One of the most commonly used investment tactics for me and for my students is the value-added strategy for commercial real estate investment. Not for the faint of heart, this strategy is all about purchasing non or underperforming assets, Renovating them, Repositioning them and then Re-establishing their value in the market.
Although the initial purchase and financial support of the non-performing property can be scary during the lease-up phase, upon repositioning, the returns can be very rewarding either through cash flow or refinance. The hold period of these assets can be a critical component to your investment strategy.
Some investors make minimal improvements and then place the asset immediately back on the market looking for the immediate yet often smaller return on their investment. Others plan to hold the asset long-term until the property has maximized its optimal market value. In this case, the investor either then sells the property or refinances, pulling out any available equity for investments in other projects.
In the retail market, often investors are able to change the facade of the property, change the tenant mix and reposition a non-performing property into a highly lucrative investment.
This has been the strategy of NY-based Coventry Real Estate Advisors and OH-based Developers Diversified Realty. They look for retail properties where the mall format isn’t efficient. They look for tenants that can offer convenience and competitively priced products and services.
By changing the tenant mix they have changed the target market and have turned non- or underperforming mall properties into successful, high-valued retail centers by attracting more high-quality tenants who will add increased viability over the previous mall tenants.
In the multifamily housing market, you will want to look for buildings in good locations, with convenient access to highways and drive-by traffic, and which have a good unit size, mix and density of units. If by performing some deferred maintenance and improved curb appeal you can increase the amount of rental income, either increasing rents or decreasing vacancy, you will immediately have added value to the property and therefore increased your return on your investment.
You can easily pick up some value in this market as some investors overpaid and over-leveraged their properties and therefore were unable to perform routine maintenance since they did not have the cash flow. We can come in as investors and buy them out or buy them from the lending institutions, perform the needed maintenance and tenant up the property to bring the value up to a performing level.
No matter what your preferred property type, location is always the key when choosing a property to Renovate, Redevelop and Reposition. In the warehouse and office market you may find properties that have ideal locations but are functionally obsolescent. By performing a complete tear down or adding in new features such as wireless internet, the viability and marketability of the building can be significantly improved.
This is still a good time to invest in commercial real estate, you just have to use the strategies taught to you at the Commercial Property Academy to be sure you are not overpaying and that you have evaluated the viability of the property you are buying. Want to learn more? Go Here:http://commercialacademy.com
Photo: by tauntingpanda @ flickr.com