Ways to Add Value to a Deal
I’m going to show you the different ways you can build value in a real estate deal. You need the find the value in order to create and increase income. Approach each deal with the question: Where’s it at? Where’s it at? You can add value many ways and today I’ll show you five. You can always add value the hard way, which is yourself – sweat equity, or you could actually manage the value add and actually have a game plan.
A salesperson has to add value. If you’re selling something, selling a product, there’s got to be a value add. Otherwise you’re just stuck on price.
For example, if you want to build a phone, a great phone, what value add would it need? It would have apps on it. It would have a camera, great camera and it will be able to shoot video and do slow motion. It would have to have improvements constantly. It would be a value add.
How do you keep people shopping your product? You add value.
How do you add value to your career? You add value to the person you’re working for. Let’s say you’re a receptionist. How do you add value? Well, you know what, you know everything that’s going on. You know about all the products.
How do you do that in an apartment? I’m going to walk you through five ways to add value
1. Rent Disparity
Now, the first thing I look for in any market is what’s called rent disparity. Rent disparity means a difference. Rent disparity is if you can find a market that’s got $800 rent but has the potential to go to $4,000. Basically, it’s an economic explanation for the process of gentrification (creating improvements to raise value). It describes the disparity between the current rental income of a property and the potentially achievable rental income. You’re looking for the middle ground.
My sweet spot is that I want to be in multifamily, not shopping centers, not storage, not houses. So, when you buy four units and you’re at a thousand dollars a month, where’s the rent disparity? Where’s the value that can be added? How are you going to add value to exit? How are you going to add value to raise the rents? So, one thing to look for is markets where there’s rent disparity.
If I know there’s a bunch of product around being built around my property at significantly higher prices per door – again, rent disparity. But it’s also timing. I got people that are investing (banks and investors) that are investing a bunch of money around my property – It’s a timing play. How do you know about the timing? You got to be in the marketplace. You got to be in the marketplace to know when the timing’s right…
3. Amenities (Kitchens, floors, Garages, VIP Parking, Washer and Dryers)
Amenities are going to get you more rent. You fix a pool because it makes the place easier to rent.
People viewing the property will say, “Oh God, you’ve got ellipticals. Oh God. Oh, my gosh. You have nice people here. Oh, you got grills outside!” That only makes for a higher closing ratio when people visit your property. So, you captured them. Amenities make it easier for the management company to close the deal. For example, let’s say washers and dryers cost $600 per unit but by installing them I can increase the rent by $65 per month. That’s roughly $800 per year. Would you invest $600 to get back $800 a year? Uh, Yes, I would.
Here’s a value add example: We’re going to get another $65 a month for washers and dryers, we think we’re going to get another $25 per VIP parking. We think we’re going to get another $17 a month for VIP trash. We pick up your trash. You don’t. That’s another$100 to $150 a month! Multiply that by 200 units per month, which is $30,000 and 12 months would be $360,000 a year!
That’s called value add. invest something to get something back. And investment means you put your money at risk in order to get more money back. What will people pay for is value.
You need the property/deal to be producing income. When you buy one of these deals, the bank is not going to give you a loan if you cannot substantiate that this deal will produce income immediately.
5. Reducing Expenses
If I’m buying a property and I have another property in the same city I can have the same management company do both properties. There will be savings based on economy of scale. I can reduce my trash expenses, or other property maintenance expenses – again using the economy of scale. And that’s going to lower the expenses on the portfolio. Another way to lower my expenses is to get preferred financing or use debt to my advantage on the deal. I could get an interest only terms or great debt which is going to return my investment, return my cash flow to investors, etc.
This is about value add. It’s about where’s the value add in the deal. There’s times where I paid all the money for a deal or over because I know there’s value add based on timing, based on pricing, based on debt, based on opportunity.
Add value to your deal and you’ll always have a buyer and appreciation when you exit.
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Also Check : Walking Through the Deal.