We’d like to share one of the great strategies that sophisticated commercial real estate investors utilize to generate significant risk-adjusted returns. It is the backbone of our investment strategy at First National Realty Partners and the predominant strategy we utilize in our private equity real estate funds. It’s called:
Value-added transactions are all about transforming a piece of real estate from its current state and re-positioning it into a state of significantly higher property value. Value-added players such as ourselves actively look for assets that may have operating, physical, or financing issues.
We acquire these properties at discounts to intrinsic value, correct the issues, increase net operating income, and cash flow to unlock the true value of the asset. Finally, we execute a clear and defined exit strategy and dispose of or refinance the asset at the NEW higher price point.
We then rinse and repeat, moving our capital into the next transaction. When executed correctly, a savvy investor can build up a large portfolio of real estate, while recycling the same capital over and over again. The key to doing this is increasing net operating income through our value-added component to levels that support debt service. A lot of articles we read talk specifically about multifamily when discussing value-add properties, but value-add real estate can work across any commercial property.
Value-Add vs. Opportunistic
We’ll only spend a moment on this, but want to call out the difference between the value-add strategy and an opportunistic deal. Both are similar in the sense that they need a transformation from their current state, but they are not the same. Opportunistic deals are riskier because of the amount of heavy rehabilitation or ground-up development that is needed. While opportunistic investment properties have the highest return they also bear the greatest risk. We like Value-add investment because they generally have significant upside while carrying lower risk than an opportunistic deal
Value-Add vs. Core Plus
Although we don’t see these lumped together frequently, it is good to know that a deal that isn’t quite value-add but also isn’t a core investment deal is known as core plus. Core plus is a core deal that has some growth upside to it. Perhaps there are some efficiencies from placing new property management or higher rents that can be achieved at the property type from placing new tenants.
We believe that value-add commercial real estate deals are some of the best CRE investment opportunities available. If you would like to learn more about value-add real estate deals or have other real estate investing questions, please reach out to us. First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets – including middle-market service-oriented retail shopping centers – well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you’d like to learn more about our middle market retail investment and lease opportunities, contact us at (800) 605-4966 or email@example.com for more information.
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