Commercial real estate investors can make big bucks by doing what is called Value Add commercial real estate deals. The most successful commercial real estate investors look for value add deals. This is where millions can be made. In this post, we’ll go into detail exactly what is Value Add commercial real estate, and how to add value to commercial real estate properties. Let’s get started!
What is Value Add Commercial Real Estate
What is Value Add Commercial Real Estate?
Value Add commercial real estate is exactly as it sounds. Value add commercial real estate is when investors add value to their commercial property. Value can be added to all types of commercial real estate. Value can be added to apartment buildings, shopping centers, retail centers, office spaces, industrial warehouses…seriously, any commercial real estate property is eligible to be Value Add commercial real estate. Basically, value add commercial real estate is when you add value to the property through various things.
One of the best ways to increase property value is to increase the Net Operating Income, or NOI. As the NOI increases, so does the property value. Net Operating Income is the rental income collected minus operating expenses.
How to increase Net Operating Income
Commercial real estate developers and investors can increase their net operating income in several ways. The first is simply increasing rent when leases expire. Investors can also bill tenants for utilities associated with the property, thus taking the burden off themselves, while increasing cashflow. Property owners should also look to make their operations more efficient by hiring the best possible property management company available. All of these steps can help reduce expenses while increasing your net operating income, which in turn increases the value of your commercial real estate property.
Adding Value to Commercial Real Estate
As we’ve mentioned before, investors choose commercial real estate because commercial real estate provides high yield returns consistently. However, many investors look to increase those returns by adding value to their properties. Adding value to a commercial real estate property is done in two ways; adding value by market appreciation and adding value through property improvements.
Adding Value by Market Appreciation
The first way that commercial real estate owners increase the values of their property is to allow the forces of the market to slowly increase the value. If you’re a good operator and consistently raise rents to keep up with the general market, in 20 years, by making no improvements or adjustments, some commercial properties can literally double in value. Simply by allowing time to run its course, most commercial real estate rises slowly in value thanks to market appreciation. There is always the risk that the market could see a downturn, but normally, as with all real estate, property values increase over time.
Adding Value Through Property Improvements
Instead of simply waiting for the market to appreciate over time, you can increase the value of a commercial property by applying “value adds” to it. For example, in an apartment complex, you could remodel the kitchen (installing granite counter tops, stainless steel appliances and tile floors, etc.). These improvements allow you to charge more in rent and that increase in rental income can increase the NOI and when the NOI increases, so too does the value of the property. When you add value to a property through improvements or other such adjustments, that’s called a “value add” deal…because you added value. The most successful commercial real estate investors look for properties that have great “value add” potential.
Casey Development, Ltd: Commercial Real Estate Developers in New Braunfels, Texas
Casey Development, Ltd. has a proven track record of investing in and developing commercial properties in New Braunfels, San Antonio, and Austin, Texas. Our expertise, knowledge, and years of experience allow us to find the best commercial real estate opportunities for our clients. If you’re interested in learning more about commercial real estate investment services, use the form on this page to contact us.