Understanding Value-Add Commercial Real Estate

Understanding Value-Add Commercial Real Estate Finding the right commercial property to invest in isn’t always easy. There are many factors to consider, such as the type of property, the location, and of course, the cost. Time is always an important factor to weigh as an investor, but that doesn’t mean you should avoid considering a property that needs some improvements.

When you find a diamond in the rough and take a building that needs a few updates to bring it to today’s standards, you can turn the worst property on the block into the most desirable commercial property. Learn why a value-add property may be the next investment for your portfolio.

What is a Value-Add Investment?

A value-add investment is the purchase of a property that does not meet its market value. These properties have vacancies, poor management, or are outdated and rundown. Because value-add properties close quickly and cost significantly less than core real estate properties, they have great potential to increase an investor’s profit. However, these commercial properties are high-risk. They also take time, effort, and capital before they become profitable.

How Do Investors Benefit from Value-Add Commercial Real Estate?

Investors benefit from buying value-add commercial property by repositioning the property. That is, elevating the property’s position in the marketplace by adding value to the asset. This can be done in a few ways, including:

  • Making structural or cosmetic improvements to command higher rents
  • Changing marketing strategies to attract quality tenants
  • Improving property management 
  • Managing and lowering operating expenses

The property’s cash flow will be increased significantly. Once the net operating income has been raised, the investor has several options. The property owners may keep the property and have a new source of cash flow or lease or sell it and reap high returns.

When Are Value-Add Investment Properties Worth the Risk?

While buying value-add investment properties can diversify your portfolio and bring high profits, it is risky. Here is what you need to know about value-add investing based on your real estate experience level:

Since the risk associated with value-add investing depends on the needed repairs and updates, it is not recommended for beginner investors. These investments are a project that may run over budget or take a long time to complete. If you cannot follow through with your business plan, you may be forced to sell your property at a lower price than you envisioned. However, you can still be a part of value-add investing through passive investing

Investors with moderate to extensive experience in real estate development will likely succeed with value-add projects. For many, value-add properties offer the perfect balance of risk and reward. Value appreciation and notable tax benefits can yield high returns, so this type of investment is popular among experienced investors. 

Most importantly, you need to remember that value-add properties usually sell for cash. Therefore, it’s vital to have enough cash flow to purchase the property and make all the necessary improvements.

Consult the Realty Experts 

Ullian Realty is a Florida commercial real estate group that provides professional realty services in Brevard County, FL. Our certified team will guide you through your value-add commercial real estate investment. Take a look at our commercial property listings!