This is part five in a five-part series about increasing your income as an income property owner. Bob Nelson, real estate investment broker, with Pacwest Real Estate Investments, and René Nelson, commercial broker and owner of Pacwest Commercial Real Estate in Eugene, discuss value add opportunities and financing.
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Value-add properties can be a real sweet spot for investors. Think about an apartment complex that was built in the 1960s or ‘70s and hasn’t been updated recently. It’s important to consider how to use the right financing during a value-add opportunity.
Let’s define what we mean when we say value add. For us that means buying a property at a price that is indicative of its current condition, changing its condition, changing the rent structure, changing a number of things about it, and causing it to produce a much higher income—and justifying the amount of money I put into it.
As I make an effort to find a value add, first and foremost it’s important to be able to identify how much I can pay for that property—because I know that I’m going to add another $40,000 and I want an entrepreneurial profit for doing it. In other words, I’m looking for a profit for taking on that mission because there’s going to be a number of uncertain times for tenants and so forth and I need to deal with that and I want to see a profit for doing it. Then for interest rates, you’re attempting to find a situation that would at least have a fixed interest rate for the period of the time that you’re renovating the property. That is an ideal situation.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
I take a look at the probable final valuation, deduct the cost of getting there, the entrepreneurial profit also, and that’s the maximum price I can pay for that property. There’s not a lot of them out there that really “pencil out.” The inventory is scarce and it’s a situation in which even the value-add properties are attracting premiums. They frankly shouldn’t, but that’s just the way it is. It’s the only dance in town and you’ll take that. That’s a tough situation.
Increasing Your Income through Value-Add is from Bob Nelson and René Nelson on the “Real Estate Today ” Eugene, Oregon, radio show, which airs at 5:30 daily on KPNW.