Value-add investments follow the same principles, whether you’re turning around a 200,000 sq. ft. industrial building or a flipping a home.
From my own 2 decades of experience, here are 4 things I swear by when it comes to value-add deals.
Know Your Numbers
I use this formula to determine max offers:
Do this:
- After Repair Value (ARV): $380,000
- Renovation Costs: $70,000
- Other Costs (eg: 10% for holding, closing, commissions, etc.): $38,000
- Desired Profit: $50,000
The maths?
$380K - $70K - $38K - $50K = $217,000 max offer.
Set Your Vision
For me, my process starts with a rough 'chicken scratch' sketch.
I take a look over the floor plan and examples of finishes I want to include.
The architect then refines this into detailed drawing and renderings, before I share my vision with the GC.
Why?
Because if you can't see what you want, they can't see either, and you won't get what you want.
Control Your Budget
Find a GC who’s compensation is tied to profit, not total cost.
Sharing profits ensures they have invested interest and skin in the game, so losing hurts both people.
But winning benefits both too.
Your Broker is Your Partner
From my experience, you want someone who acts as a principal rather than an agent.
Their compensation should be directly tied to the project's overall success and profits.
I usually hire a broker for both sales and leasing. They receive a commission and a bonus tied to the improved part of NOI. (This ensure they’re invested, have skin in the game and also think like owners.)
For a deeper look at the numbers behind value-add, check out my proforma lessons.
Conclusion
The game doesn’t change. Only the size of the deal does no matter where you are in your real estate journey.
Interested in discovering more tips and strategies for value-add deals?
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