WAYS TO ADD VALUE TO INCREASE APPRECIATION OF A COMMERCIAL REAL ESTATE PROPERTY

WHAT IS VALUE ADD COMMERCIAL REAL ESTATE?

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, etc. Any commercial real estate property is eligible to be Value Add commercial real estate. 

Value-add refers to the purchase of a building for the purpose of adding value. Value-add may come from lowering operational expenses and increasing revenue. It also may come from repurposing a property altogether. Value-add properties are those that need corrective action to reach their full potential value. These properties are riskier and offer better returns than standard, or “core” properties. Properties in this category may suffer from a host of common ailments, including deferred maintenance, below-market occupancy, lease rates below the area norm, and substandard facilities and equipment in need of repair or upgrade.

In order to generate a good return on investment (ROI) with a value-add property, investors must put in capital, sweat equity, or both. The end value can be in the form of increased net operating income, cap rate compression, or any number of items that ultimately lead to a short-term increase in value.

Value-add commercial real estate investments typically target properties that have in-place cash flow but seek to increase that cash flow over time by making improvements to or repositioning the property. Common ways to improve value-add properties include property renovations, both inside and out, management restructuring, marketing efforts, and changing how the property generates income. This could include making physical improvements to the asset that will allow it to command higher rents, increasing efforts to lease vacant space at the property to quality tenants, or improving the management of the property and thereby increasing customer satisfaction or lowering operating expenses where possible. 

 

What Are the Characteristics of Value-Add Properties?

The focus of this investment is to find ways to improve the property or decrease operating expenses. Value-add properties may possess a variety of characteristics, such as:

• Currently have management or operational problems.
• Require physical improvements.
• Have problems with capital constraints.
• May be poorly leased or about to turn over leases.
• Leased at below market rents.
• Not being properly maintained or managed.

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 (NOI). As the NOI increases, so does the property value. Net Operating Income is the rental income collected minus operating expenses.

 

 

ADDING VALUE TO COMMERCIAL REAL ESTATE

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. Investors may make improvements to the property that enhances its quality so that it appeals to other types of tenants. Some ways that value is added to these properties include:

 

• Naming the Property

Naming your property increases knowledge of your property. This is a great idea for branding also which will significantly increase its value. You can research name ideas but a good idea is to consider the property’s area, community, and history.

 

• Increase size

Adding further square footage to your commercial property can raise its value. Depending on the use of the property, you may increase the size by adding an extra office, more parking spaces, or a conference area. In order to do this, you must consult with local authorities to gain the necessary approval before you start any construction work.

 

• Improve exterior

Add value to your commercial property’s exterior. The appearance of your commercial property can greatly influence customers or potential tenants. There are several low-cost ways to increase value by making external improvements. By ensuring that your property is extremely clean is a great way to boost its value. Make sure that your grounds, parking areas, and any walkways are kept clean and easy to access. You should ensure that all rubbish bins are regularly emptied, any grass on your premises is cut, and keep any drains unclogged.

The building itself should be well maintained, so anything that needs to be mended should be fixed as soon as possible. Any paintwork on the outside of the building should be kept clean as this is a great, easy way to keep up the appearance of your commercial property.

 

• Change Management or Leasing Companies

Sometimes all that’s needed is to look at your property through a new pair of eyes. Different energy or philosophy can add value to your property. New managers or leasing agents may be able to give you ideas on increasing income, decreasing expenses, and giving your property a fresh, new look and feel.

 

• Reconfigure the commercial property’s space  

Adding or dividing up space can also help increase a commercial property’s value. Consider adding spaces such as parking or storage, which can easily increase value as both are always in high demand. Finishing unfinished spaces or building additions could also be a way to achieve the same result.

 

• Stay modern

Keeping your building up-to-date is a failsafe way to keep adding value to your property. Customers and tenants love an aesthetically pleasing building. Ways to keep your property modern can include the use of the most current, energy-efficient heating and air-conditioning, water heaters, and lights. All of this can help you save on regular energy costs too! Upgrading your roof is also another great way to modernize your property and cut costs, which means a new roof can also offer a great return on investment.

 

• Add Amenities or Explore Income Producing Ideas

You can add amenities to increase the value of your commercial property. Amenities you might add are concierge services, a fitness center, a conference room, a business center with a fax machine and copier, a coffee bar, etc.

Income-producing ideas are established as a source of generating more income. Some income-producing ideas include renting your roof space for cell towers, adding a laundry room and coin-operated machines to an apartment complex, renting your common areas for art shows, car shows, kids’ rides, etc.

 

• Updating signs

On entering a business building, the first thing most people will see is the signage showcasing your branding. If your signage is in need of repair, hidden by landscaping, or difficult to read this can devalue your property. Keep your signage up to date and also consider different sign styles, materials, sizes, and placements. It should be perfectly lit and have signboards in all the right places. The pathway to the entrance and the flooring should be refurbished, and the outside area can be embellished with stones and greenery, and beautiful blooms that create a blissful environment. You could consider speaking with a sign maker to work out all your options.

 

• Avoid vacancies and maximize your marketing 

Even if you have updated your commercial property with all the latest features and your space is offered at a fair market value rate, your space will automatically be worthless if it has vacancies. After all, one of the easiest ways to lose money in this type of real estate investing is through vacancies and lost tenants. Finding tenants and avoiding vacancies are likely the most obvious ways to add value to your investment. This means that finding reliable and long-term tenants is key to becoming a successful commercial real estate owner.

 

• Enhance the Security of the Premises

Businesses are vulnerable to thefts and vandalism. Thus, it is vital to have a robust security system in place to avoid such challenges. The premises should have a tall fence and surveillance cameras in all the common areas, parking, pathway, entrance, etc. Upgrade to a high-security gate with an alarm system to evoke a sense of safety in the customers visiting the commercial building. It will keep unwanted people away and stop kids and pets from wandering away.

 

• Increase the Rent

Whenever you sign a new lease agreement, you must increase the rent according to the market trends and the condition of the property. Also, add the clause of annual rental increase while keeping in mind the inflation. It will help in generating a better cash flow from the property and this will grab the attention of the buyers. Review the market to determine the average rent; if you are below the average for your type of property, increase the rents accordingly. Increase the rent over time for existing tenants; however, when renting a vacancy, charge at the new increased rate. You can check rental rates by going online to search or by contacting a local property manager or leasing company in the area.

 

 

How to Find Value Add Real Estate

Though there are numerous distressed rental properties out there, it might not be easy to find the right one for you. Here are some tips on finding value-add real estate:

 

• Join real estate investment groups

Many neighborhoods have local investment groups that converge frequently to offer networking and educational opportunities to their members. Quite often, they will also have property listings in their monthly newsletters or websites. 

 

• Find Listings on the internet

There are numerous lists online that contain short sales, foreclosures and value add real estate. While some of these lists are free, others require a small fee for access. You can also use filters such as budget, rental strategy (traditional or Airbnb), and the number of bathrooms, and bedrooms.

 

• Connect with a wholesaler

Wholesalers are people that find buyers for value-add real estate on behalf of property owners. Most of these people are well-connected with sellers and agents in certain neighborhoods.

 

• Drive around the target neighborhood 

You could simply drive around the area where you want to buy a property and look for potential investments. Look out for homes that show signs of deferred maintenance or neglect. Reach out to the owner via telephone or email and make an offer.

 

CONCLUSION

Like any investment, value-added real estate fits well in some portfolios, and not so well in others. Under the right stewardship, value-add investments can provide excellent returns and substantial tax advantages when compared to equities, bonds, and other common investment vehicles.

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.