Commercial real estate (CRE) investing is a popular way of generating income and building wealth. However, not all CRE properties are created equal. Some properties require more work and risk than others, but also offer higher potential returns. These are known as “value-add” properties.
What Is a Value-Add Property?
A value-add property is a property that has the potential to bring in more income in the future with some effort made towards changing management or bettering the property1. The property may be of lower value due to its age, due to deferred maintenance leading to larger disrepair, or poor management2.
Value-add properties are typically locations that cannot reach their market value right now due to poor management, intensive repair requirements, or low demand for property in the area. There are times when investors will come across value-add properties; properties that still have a greater potential to reach1. Caspian Group has partnered on many opportunities when there is a property that demonstrates a high ROI potential, and has decades of experience with adding value to commercial properties.
Generally, value-add properties fall into one of the four major risk profiles of CRE investment properties, along with core, core-plus, and opportunistic properties. Value-add properties have a higher degree of risk, and higher potential returns, than core and core-plus risk profiles, but less risk and lower potential returns than properties in the opportunistic category3.
The table below summarizes the main characteristics of each risk profile:
Stabilized, high-quality, low-vacancy, well-located
Stable and predictable
Similar to core, but with some minor issues or opportunities for improvement
Stable with some upside potential
Underperforming, outdated, poorly managed, or in need of renovation
Variable and uncertain
Distressed, vacant, undeveloped, or in need of major redevelopment
Very high (75%+)
Negative or minimal
How to Find Value-Add Properties
Finding value-add properties can be challenging, as they are often not advertised or listed on the internet. With a broker in your corner, you have access to a network of opportunities. Our brokers have access to off-market deals or can create deals of properties that may not even be for sale. However, if you aren’t ready to talk with a broker, there are many ways to gain more knowledge through your own research:
- Join real estate investment groups – Many neighborhoods have local investment groups that converge frequently to offer networking and educational opportunities to their members. Some examples are MnREAI, MNRec, or Caspian Group events.
- Find listings on the internet – There are some lists online that contain short sales, foreclosures and value-add real estate. While some of these lists are free, others require a small fee for access.
- Connect with a wholesaler – Wholesalers are people that find buyers for value-add real estate on behalf of property owners.
- Drive around the target neighborhood – You could simply drive around the area where you want to buy property and look for potential investments. Look out for locations that show signs of deferred maintenance or neglect.
How to Add Value to a Property
Once you have found a value-add property, you need to devise a strategy to improve it and increase its income potential. This may involve some or all of the following considerations:
- Renovation/Redevelopment Costs –
- Penalty During the Renovation/Redevelopment Period –
- Benefit Following the Renovation –
- Permanent Loan Refinancing –
- Exit Assumptions –
The key point is that value-add real estate is all about trade-offs. You will need to weigh the costs and benefits of each improvement and decide which ones will generate the most value for your property. Partnering with an experienced professional can save you or your investors considerable time and aggravation by foreseeing and advising along your side.
Caspian Group Properties
Caspian Group is a full-service real estate investment, development, and management firm that focuses on acquiring and repositioning underperforming multifamily and mixed-use properties in the Midwest and Southeast regions of the United States. At Caspian Group, we love taking on “value-add” opportunities.
Some of the properties that Caspian Group has successfully transformed include:
- Farmington Mall – 4.4 acres with a 39,144 SF retail building and 4,158 SF restaurant in Farmington, MN, that was acquired in 2016 for $600k. It underwent a $1.5 million renovation that included interior and exterior upgrades, amenity enhancements, and tenant incentives. The property increased its NOI 189% and its value by 537%.
- 8651 Naples St — 12.4 acres bought in 2021 for $4.7M. Value was added by restructuring leases, and refocusing the marketing on its rare outdoor storage possibilities. The value was increased by 49% and just sold for $7m.
- Monticello Mall – 26,000 SQ FT shopping center in Monticello, MN. The building was 50% vacant at purchase in March 2020 for $800k. Renovation budget was limited to only $700k. This property is now under contract to sell for $3.3M .
These are just some of the examples of how Caspian Group has applied the value-add strategy to create value for its investors and tenants.
In value-add real estate investing, underperforming properties are acquired and improved to increase their value and income potential. Value-add properties have higher risk and higher returns than core and core-plus properties, but lower risk and lower returns than opportunistic properties. Value-add real estate requires careful analysis, planning, execution, and exit strategies to be successful. Caspian Group is one of the leading firms in the value-add real estate sector, with a proven track record of transforming commercial and mixed-use properties in all areas of the United States.