INVESTMENT STRATEGY
VALUE-ADDS
What You Need to Know About the “Value-Add” Buzz THE SUCCESS OF A REAL ESTATE INVESTMENT COMES DOWN TO DEAL ANALYSIS, DATA, AND NUMBERS.
by Kyle Jones
he problem with buzzwords in the world of investing is they replace sound decision-making with decisions based on hype. Remember the buzzwords that dominated last year? Crypto and meme stocks were generating a lot of investor attention—along with their money. Flush with stimulus money, newbie investors flooded the markets, snatching up anything that was attracting attention on internet forums and social media. Investors snapped up crypto and meme stocks based purely on buzz. Dogecoin, a cryptocurrency that started as a practical joke, was flying high about a year ago. But since its peak last summer, it has dropped more than 740%. Gamestop, a meme stock that made waves last winter fueled by online buzz, has fallen 167% since the peak of the hype last December. If investors had done their homework when analyzing the prospects of Dogecoin and Gamestop instead of relying on buzz, they would have realized Dogecoin was a joke currency and Gamestop’s momentum was fueled purely by artificial hype rather than any underlying economic factors. Likewise, they would have realized the Gamestop price spike was artificially created by a group of investors bent on teaching the hedge T
funds a lesson. They combined forces to drive up the share prices of flailing companies targeted for short selling, causing hundreds of millions of dollars in losses when these hedge funds were forced to cover those shorts at high prices. Once the buzz died down, the crash was on. THE BUZZ ABOUT VALUE-ADD In the world of real estate investing, a buzzword currently making the rounds is causing investors to forget the basics of deal analysis and leading them to ignore the financial data and underlying economic fundamentals essential for projecting the prospects of a deal. That buzzword is “value-add.” Like crypto and meme stocks,
the word “value-add” implies a “can’t miss.” As a result, investors act carelessly. Investors assume any opportunity associated with the word “value add” is a slam dunk. However, in the wrong hands, a value-add investment carries high risk like any other investment. These investments are anything but “can’t miss.” In fact, investors could lose more money with these deals than if they had stuck with a more conservative investment strategy. Value-add investments, when done correctly, can build wealth. As the name implies, a value-add opportunity is one in which an investor can make substantive renovations to the asset or changes to management efficiencies and add value to an investment to
30 | think realty magazine :: september - october 2022
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