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Unwrapping ‘value-add’ in real estate investing

By: Max Sharkansky, Managing Partner

When looking at a sponsor’s track record, investors can gain a sense of the experience and specialization that the sponsor has.

For example, looking at Trion, they would see that we have completed over 40 deals, and about 35 of those have been multi family. Further, all our prior projects have been investments in value-add multi family real estate.

But what does ‘value-add’ mean?

‘Value-add’ is an industry term that refers to investing in underutilized properties in areas that have seen a lot of rental growth, which has not been captured by the existing ownership. They may be located in areas that are improving and, for whatever reason, these particular assets haven’t participated in that rental growth.

Oftentimes, we’ve acquired multi family assets that have been owned and managed by families where real estate isn’t their primary business. Perhaps a member of the family has passed away, their heirs have inherited the property and don’t know how to manage the property efficiently—or it just may not be a priority for them.

Value-add investors will identify and acquire properties like this in areas that have seen disproportionate rental growth and then engage in heavy renovation. For example, Trion will typically install vinyl-plank flooring, stainless-steel appliances, new fixtures, and cabinets; remodel the bathrooms; and then paint the exterior a bright color to give it some curb appeal.

To attract further attention, value can also be added by creating property-specific websites, where residents can pay rent and submit maintenance requests online—conveniently from their cellphones or computers.

A value-add multi family investor will take an underutilized asset in an area that is improving, and convert it to a modern, attractive place to live. As a result, the sponsor is able to increase the rents that the property generates—which, in turn, adds economic value to the investment.

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At Trion, because we manage our properties via an in-house platform, we can do so efficiently. This means that not only can we increase rental revenue, but we can also decrease the operating expenses that the property incurs.

In real estate, like many businesses, the value of the asset is just a function of how much income it generates. If we’re able to increase the net operating income by 1.5 times—or potentially double revenues—that translates to a much higher property value.

Related: What is Good Cash on Return for Real Estate Investing?

Posted By Max Sharkansky, Managing Partner

Max is co-founder of Trion Properties and oversees all aspects of acquisition, disposition, and property analysis for the company. Since founding Trion he has led the acquisition, renovation and disposition of over $300,000,000 in mismanaged and distressed assets, primarily in multi family, yielding an average IRR in excess of 30%.

Max's driving objectives in investing are to deliver outsized returns without taking outsized risks and the words he lives by are that "real estate doesn't kill people, debt does."