When searching for value-add higher CAP rate properties, keep in mind that, risk, patience, greater equity, teamwork are all essential components to gain a positive outcome. This means a lower CAP rate when done. How and what do you need to prepare for this difficult strategy to work?
First of all, make sure you have the capital and team of workers to either improve the buildings you are investing in or the staying power to achieve getting higher rents or longer term leases that add value to your property.
There are several strategies to utilize in this venture. You can try to get your tenants to sign longer-term leases like from three years left on a primary term to 10 years by giving up something, such as lowering the rent bumps or improving the building they occupy.
This requires your crew to fix up the property or the expectation of lower rent to gain higher long-term value.Examples could be replacing the parking lot, adding a monument sign, painting the inside and outside of the units, carpeting, adding new high-speed internet, faster elevators, nicer appliances, more amenities like a workout area.
Higher equity and longer vacancies could affect your immediate cash flow and risk comes into play if you don’t find the tenants that are willing to pay more for your efforts.
Simply getting your present tenant to pay more for a longer lease is your best bet but think ahead what you are offering them to gain these positive outcomes.
The area you purchase in should be deserving of your efforts. You don’t want to try this in areas that perhaps are not growing but have high crime and negative factors that are not worth the effort in the first place.
Purchasing a building in disrepair in a good area is a far cry from a bad area that needs work. Vacancies that are present can simply be caused by poor management or lack of funds by a present owner, not by conditions of the area.
Finding these type of investments pay off in the long run. Sometimes buildings are a good buy simply because the present owner is in trouble with other investments or is in ill health. You can step in with cash and a timely closing to take them out in a hurry to gain a higher CAP rate.
Be prepared for short due diligence period and quick close with an all-cash offer to take advantage of these opportunities. You may need a short-term loan or mezzanine finance to get your goals accomplished.
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