Today we’ll be talking about value add properties. Thank you so much for checking out the Real Estate Today podcast.
I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments. Joining me today is René Nelson. René is a Commercial Broker and owner of Pacwest Commercial Real Estate. I’m the owner of Pacwest Real Estate Investments. René, thanks for joining me today.
René Nelson: Thanks Bob. You know my buzz right now and kind of my sweet spot is value add properties. Whereas, somebody buys an apartment complex that maybe is built in the 60s or 70s and it hasn’t been updated recently.
Bob Nelson: Right.
René Nelson: So on the last show we also talked about rising interest rates and how an investor should look at that. Let’s talk a little bit about value add and how to use the right financing during that opportunity.
Bob Nelson: Well first of all, it’s difficult to find what we refer to as a value add, which means I’m going to buy it at a price that is indicative of its current condition, change its condition, change the rent structure, change a number of things about it and cause it to produce a much higher income and justify the amount of money I put into it. There’s the value add concept. As I make an effort to find a value add, it’s really important to be able to first of all, identify how much can I pay for that property? Because, I know that I’m going to add another forty thousand dollars and I want an entrepreneurial profit for doing it.
In other words, a profit for me taking on that mission because there’s going to be a number of uncertain times for tenants and so forth and I need to deal with that and I want to see a profit for doing it. How much can I pay for it, knowing I have to add forty, that I’d like to see a profit for doing that? I take a look at the probable final valuation, deduct the cost of getting there, the entrepreneurial profit also and that’s the maximum price I can pay for that property. There’s not a lot of them out there that really “pencil out.” It’s a scarce inventory market and it’s a situation where, even the value add stuff is attracting premiums, that they frankly shouldn’t but that’s just the way it is. It’s the only dance in town and you’ll take that. That’s a tough situation.
Then for interest rates, you’re attempting to find a situation that would at least have a fixed interest rate for the period of the time that you’re renovating the property. That’s I think the key.
René Nelson: Absolutely. So if you can find like a three or fixed rate, that’s an ideal situation.
Bob Nelson: I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments.
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