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What is a Value-Add Strategy in Real Estate Syndication?

Investors in any real estate syndication can make money in two ways. First, they potentially earn monthly or quarterly cash flow distributions as properties turn a profit. Second, they can enjoy a strong return if and when the property is sold at a higher value than the purchase amount.

There are different strategies that real estate syndications can use to help their properties increase in value over time. One of the most prominent is known as a “value-add” strategy. Here’s how it works.

The Value-Add Strategy Explained

A value-add strategy simply means improving an asset over time so that it’s in better condition (and more valuable) when it’s sold than when it was purchased.

For the value-add strategy to work effectively, syndicators often select properties that are ripe for improvement. That is, they search for properties that could increase in value with the right mix of upgrades.

For example, imagine a multi-family syndication that purchases a 20+ year old property. . Given the age of the property, there may be interior and exterior improvements to the property that can quickly increase its value. Examples of value-add improvements could be:

  • Repaved parking lots

  • Adding a washer/dryer in units

  • New appliances and flooring

  • Improved amenities like a pool area or dog park

  • Building covered parking

There are many other ways to add value as well, including bringing in new management to optimize rent increases and decrease vacancies, adding new amenities for residents, changing up marketing strategies, plus more. Sometimes, adding value includes evicting problematic tenants and/or reducing operating costs.

The forced appreciation that accompanies a value-add strategy can deliver tax benefits as well. Adding value helps owners maximize depreciation, and a cost segregation study can be used in some cases to pull forward depreciation-related tax benefits. A cost segregation study isn’t always the best path forward, and be sure to consult with a tax professional before making any depreciation-related decisions. Keep in mind that in order to take full advantage of depreciation benefits, the 2022 tax year is the last year for 100% bonus depreciation and reduces 20 percentage points every year through 2027, when it reaches 0.

The Unit-By-Unit Approach

One of the simplest and most effective ways to approach value-add is to go unit-by-unit in a multifamily property. Take the existing vacant units, and pursue interior improvements (like fresh paint, new flooring, updated cabinets, etc.). Once the improvements are complete, the unit can be leased at a higher rent.

Continue with this approach as units become vacant. Perform interior updates and improvements, and then lease them again at a higher rent. If the investment group holds a property for 5 years or more, there’s likely time to add value to the majority of the property and potentially turn a significant profit upon sale.

What to Look for in an Operator

The key to the ultimate success of a value-add strategy is partnering with a quality operator — the entity and/or people who take care of day-to-day management of the property. Look for operators that:

  • Know the market inside and out, including the improvements that will deliver the greatest ROI.

  • Have a demonstrated track record on using the value-add strategy and other properties.

  • Work with an established supply chain, including the construction crews, staff and vendors needed for execution.

While the value-add strategy is often effective in commercial real estate investments, it’s difficult to maximize any property’s potential without a strong operator.

Invest in Multifamily Properties Through Madison Investing

An individual investor often can’t afford to purchase a large multifamily property that sells for $50 million. But they can pool their money with other investors to form a syndication that purchases a multifamily property. The best part of joining a real estate syndication is that the general partners take care of all the heavy lifting, ie. operations, making it a fully passive investment for investors..

At Madison Investing, we connect investors with attractive multifamily and self-storage opportunities through real estate syndications and real estate funds. If you’re an accredited investor interested in diversifying your portfolio and taking steps toward financial freedom, request an invitation to join our investment club to explore your financial goals and the possibility of investing with us.



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