Hornstein Fetter June 2018 Market Insight

Why are so many investors looking for “value add” deals in today’s multifamily market?

by Joe Hornstein

As most know, the Denver apartment market is very competitive with investors outbidding one another. Because investment returns have continued to compress lower, many investors are asking us to find them “value add” properties to purchase where there is an opportunity to buy a property that has existing issues to solve, but also the ability to realize a better than market investment return within 6-18 months.

As an example, we recently represented a buyer to purchase a 24-unit apartment building in Southwest Denver a couple years ago. At the time of purchase, the 1Br units were renting for around $650 on average. They put around $10,000 per unit into updating the units and common areas, increased the rents to an average of around $900 on average. Once the reposition was complete in about 24 months, they sold the property for $50,000 per unit over their basis in the property and were able to complete a 1031 exchange into a much larger property, also with “value add” potential.

Once you have updated the units and raised rents to maximum potential, there is only so much more you can do to make the property you own more valuable than its current value, other than waiting for the market to go up or down. However, by selling your property that has realized its maximum potential and completing a 1031 into another property with “value add” potential, there is an opportunity to increase your equity faster. Of course, there is also some risk associated with making any move in real estate, but we believe if you are working with the right, experienced multifamily brokerage team and willing to be patient in finding the right opportunity, it’s a great way to succeed in what has become a very competitive multifamily real estate market.

To discuss how we can help you implement this strategy with your current real estate holdings, please contact us at 303-962-9547 or jhornstein@pinnaclerea.com.