Examples of Risk in Value-Add Investments

[Justin Goodin]

In multifamily value-add investments, common risks include:

• Not being able to achieve target rents
• More tenants moving out than expected
• Renovations running behind schedule
• Renovation costs exceeding initial estimates (which can be a big deal when you’re renovating hundreds of units)

When evaluating deals as potential investments, look for sponsors who have capital preservation of the forefront of the plan and who have a number of risk mitigation strategies in place. These may include:

• Conservative underwriting
• Proven business model (e.g., some units have already been upgraded and are achieving rent increases)
• Experienced team, particularly the project management team
• Multiple exit strategies
• The budget for renovations and capital expenditures is raised upfront, rather than through cash flow

Value-add investments can be powerful vehicles of wealth, but they also come with serious risks. This is why risk mitigation strategies are important - to protect investor capital at all costs.