Deal Types: Stabilized vs Value-Add
Much like buying a home, buying an apartment building comes with many choices; a significant one being 'Buy it already fixed up' or 'Buy it...and then fix it up'. Already fixed up is called Stabilized. Buying and then fixing it up is called Value-Add. This post explains the benefits and obstacles of buying either type of apartment building.
Stabilized - Buying a stabilized apartment buildings offers the benefit of immediately performing in so much that you have a good management team and low cost financing (or cash) then you should immediately begin receiving monthly income and profit. This is the primary benefit. Other benefits includes an opportunity to lower operating expenses to increase profit, a stable tenant base, and hopefully fewer surprises with predictable performance. The obstacle of a stabilized property is that there may be little improvement to rents or performance and thus the property value may remain the same or only have modest growth. Recently our Real Smart Asset team purchased Maple Flats, a stabilized property in the Northeast of Kansas City. We liked this stabilized property because of the opportunity to lower management expense, the increasing rents due to the neighborhood improvement and the ability to secure a 10 year fixed note with 3 years of interest only at 80% loan to value. The property has performed well and therefore we are actively seeking stabilized properties.
Value-Add - Buying a Value-Add apartment building means that you plan to perform improvements to that building to increase the value (either by increasing rents, decreasing expenses) to then hold long term or resell. In this model, the goal is the post renovation value and therefore all your focus is on the improvement budget, post construction appraised value, rent targets, etc. For example, a couple buys a run-down six-plex building with rents at $500 per month. They plan to buy it for $400,000 and then spend $10,000 per unit in improvements within a neighborhood which is improving. After they buy and make the improvements, they raise the rents to $750 per month. This couple has now spent $460,000 on their value-add building, however the actual market value of that building may now be $600,000 or more. The additional value beyond the building plus improvements, (typically assessed by an appraisal based on Net Operating Income, Cap Rate and sometimes comparable property performance) can offer you very creative financing opportunities. Banks will reward solid operators by allowing them to refinance out their original equity in a project (occasionally more) if the new tenant leases are strong and the operating performances is stable. Our Real Smart Asset team have performed these such value-add projects on Gladstone and Pendleton Heights apts. We have also successfully refinanced out our original capital to then reinvest in Belton, Chestnut, and Maple Flats. Value-Add projects do come with additional risks of construction delays, cost over runs, lease-up delays, and more. I highly recommend partnering with successful operators and managers for your first value-add project.
Our team is pleased to offer you Windsor Townhomes a stabilized investment property in the North KC suburb of Platte City, currently supporting a military base and the newly renovated KCI International airport opening 2022. Our latest value-add investment project Olivia and Gabriel, historic buildings in the Northeast of KC, is nearly closed. Accredited investors have an opportunity to learn and invest (and diversify) into stabilized and value-add projects with lower risk working with our proven team of operators.