07 Nov How To Mitigate Risk In Value-Add Multifamily Investments Part II
This is a 2-part series on value-add multifamily investments. In our Part 1 titled: What Is A Value-Add Multifamily Investment?, we discussed what a value-add was and how it was conducted on large-scale apartment communities and the benefits of value-add strategies when applied to multifamily investments.
We also discussed the benefits that a value-add can create for both the residents who reside in these communities as well as the investors who invest in these multifamily apartment communities.
Now, we’re going to discuss some of the risks you should be aware of when it comes to value-add strategies and multifamily investments.
Examples of Risk in Multifamily Value-Add Investments
Common risks when conducting a value-add strategy in multifamily can include:
- Not being able to achieve target rents set in the business plan
- There could be more tenants that don’t renew their leases than planned for
- Renovations can run behind schedule which increases costs(
- Renovation costs may exceed projections (which can really add up when you’re renovating dozens – or hundreds – of units at a time)
When reviewing potential investments, seek out operators/sponsors who have capital preservation at the core of their plan, and they should have a number of risk mitigation strategies in place to further protect you and your capital. These may include:
- Conservative underwriting, which is key
- Proven strategy within their projected business plan (e.g., units that have already been renovated are achieving the forecasted rent increases)
- Experienced team members, in particular, the management team handling the project and all of the construction, budgets and timelines
- They should have a multitude of exit strategies in place
- Always make sure that the renovation costs and other capital expenditures are raised upfront and not earmarked through cash flow.
Value-add multifamily investments can prove to be incredible vehicles to wealth, however, they can come with risks and challenges that can affect the bottom line of the investment returns. That is why it is imperative to have risk mitigation strategies in place – to protect the capital of the investor at all costs.
As we always profess, no investment is risk-free. That said, when an investment, despite its risks, provides exceptional benefits to both the resident community AND the investors, it becomes quite an attractive investment that outpaces most other investments for those reasons.
Investor capital that is properly leveraged in a value-add investment can create immensely improved lifestyles in these communities, which creates a deeper sense of community and ultimately a cleaner and safer place to live, which makes tenants happy.
When investors have more control over the renovations executed within an investment, rather than relying on a yield play and relying solely on market appreciation, they have more options when it comes to preserving and safeguarding investors’ capital and maximizing investors’ returns, which makes investors happy.
Now that’s a win-win strategy!
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