What is Value Add in Real Estate

By Harvest Properties Group on July 27, 2020
You've probably heard the term "Value Add" before. It's a […]

You've probably heard the term "Value Add" before. It's a term used in all areas of industry, investment, the corporate world, real estate, etc. But what does it mean? If you're talking about an employee or team member you're really saying what value does that person add to the team. In my years of working in Technology a value add team member might have been a developer who brought very strong SQL skills to the team. Or a tester that understood the different areas of Quality Assurance and how those benefited a software development cycle.

So you might be asking yourself...what in the world does this have to do with Real Estate? Well, nothing to be honest. It's just an example of the term "Value Add". So let's get to Real Estate. What is "Value Add"? It's, quite literally, what an owner, investor, developer, etc can do to add value to a property. Flippers by distressed properties and add immediate value through renovation. They will buy a house below it's market potential and add new carpet, new cabinets, knock down a wall to create more open floor plans, put up walls to create a new bed room...you name it, in order to add value. Then, turn around and "flip" the house, or sell it, for a higher price than they paid. If they are good this new price will be more than the price they paid for the house and the renovations. Netting the flipper a nice profit. 

Harvest Properties Group focuses on "Value Add" Apartment and MultiFamily properties. When we get into this space we have even more opportunities to add value. An apartment's value is based on a number of things. Of course the area where it's located and the "comps" in that area. But rents collected and expenses paid play into an apartment's value. So when we look at "value add", for an apartment, we really have a number of areas where we can increase the property's value. Because of this apartments offer more flexibility in terms of "value add" opportunities.

While the price for a house are based purely on other houses in the same, or similar, area an apartment's value is determined by its income. This means that, like houses, you can fix things up which will increase the value through increased rents but you can also add value to an apartment by lower expenses. Whoa...so now you have multiple ways in multiple areas where you can ADD VALUE!

An owner can paint the outside, replace the roof, renovate the units, etc and add value. That same owner can also do things to lower utilities, which lowers monthly costs, which lowers expenses. This increases the amount of profit the owner makes which increase the apartment's value! What about other revenue streams? Apartment owners can rent washers and dryers to tenants. Install vending machines. Install storage that they lease to tenants. All of which add to a property's overall revenue which, in turn, increases a property's value.

So, "value add", in Real Estate, is really just that. It's anything that add value to a property. It just so happens that, with apartments, the options tend to be more. And at Harvest Properties Group we like "more" options!

Article written by Harvest Properties Group
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