generate higher returns than more conservative strategies like core and core-plus, which require few modifications to the property. Investors acquire commercial real estate for constituent cash flow and long-term appreciation. Value-add opportunities allow investors to boost both cash flow and equity through strategic improvements in appearance, amenities, and management efficiencies. Although value-add investments come with outsized upside, they can also potentially come with huge risks. WHEN VALUE-ADD BECOMES VALUE-LOSS A value-add opportunity can become a loser under multiple circumstances, including overpaying at acquisition or underestimating costs post-acquisition. Overpaying and cost overruns diminish the returns you once projected. Value-add opportunities get all the hype, and everyone wants to get involved with them. Still, there are two misconceptions to remember when evaluating value-add opportunities versus other opportunities: • Misconception #1 is that all risks associated with value-add investments are minor and can be overcome easily. • Misconception #2 is that other strategies such as Core and Core-Plus can’t compete with value-add assets. MISCONCEPTION #1 The idea that all risks associated with value-add investments are minor and can be easily overcome is false. There are many risks, both external and hidden, that can get out of hand and end up being prohibitively time-consuming or costly to remedy
or mitigate. Risks involved with value-add investments include: • Rehab running behind schedule. • Overrun on material costs. • Unplanned labor costs and issues. • Disasters occurring during renovations (e.g., striking a water main or gas line). • Natural disasters. • Troublesome tenants. • Unsavory elements moving into the neighborhood or neighboring communities. • Not achieving target rents. • Inability to reduce vacancies or unexpected increase in vacancies. • Rehab costs exceeding estimates. • Undetected foundational or structural issues. MISCONCEPTION #2 Another misconception surrounding value-add opportunities is they are the end-all-be-all of real estate strategies—core and core-plus opportunities be damned. When value-add properties get mired in problems, they’re no longer the “value” an investor thought they were. A solid core or core-plus opportunity seems relatively favorable compared to value-add properties caught in those circumstances. CORE/CORE-PLUS VS. VALUE-ADD So, what’s the difference between core and core-plus properties versus value-add? • Core properties have high occu- pancy (90% or higher); generate
stable, consistent cash flow from established, high-quality tenants locked into long-term leases; are located in prime locations; and require little to no upgrades. • Core-plus properties are similar to core properties, but they offer the opportunity to improve cash flow through slight property, management, potential to generate above-average gains. And, if they perform exactly as projected, they will outgain other investment strategies. That doesn’t mean investors should ignore core and core-plus properties. They can prove valuable in any portfolio as a consistent and reliable cash flow source. Compared or tenant improvements. When handled properly, value‑add properties have the to underperforming value-add properties, core and core-plus properties have the potential to outperform value-add properties but without the risks or headaches. The success of a real estate investment comes down to deal analysis, data, and numbers. It doesn’t matter which strategy you pursue. If you rely solely on buzzwords and fail to do your homework, your investment will fail. On the other hand, if you dot all your “i’s” and cross all your “t’s,” you can make money from just about any strategy. •
Kyle Jones is the founder and key principal of TruePoint Capital, LLC, a private equity firm focused on owning and operating value-add multifamily
assets and ground-up construction. Jones is responsible for overseeing all aspects of the company’s financial activities, operations, and investor relations. In addition to TruePoint Capital, LLC, Jones is a co-founder of American Grid, which is a residential appraisal management company. Before becoming a full-time investor and entrepreneur, Jones worked for multiple Fortune 100 companies and in the high-tech sales industry.
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