Everyone wants to do value-add deals in Multi-Family. In my opinion these are 3 types of value-add in Multi-Family or Commercial Real Estate in general.
1) Cookie cutter value-add
This is the most common one where there is some deferred maintenance but mostly interior unit renovations that lot of the times proven by the seller. The reason lot of people get into this because of the predictability of the deal. In this climate of low interest rates, so much capital chasing deals and extended economic expansion cycle, lot of people wants to do typical and safe value-add. These deals getting skinnier day by day. The cap rate are compressing, people are overpaying and it usually end up as very thin deal unless its executed perfectly. There is no margin of error in these deals. That's why sponsors are taking 15%, 18% and giving most to investors as deals are not penciling out.
2) Deep value-add
Properties that are not renovated for so long time, high mismanagement, high vacancy, lot of down units, huge deferred maintenance like roofs are bad, sewer lines to be replaced, foundation issues etc where there is a lot of meat on the bone/ reward but at same time it's high risk. In most of the cases, people take bridge loans, refinance cash-out and move to long term loan. In this process they can return lot of their initial capital to investors and still keep them in deal for long term but with lower ownership for investors.
3) New construction
New construction is really big value-add where you are developing from raw land to great product. Its high risk but high reward to investors and sponsorship team alike. There are lot of unknows and risk but with right structuring lot of risks can be mitigated to investors. And when you are there in all the phases of rezoning, horizontal development and vertical development, sell or lease up and manage the property you will be adding most value and pass on the value to investors.
For Zovest #1 is bread and butter, but we are mostly going towards #2 and #3 these days. Please reach out to me at email@example.com for further questions, comments, feedback and ideas on what kind of value-add you typically execute or like to invest.
Have a great year ahead!
We at Zovest Capital, invest in value-add and new development of Apartments in growing markets to provide passive cash-flow to our investors.