Value-Add Multifamily Investing: What are the Advantages?
Real estate investors rejoice! One of the best opportunities for investing right now is in value-add multi-family properties (ranging from $1 million – $10 million). As more and more people move toward renting, especially in large cities, investors are pouncing on the opportunity that’s presented by the socioeconomic winds of change.
Value-add multifamily investing can earn you returns through a property’s net operating income, also known as its NOI. With higher rents and lower operating expenses, profits can be realized. As profits are realized, the property’s market value increases — a win-win for real estate investors.
So what are some of the most important advantages of value add multifamily investing and how do you get started? Let’s take a closer look:
Flexible Financing
If you’re looking to buy a property in need of repair or rehab (or you already own one), you may not realize that the equity built up in your property can be tapped into in order to fund this rehab. This cash-efficient strategy can also be used to buy a new value add project which can in turn enhance your portfolio. A Los Angeles hard money lender will be able to educate you on the best financing options and strategies.
Improved Cash Flow
Let’s face it, who couldn’t benefit from increased cash flow? No matter how long you intend to hold onto a property or what your business strategy is, an increased cash flow improves investor returns while reducing risk — yet another win-win.
Investors looking to capitalize on value-add projects as either a short term or long term hold.
Long term holders generally invest in stabilized properties. Of course, long-term property real estate investors want a portfolio full of properties that create strong cash flow, but the question to ask yourself on these types of assets is whether or not the adjusted return and the inherent risk will lend themselves to the possibility to buy an already-stabilized property or build your own.
Structural Features of the Loan
Another point to remember about value add loans is that they’re made up of more parts than a typical property bank loan. Both buyers and lenders have to understand the key sensitivity points from the point of view of the other party. This can create a climate between them that causes failures, in terms of things like:
- Prepayment penalties
- Recourse vs. non-recourse
- DSCR Requirement
- Class C Property Eligibility
- Secondary and Tertiary Market Lending Ability
- Occupancy Requirements
As you can see, value-add multifamily investing allows for risk-adjusted profiles that work with both short and long term asset holding periods. There are a range of hard money financing options including real estate funds, partnerships and more. But it’s important to remember that there are several points to keep in mind that can cause friction or failure in the process. By being aware of these, you can take steps to help increase your cash flow, the smart way!