As the California real estate market corrects from the unsustainable growth of the pandemic era, investors are shifting their real estate investment strategies.
Yes, investors can always count on the long-term appreciation of real estate. But California investors can no longer rely on the steep, organic appreciation seen from 2020-2022. So, to maximize returns in CA’s stabilizing (or even temporarily declining) markets, investors are opting to force appreciation through value-add investing.
What is Value-Add Real Estate Investing?
Value-add real estate investing is when an investor finds a way to quickly and dramatically increase the value of a property. Value-add projects carry a low-to-moderate risk level while providing moderate-to-high returns.
There are several ways to add value to real estate, including renovating existing structures, changing the layout of an existing structure to meet current buyer and renter demands, and building an ADU (accessory dwelling unit) next to the main house.
These value-add projects are providing big benefits to investors statewide.
Value-Add Projects Can Generate Substantial Returns
Perhaps the greatest benefit of value-add projects is the impressive return potential. Investors who are willing to transform property can profit by selling the property for much more than their initial investment amount. The property’s after-repair value ends up being much greater than the sum of the purchase price and renovation costs, giving the investor a fair profit for their efforts.
Home flip projects with ADU additions can generate annualized returns of over 20%!
Value-Add Projects Can Be Short-Term
For investors looking to get in and out of a deal quickly, value-add projects can be completed in the short term.
Take a fix-and-flip project for example. By renovating a fixer-upper in a matter of months, an investor can potentially walk away with substantial returns without tying up their funds long-term.
Short-term projects offer greater freedom to investors who wish to have funds available in the next year or two for future expenses or other investment opportunities.
Value-Add Projects Can Also Improve Long-Term Cash Flows
Value-add projects can also serve investors who are happy to commit to long-term investments as a means of generating passive cash flows.
By adding value to an existing rental property, an investor can command higher rental rates throughout the useful life of the property. This means greater cash flows for years to come while simultaneously enjoying organic, long-term appreciation.
Just as importantly, the increased equity from the value-add on a rental property can be leveraged; investors can take out a home equity loan or HELOC (home equity line of credit) to fund additional real estate investments.
Cooling markets are no reason to stop investing in real estate. With a shift in strategy, your investments can continue to produce solid returns. And value-add investing may be just the shift your portfolio needs.