Kind Of Blue by Miles Davis is seen by many as the greatest jazz record ever made.
On that record, Davis uses a style called Modal Jazz.
Versus jazz that came before, modal meant that while there was a general concept (like, say, value-add in real estate), musicians were free to play without restriction from chord changes.
This meant that great performers had freedom to pursue success in the moment. Even though there was a general structure, their improv options were limitless.
Now, you’ve probably read over and over about choosing B/C class properties as prime value-add investments.
The value-add concept is a fantastic structure for real estate investing.
But there’s no perfect blueprint of how to do it. The savvy syndicator needs to improvise based on the submarket, tenants, contractors, general economy, and more.
So let’s get into some examples of value-add plays in reality.
The Hype Job VS The Real Deal
The main idea to remember is that Things Rarely Go According To Plan. But they still work out when fundamentals are sound.
1. Theory VS Reality Of Location
Just after acquiring one of our properties, we were asked to approve designs/color palettes for reno units.
The palette we all loved turned out to be way too dark.
I mean, it looked great on the design examples. But when it was actually in a unit, and when the natural daylight was hitting it from the windows, it made people feel really gloomy.
What I think (as a syndicator) means a lot less than what my tenant thinks/feels living there.
And the cool design left the tenants feeling borderline suicidal.
So we immediately changed it for a lighter color than brightened the area up way more.
2. Renovation Timeline Means Balancing Interior & Exterior
Our deal underwriting for another property said that we would start the interior renos after two months of operations,
Because the exterior (eg. sidewalks, trees) needed work as well.
And tenants judge their emotions based on the “whole package”, not just their own units.
We’ve found that when you ask for a premium on rents, potential tenants always take the exterior grounds into consideration first. Even if they work long hours and never leave the unit once they are home.
potential tenants always take the exterior grounds into consideration first
When they first decide to move in, they check out the parking lot, signage, exterior paint job, and leasing office first.
So no one even gives us a chance to check out a newer (and more expensive unit) unless they are suitably impressed by the exteriors.
3. The Effect Of Trendy Renos
You might think we are talking about backsplashes. The climax of every home reno show.
Do you want to know what got the most positive feedback from tenants in one of our property surveys?
Yes, most of our existing tenants could have installed a USB plug themselves after a quick trip to Best Buy. So we didn’t include it in our initial value-add plan.
This is where having a proactive Property Manager pays off.
The feedback was overwhelming; people had a powerful desire for USB outlets. Like a car versus a horse-and-buggy type feeling.
Our theory told us one thing, and our submarket told us another (immediately)
What’s written in the investment plan has to be subservient to what the actual submarket wants.
4. Costs Of Construction Management
This is a very boring point. But we find a lot of investors (and even syndicators) ignore the costs of construction management.
a lot of investors (and even syndicators) ignore the costs of construction management.
It’s a small percentage of capex budget.
But at 5-10% it can make or break a value-add strategy on a tight deal.
Plan for it.
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Hopefully this gives you a clearer picture of how a potential investment turns out after the deal closes.
Yes, all these points fit under the category “value-add”. Yet they might not match exactly what the Investment Summary said.
And pay close attention to your investment updates, because your returns are protected by the flexibility of the Syndicator and Property Manager listening to the particular market, even while they follow the principles of the Investment Summary.
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