Mastering the Value Add Business Model: A 3-Step Guide for Multifamily Real Estate Investors

• Step 1. Find and buy properties

  • Choose the right market

  • Cosmetically outdated

  • Operationally inefficient

  • Give investors good and fair equity splits

See my blog post on selecting the right market here:

Are there other comparable properties in the immediate area that look better, similar vintage, size, amenities and are charging higher rent? Is there opportunity to make the property look better so that you can raise rents? Can the tenants afford a rent increase? Does their household income exceed 3X the rent?

When you look at the T12 financials, where are they spending too much money or spending money on unnecessary things? Where is the property missing opportunities to add other income? The T12 can be fun to look at because it tells a story about how the property operates and why.

• Step 2. Improve the properties

  • Rehab

  • Amenities

  • Management

  • Organic growth

During due diligence, coordinate who will oversee the general contractors who do the rehab work. This can be either your team member on the asset management team, or the property manager. Whoever does it, make sure they are experienced in overseeing a project of similar improvement cost, size of property and asset class.

• Step 3. Sell

  • Now that you've improved the NOI of the deal, the value of the deal is likely to increase

  • Sell or refinance in 3-5 years

Back to the last bullet on step 1: When you give your investors good and fair equity splits, they're likely to invest with you again. This is one drawback with having A class shares where they only get a fixed return and no equity split. I invested in a deal that projected a 16% IRR and they also had an option for a guaranteed 10% annual return with no equity position. A massive pricing increase nationwide happened and the deal return 61.7% annual IRR. The annual returns for class A 10% and class B 61.7% were broadcasted to all investors side by side. That would be a tough pill to swallow despite still being a decent return.

Also I see people have a waterfall structure where after 15% IRR all profits are split 50/50. I prefer to not invest in these deals because if the deal hits a home run, you get drastically less than an 80/20 straight split for example.

My personal preference is an 80/20 straight split. 2% asset management fee. 0-2% acquisition fee. Nothing else.