You're about to discover how investors make the "big bucks" by doing what are called Value Add commercial real estate deals. The most successful commercial real estate investors do value add deals. That's where they make their millions (including myself and my Proteges). In this training, you'll learn what value add deals are, how to locate them, how to evaluate them and most importantly, a road map that you can follow to make the big bucks yourself!
Adding Value 101
Adding value to a commercial property is done in one of two ways...
Adding Value by Market Appreciation
The first way that commercial real estate owners increase the values of their property is to allow the forces of the market to slowly increase the value. If you're a good operator and consistently raise rents to keep up with the general market, in 20 years, by making no improvements or adjustments, some commercial properties can literally double in value. Simply by allowing time to elapse, most commercial real estate rises slowly in value thanks to market appreciation. This is not always the case, as some markets do go down if the population leaves overtime. But normally, all things being equal, if you continue to increase the rents of your commercial real estate to keep up with the general market, your property will appreciate and the value will increase.
Adding Value by Making Improvements
Instead of simply waiting for the market to hopefully appreciate, you can increase the value of a commercial property by applying "value adds" to it. In the example of an apartment building, you could remodel the kitchen (installing granite counter tops, stainless steel appliances and tile floors) and install washers and dryers in each unit. Those improvements allow you to charge more in rent and that increase in rental income can increase the NOI and when the NOI increases, so too does the value of the property.
When you add value to a property through improvements or other such adjustments, that's called a "value add" deal...because you added value. The most successful commercial real estate investors look for properties that have great "value add" potential. Using the apartment building example, wise apartment investors look for properties that need certain improvements which provide the biggest bang-for-your-buck return on investment (ROI). Remodeling kitchens and adding washers and dryers have proven to bring the highest ROI of any improvements, in recent years. Brand new built properties rarely have any value add potential so you are stuck with waiting for appreciation to provide any value increases over time. Some large institutional investors want brand new properties but we mentor individual investors on value add deals so they can produce enormous results, far more efficiently, than what typical large institutional are seeking.
Value Add Commercial Real Estate Investing
You're about to discover...
- Definition of value add commercial real estate
- How to locate value add deals
- How to evaluate the best ones
- Roadmap on how to create your own commercial value add deals
- An example of a real deal from one of our Proteges that purchased a $3 million property and increased the value to $6 million in two and a half years
What is Value Add Commercial Real Estate?
Value Add commercial real estate is when you can add value to your commercial property. It can be an apartment building, a shopping center, a retail center, office building, industrial warehouse or any type of commercial property. Basically, it is when you add value to the property by doing certain things. What is this value and how do you add it? Let me explain.
If you are watching my videos, you know by now that as you increase the net operating income, or the NOI, the property value goes up as well. Some of you may be asking, what's the NOI? The NOI is your rental income minus your operating expenses. As that number goes up, so does your property value.
How Do You Increase the NOI?
- Increasing the rents as the leases come up.
- RUBS: Ratio Utility Building System. This is where you bill back the tenants for the utilities. Taking the burden off you increases your cashflow, thus increasing your NOI as well.
- Add other income. We just recently discovered that everyone around our property was charging $400 for a pet so we started charging anyone with a pet $400 plus we increased the monthly pet fee to $75. There was no pushback at all from anyone because they love their pets.
- Reduce your expenses by:
- Being more efficient with your property operations. You can do this by being a better operator and hiring good property management who are efficient.
- Contesting your property taxes. If you believe your property tax is too high, you can hire a company, a firm, or an attorney, that will go in and contest your property taxes to get them reduced.
- Cutting expenses some other way. If you really look at your income expense statements, there may be something you can start cutting out that's unnecessary.
As you increase your NOI, you increase your property value. That is how you add value to your commercial property, hence the phrase, value-add commercial property.
How to Calculate a Value-Add Commercial Deal
The first thing you need to understand are the basic terms in commercial deal evaluation. They're not complicated. In fact, you can learn them from my video called The Seven Commercial Real Estate Terms You Must Know. You can watch it and learn these terms to ensure you understand what I'm teaching here. Once you increase the NOI in a property, the property value goes up as well. How do you calculate that increase in property value?
Value-Add= Increase in NOI divided by Market Cap Rate
What is the market cap rate? The market cap rate is a compilation of similar commercial properties. If they're all multifamily properties, you find out what they've sold for. Then you find out what the cap rates are and average it all together. The result is your market cap rate. If you want to find the market cap rate in your market, you can call a local commercial real estate agent and ask them. Ask them what the market cap rate for C-class apartments in your neighborhood are, and then use that number to calculate the value-add.
Examples Increasing the NOI
I'm going to compare a single-family home with a 16 unit, and I'm going to compare that with a 90 unit. This will enable you to see the differences between the properties. For the market cap rate in my example, we're going to assume it's 8%.
- Rent Raised/month: $200
- NOI Increase/year: $2,400
- Value-Add: $0
In other words, $200 times 12, that's $2,400 per year added to my bottom line. That’s the NOI increase per year. How much value did I add to my single-family home by increasing the NOI? Unfortunately, none. This formula does not apply to single family homes, only to commercial real estate. It applies to five units and greater for apartments, and anything else that's commercial. However, it does not apply to a fourplex, triplex, duplex or a single-family home. This is why investing in commercial real estate is so powerful. We can force the appreciation, force the value up very quickly. In a single-family home, you can double your rent, but the property value stays the same, because the property value is determined by your neighbor's property down the street.
16-unit Apartment Building
- Rent Raise/month: $200 on every unit
- NOI Increase/year: $38,400
- Value-Add: $480,000
In this example, I raised the rent $200 per month on 16 units, and multiplied that by 12, which equals an additional $38,400 to my bottom line. Using the value-add formula (increase in the NOI divided by the market cap rate), I divide $38,400 by 8% equaling $480,000. Therefore, I have a value-add of $480,000. My NOI went up $38,400, but the property value went up $480,000. You can see the correlation and how important the NOI is. This is the beauty of commercial real estate.
90 Unit Property
- Rent Raised/month: $200
- NOI Increase/year: $216,000
- Value-Add: $2.7 million
In the final example, the rent was raised $200 per unit, times 90 units, times 12 months, giving me a $216,000 increase per year in NOI. I then divided $216,000 by an 8% cap rate, which gives me $2.7 million. That’s the power of the NOI.
How to Find Value-Add Commercial Deals
Next, I'm going to show you how to find value-add property. You may be expecting me to give you websites or show you how to search with certain search words or keywords. I'm not going to do that because there are no websites to go to. Instead, you need to develop a new way of looking for value add opportunities.
Establish a New Mindset
First, you need to develop a new mindset. Looking with that new pair of eyes is very simple. You're looking for the value of a property. You need to see how much you can increase the NOI on a property per year divided by the market cap rate. Again, I showed you that if you can increase the property value on a 16 unit, by $200 per unit, that's $38,000 a year which increases the property value by almost $500,000. You need to approach every commercial property that you look at this way. Those are the new set of eyes.
Look to see if you can raise the rent, perhaps bill back the utilities, or reduce expenses. How do you know if you can raise the rents or add other income? If it’s an apartment building, you can go on to rentometer.com to see if the rents can be raised. If you want to know the current rates for an office building or a warehouse and whether you can raise the rent, go onto LoopNet. There are two options on the site, acquisition and leasing. Leasing will show you what other office buildings and shopping centers are getting for rent per month.
Can you reduce expenses? Always ask this question of your properties as well. How do you know if you can? Your first line of communication should be with the property manager because the property manager pays the bills every month for his properties, so will know if expenses are high or not. Getting an advisor or mentor will help you to see if it is possible for you to reduce expenses. Now, I guarantee you if you choose 10 properties in your market, in two out of those 10 you'll be able to do this formula and see the upside in value.
To summarize, you find value-add commercial real estate by looking at every single property the same way and asking, “Can I increase the NOI?”.
Roadmap to the Big Bucks with Value-Add Commercial Real Estate
- Get educated. You must become a student of the game. You can also become our student, but you need to become a student of commercial real estate by watching my videos, reading books, and meeting people.
- Focus on one property type. Do not do shopping centers, apartments, and grocery stores. Choose one and become an expert at it. There is power in focus. I don't know anyone who's extremely good at apartments and shopping centers. I know people who are really good at one or the other and make a fortune with them.
- Get your team in place. Hire a property manager, agent and lender. Get us involved. Assemble your team so you can be taken seriously when it's time to buy your property.
- Evaluate lots of commercial properties. This is so you can see if they do have the value-add component attached, to see if there's upside. You need to go through quite a few to find the property with the numbers that make you excited. Start examining lots of deals and making lots of offers.
- Buy a commercial property with value-add. You're going to buy a value-add commercial property by following the first four steps.
- Execute your exit strategy. A well thought out exit strategy is of extreme importance in commercial real estate. The big bucks are made on the exit, so the exit strategy must be precise, razor sharp and conservative. If you are a beginner, don't try to do it yourself. You need someone with experience to help you out with this.
A Real Student Deal
In conclusion, I'm going to share with you a real deal that one of our students did and provide a link at the bottom of the page to his story. He took a $3 million property and he increased it to $6 million in value in about two and a half years. Chris wanted to invest in commercial real estate. He had a retirement fund that was doing okay, but he was nowhere near reaching his retirement goals. For this reason, he came to us and his first deal was a 90-unit apartment complex. We helped him develop a value-add strategy for fixing up the property, raising the rents, hiring good management, and putting all that together in the first 12 months. Truly, his story is an example of the power of value-add commercial real estate.
Here's the full story on Chris: How Chris Became a Millionaire in 1 Year