The Asset Advantage

In this edition of The Asset Advantage we are diving into an essential topic for multifamily investors: the distinctions between physical and operational value add strategies and how each can impact returns.

What is Value Add?

First, let’s start by just defining what we mean by “value add”. This refers to strategies that enhance a property’s worth, typically by improving its revenue or reducing expenses. This value can be added several different ways, most of which fall under two primary buckets: physical improvements or operational efficiencies.

1. Physical Value Add: Enhancing the Property Itself

Physical value add involves tangible upgrades and renovations to the property. These directly affect the property’s appearance (internal and external), longevity, and amenities, making it more attractive to potential tenants and often allowing for higher rents.

Examples of Physical Value Add:

• Interior upgrades: Replacing flooring, countertops, fresh paint, new lighting fixtures, new appliances, etc.

• Exterior Enhancements: Updating building exteriors such as paint or siding, landscaping, paving the parking lot, adding signage, etc.

• Amenity Additions: Adding or upgrading shared spaces, such as gyms, pools, community lounges, mail rooms, etc.

Benefits of Physical Value Add:

• Increased Rental Income: Higher quality units command higher rents, directly improving monthly cash flow.

• Enhanced Tenant Retention: Attractive upgrades can boost tenant satisfaction and in turn lead to longer lease renewals.

• Long Term Appreciation: Properties with superior finishes and amenities tend to command premium prices when the time comes to sell.

2. Operation Value Add: Optimizing Management and Efficiency

While physical improvements transform the appearance of a property and are most commonly thought of when hearing the term “value add”, operational value add can play an equally large role in increasing a properties value. This approach targets increase NOI by minimizing expenses and boosting the property’s operational efficiency.

Examples of Operational Value Add

• Improving Leasing Practices: Implementing strategies to reduce vacancy rates and attract quality tenants.

• Preventative and Predictive Maintenance Programs: Create a proactive maintenance calendar for HVAC systems, plumbing, and common area lighting to prevent costly emergency repairs and extend the lifespan of major systems.

• Improved Tenant Screening an Onboarding Processes: Use automated tenant screening software to check prospective tenants’ credit scores, rental histories, and employment status, reducing the risk of missed rent payments or eviction.

• Ratio Utility Billing System (RUBS): Reallocate utility expenses by implementing RUBS, where tenants pay a portion of utilities (such as water, sewer, and trash), reducing the property’s utility expenses. Where possible, it may be a good idea to install individual metering to directly transfer the costs to tenants.

• Implement Technology Based Solutions: Digital payment systems, self-guided tours, and other smart home integrations attract tenants who value convenience and simultaneously decreases the effort required of the management team.

Benefits of Operational Value Add:

• Improved cash flow: Operational efficiencies increase NOI, without requiring major capital improvement.

• Lower Tenant Turnover: Streamlined processes, prompt maintenance, and improved tenant communication lead to higher tenant satisfaction and retention.

Key Takeaways

Both physical and operational strategies offer unique advantages, and the best blend is often dependent upon the property’s specific needs and current state. Understanding, recognizing, and executing these strategies can really make the difference on a deal’s success.

Thanks for reading! If you would like to connect with us further, please refer to the links below.

Like this type of content? Please share with your friends to help us grow our subscriber list!

Disclaimer: Nothing in this communication shall be construed as an offer for investment in CHLW Partners, LLC (the “Company”). Solicitations for investments by the Company will only be made through a Published Investment Opportunity in the Company's investor portal provided by the Company to potential investors for such purpose.