When looking to be successful with a value-add investment, it is important to choose renovation opportunities that potentially have the most embedded upside profit potential. Properties that are viewed as older, uglier, in disrepair, mismanaged and generally unsightly have the potential to be more profitable. In other words, you have a greater incremental increase in value when taking a D- property to a C, that a C to a C+ property.
It is important to find a property that may not be the most aesthetically pleasing, but has no structural issues. Then, you must rehab it and reposition it within the micro-location and market in which it serves. If the specific property is substantially more unattractive than other properties in the market, and there is significant room to raise the rents once the property is renovated, then that is worth investigating further. In simple terms, this strategy can best be defined as “ugly with good bones”.
Instead of taking the rent roll of the entire property and forecasting how much each individual unit will require in terms of renovations to predict the available rent premium, there is a smarter and more efficient way to execute this process. The whole idea is that a property owner has a bunch of apartment units that produce an aggregate cash flow. Based on this approach, this bundle of units can be viewed on a hypothetical average basis, that commands a certain average rent. Because all the units in an apartment start from a similar level and end up at the same state, it makes more sense to utilize an average renovation budget per unit, along with an average monthly rent premium, when determining the cost-benefit analysis.
Although most people have their own internally-generated due diligence checklist when investing in value-add properties, the following is a quick and high-level strategic approach in creating strategic value:
