold and would instead continue renting. While this is not great news for the U.S housing market, it is fantastic news for landlords who can invest in value-add opportunities to retain renters who would have otherwise vacated the property.
The popularity of value-add investments has increased substantially with more than half of all private equity real estate investors pursuing theses opportunities in 2016. With the number of high-income renters increasing by 271% nationwide over the last 10 years, value-add opportunities that provide high quality housing will only become more prevalent. This phenomenon is especially visible on the city level with some areas like Seattle experiencing a 740% increase in renters who earn over $150k a year.
In the near future, investors who are looking to invest in value-add opportunities should consider doing so in areas dominated by millennials. The Washington post recently published a report titled “forget owning”, in which Robert Pinnegar explains that renting is becoming the end game for most millennials regardless of their income level. That generational trend explains the spectacular growth in the “renter by choice” group, who tend to dominate young and progressive cities like Seattle, Charlotte, and Dallas. This new class of renters who are generally classified as middle or high-income earners are demanding apartments that have open-concept designs as well as green energy features. For example, instead of building a fully equipped gym in a property, millennials and other high income renters prefer cardio class or workout studios. Even outdoor electrical outlets for the increasingly technologically savvy renter would be a smart value-add that could increase the rent millennials are willing to pay.
Value add investments have only grown in popularity since 2016, and not even a global pandemic has been able to halt their traction. However just as generational preferences evolve so will value-add opportunities. Some of the more lucrative value-add opportunities will come in markets dominated by high earning millennials who are willing to pay a premium for amenities and facilities that traditional real estate investors have previously ignored.
About the Author / Jeff Rohde Jeff specializes in content creation, and Jeff specializes in content creation. “What Are Value-Add Investments?” CommercialCafe, www.commercialcafe.com/blog/value-add-property-investments/.
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