We love value-add deals.

Why?

Because by doing value-add improvements to the property, we can increase our cashflow and substantially increase the value of our building.

Here's an example of a 36-unit apartment deal we acquired back in February 2017.

Acquisition Cost: $514,000

Renovation Cost: $275,000

"All-in" Cost: $789,000

In January 2020 (last month), we got the property appraisal and it appraised for $2.1 MILLION. We decided to REFINANCE and we were able to pay back 100% of our investor capital back and pull out an extra $409,719 in cash. Below is the screen shot of the HUD-1 for the refinance (we closed it last week):

How Did We Do It?

When we acquired the building back in February 2017, we knew the rents were low (average rent was only $413/mo/unit). The previous owner did not want to increase the rents because she was worried of losing the remaining tenants (the property was only 57% occupied).

We came in and invested $275,000 and below are some of improvements we made:
1. Improved the kitchens by repainting the cabinets/replacing them
2. Improved the bathroom by replacing the toilets and shower heads with low water/more efficient and stylish fixtures
3. Replaced the flooring in the bedrooms with carpeting and installed vinyl flooring (that looks like real wood) in the kitchens and bathrooms
4. Installed new lighting fixtures and LED light bulbs

On the vacant units and as the units turnover or the leases expire, we made these improvements and increased the rents substantially. In less than 3 years, we increased the rents from an average of $413/month/u to $805/month/u. And because of the property improvements we did, we increased the rents AND the occupancy at the same time (our occupancy right now is at 95%).

Below is a snapshot of both the rent increases (and NOI increases) for the months of February 2017, Feb 2018, Feb 2019 and January 2020. As you can see below, we basically (almost) 3X'ed the rent and more than 2X'ed the NOI.

When we acquired the property 3 years ago, we told our investors it will be worth $1.2 MILLION. We were wrong. It's now worth $2.1 MILLION and we got a new loan for $1.2 MILLION - a very safe 60% Loan to Value.

What Did We Learn?

1. Our philosophy is we make our apartments BETTER than what people are used to in the area (for example, we give our tenants in "B" areas "A" quality finishes) and by doing this, our tenants are more than happy to pay the significantly higher rent.

2. Moreover, when you provide quality apartments, not only will you get higher rent, but you also attract better tenants who stay longer at your property and refer you to their friends and family. This is the reason why we increased both the rents and the occupancy.

3. Seeing the value in negative cashflow or underperforming properties. Most investors will stay away from buildings like these because they get turned off when they see the actual numbers. We really don't care so much about actuals more than we care about how we can operate the property and if we can turn it around. In the hot apartment market we have right now, good deals are less likely to be found. You have to have the ability to find the "good" in the deal.

Hope the above post educates and inspires other landlords - experienced and newbies alike.

By the way, I made a Value-add Deal Analyzer that quickly analyzes apartment deals (below is the screen shot of my analyzer on the above deal - and the value it predicted is pretty close to what the property appraised for!)
Let me know if you want it and I will send it to you.