The term "Value Add" is a term used widely in the real estate industry

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The term "Value Add" is a term used widely in the real estate industry. Basically the concept is to take an existing property and perform a number of improvements designed to "Add Value" to the asset. We have made some basic assumptions about the property and they are included below. Improvements could be any of the following :

1. Improve the quality of the residents by raising rents. 

2. Update Decorate the Existing Clubhouse-$15k

3. New Fitness Center- $25k

4. Exterior Paint Job-$800 per unit

5. Interior Improvements - some or all

  a. New Appliances-$1200 

  b. New Counters-Resurface is $350. New Formica is $900. New Quartz is $1800

  c. New Flooring-Carpet is $1200. Vinyl Plank is $1800 (This would be in common areas and carpet in the bedrooms)

  d. New Lighting Package-$450

  e. SMART Apartment Package-$600

  f. New Fixtures-$350

 g. Blinds-$300

Assume this is a 1995 community and we are looking at updating 100-two bedroom units. 

Current effective rents $800. Market on similar properties $1250.00

Discuss the assumption that all of the above improvements will be done and you will raise rents.

1. How much will you raise rents on each unit ? (assume 100 apartments is the size of your property.)

2. You are assuming a 5% rate of return.

 

Question #1

What is the value you add to the property ? (Use the IRV equation)

Question #2

Before you go spending a lot of money, how would you determine if improvements would be a success and you'd end up with a new resident profile and a value added success story ?