The benefits of real estate investing are numerous: with selective and well-placed investments, investors can enjoy stable cash flow, tax advantages, excellent returns upon disposition, and diversification of one’s portfolio. Within real estate you can choose to find the asset that delivers returns best suited for your lifestyle. Looking for an equity multiplier? The 1 or 2 year building flip might suite you best. What about wealth storage with a tax shelter? The turn-key apartment complex might be the answer here. Maybe cashflow is your goal? The value add medium term hold is your strategy! What all this demonstrates is that real estate investing has no singular answer for success.
At Belz Living, we have narrowed upon our niche: the “tired” Class B value add apartment. Class B apartments are typically older buildings that have less amenities yet are located in desirable areas. The Class B condition varies greatly. We have experienced the most success with tired, mismanaged, Class B buildings with deferred maintenance. This gives us the opportunity to close at a discounted price, streamline asset management, and push capital into the property to rapidly increase the NOI (net operating income) and ultimately its value.
To explain it further, value add is anything that can assist the property in reaching its maximum income potential. For example, take unlivable square footage and turn it into something that can be appraised. Our first single family home rental had an unused basement space that was able to be transformed into an office, laundry room and bathroom. Our latest acquisition had a building being used as a geologist’s office although zoned as a duplex. We revamped the space transforming it into a residential duplex allowing the rent charged to double. This value add strategy is limited only by the sponsor’s creativity. This strategy is a top favorite because it gives back two fold; the building appreciation is significant on top of the monthly cash flow as these renovations justify a higher market rent.
Additional opportunities for efficiencies lay in the debt held. In an era of rising interest rates, by refinancing or securing a note with fixed, cheap debt, all while charging market rent and paying a lower debt service cost, the landlord is able to make extra money. This happens as inflation continues to increase the cost of living. If using leverage to secure a property: securing the right debt on your project is key. With volatility being the only constant currently, getting cornered into prepayment or variable debt can put one in a place no one wants to be in.
Even with expensive remodels and complicated debt restructures, perhaps the easiest and most cost effective way to increase the NOI of a property is by lowering the expenses. By lowering expenses, the NOI increases thus increasing the overall value of the property. A full blown renovation is not always needed to improve the NOI. Use market research to justify your decisions. At times, simple tweaks like lowering utility costs can help: fix sprinkler leaks, replace kitchen faucets that are dripping, replace old toilets, etc. can justify a rent increase. Improving curb appeal can works wonders as well. Showing the property is well cared for invites new residents in by supporting higher rents and decreasing vacancy. This drives less turnover which tends to always be a signifiant expense.
In the Salt Lake market, three bedrooms had the highest vacancy rate in 2022 whereas two bedrooms, one baths had the lowest vacancy.
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Again, do the research and pursue the type of unit that is most desired. There are many more ways to generate GREAT returns out of your real estate investment(s), but these are a few of our favorite things.
