When talking about Real Estate Syndication Returns 20% is usually the standard that most managers want to achieve.
I see too many people get caught up in the shininess of the deal and they forget to take account of all of the costs….
Or they simply underestimate the costs.
Today we are going to talk about Value-Add and how it can help you, or possibly hurt you, when doing a Syndication.
Pros and Cons
The first thing we need to realize is that not every apartment complex or other real estate deal needs Value-Add.
A lot of times these investments just need repairs… and there is a difference.
Value-Add is used to increase the value of a property while repairs are just to make the property suitable to live in.
But under-appreciated properties are going to be the ones with the most potential.
#1 Regular Cashflow
The first benefit of Value-Add is going to be a regular and stable cashflow.
When you take a property and make it more modern or put nicer amenities in it then you have the ability to increase the rents and potentially increasing your cashflow.
On top of this, if the market does take a turn for the worse you will be protected with cash instead of having to sell the asset at a discount.
#2 Inflation Protection
One of the great things about real estate is that it tends to rise with inflation.
Apartment rents usually increase about 2% every year and when your loan is fixed that also adds to your cashflow over time…
This reinforces benefit #1!
This also increases the Value of the property because of the change in CAP Rate…
Which is what Commercial Properties, like apartment buildings, are usually valued by.
#3 Appreciation (Forced and Natural)
If you are planning on investing to value-add then you are taking advantage of what is known as FORCED APPRECIATION.
Basically this is when you spend some money to improve the property which then increases the price.
Natural Appreciation is simply the standard rate at which the property grows in value.
This can vary greatly depending on the area’s employment growth, population growth, crime ratings, school zones, and more.
(Tip: neighborhoodscout.com is a good website for understanding the area metrics listed above.)
And, unlike equities, it is not illegal to take advantage of private information in the real estate market.
Figuring out which direction cities and towns plan to build and grow is a good way to take advantage of higher natural appreciation.
I won’t go into great detail here but some of the tax benefits include:
- Interest deduction
- Capital expenditures
- and 1031 exchanges
First, Investing in markets with few labor opportunities can be very dangerous.
If one of the companies or labor forces goes down you are at a big risk for rental loss.
To mitigate this it is good to look for deals in places with many different job opportunities.
Second, Interest rate is another risk to be aware of when looking for property deals.
Right now is a great time to be looking for those properties because interest rate are historically low.
Third, DUE DILIGENCE IS NECESSARY!
There are too many unknowns so it is important to get referrals for good inspectors and property managers who have quality experience in handling the size of your potential deal.
Real Estate Syndication can be a very lucrative way to build wealth.
The best thing you can do to make sure you succeed is to build the right team around you who has more specialized experience.
When you have qualified people on your team you can take advantage of the benefits and mitigate your risks much easier than if you tried to figure everything out on your own.
We want to be MANAGERS.
The beauty of that is that we don’t have to know everything…
We just have to know the people who do.
Who do you think is the best person to have on your team?
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.