Real Estate Titans

Appendix B:Value Add—A Case Study

I hope that throughout this book it has become clear that one of the best investment strategies in real estate is the value-add approach. Value-add opportunities exist everywhere, even more so in advanced economies like the United States or the United Kingdom. You can come across them by walking or driving through neighborhoods, speaking with brokers and friends in the real estate industry, checking listings online, and using other methods. They basically consist of repositioning a property by improving the operational strategy—that could mean increasing occupancy, lowering operational expenses, increasing rents to market (in case they are lower than market), creating new income streams from unused spaces, and more. The asset will be worth more when you manage to increase the net operating income (NOI). In some cases, a value-add approach can also be a focus on purchasing poorly leased properties in good locations, or properties that have substantial near-term lease rollover. An important metric when you implement this strategy is to be cognizant that you are buying at a similar price (or below) replacement cost.

When you take the value-add approach you take on some risks; however, you don’t have to deal with the permits and licenses risk or the construction risks, two significant risks, especially for someone with only a few years of real estate experience. The “construction” risk in value-add is usually associated with light renovations, ...