What does value-add investing mean for you, the average real estate investor? How do you benefit from something like that? And how can you tell if it’s something you really want to go in on?

As with any investment, there are inherent risks involved. You can never be 100% sure that any single project is going to be successful, but there are some specific factors that play into the success of value-add projects.

One of the key factors that determine whether a value-add investment will succeed is the market and property type itself. If the particular property type is in demand and the market is poised for growth, consumers in that area will drive prices higher and higher. That’s basic supply and demand.

For example, at Valiance Capital, we focus on multifamily and student housing in California and Texas. In California, student housing is in such high demand that UC Davis reported only a 1% vacancy rate due to the pandemic, which is double that of 2018 when it was a mere 0.5%. More broadly, student homelessness across the entire state has increased by 50% in the last decade. There’s clearly incredibly high demand for housing, a demand that we’re positioned to fulfill.

If you believe in the market fundamentals of the investment, you’re one step closer to determining a value-add property that’s likely to be very successful.

The next step, though, is to analyze the firm itself.

After you’ve determined that the market and property type are in line with your particular portfolio and broader economic predictions, do some digging on the returns of the private equity real estate group itself.

This process is as simple as asking the prospective investors about their annual returns and their expected returns for an investment that they’re making soon. Seek examples of past investments and the performance of them.  Look for proven track records.  If they’re experienced, they’ll be happy to provide investors with any information that they want to know.

Questioning the firm is especially important if they’ll be responsible for restructuring the management of the property. As mentioned above, many properties need intangible and tangible work. It’s important to evaluate the company on their ability to improve those intangible assets, so that they’re prepared to deal with management and operational issues.

For good reason, different investments draw different crowds. Income-producing, stable core investing is enticing to older investors not because the potential returns are high but because the potential risks are low (or at least lower than many other forms of real estate investing).

However, if you’re a younger investor or an investor who can weather potential volatility, value-add property investing has the potential to be a fantastic addition to your portfolio.

Additionally, read more about one of the key benefits to real estate investing: the tax benefits. From the 1031 exchange to depreciation write-offs, value-add investing maximizes all of the potential tax benefits.

The benefits of real estate investing certainly aren’t limited to the returns themselves, and so expected ROI only tells part of the story.

For one, value-add property investing is usually subject to the 1031 exchange. This tax strategy allows real estate investors to defer paying capital gains tax on real estate as long as they use the funds from their previous real estate investment to fund the next.

For average investors looking to move out of managing single-family rentals and into something that’s a bit more passive, for example, this is a fantastic option for funding their stake in the new venture.

Furthermore, depending on whether you have real estate professional status, you’ll be able to use the depreciation from value-add investments to offset your total income. If you don’t have real estate professional status, you can still use that depreciation to offset passive income gains.

At Valiance Capital, we understand that it’s not just about how much money you make, it’s about how much money you keep. From installing solar panels to maximize rebates to utilizing favorable fixed-rate loans under HUD 223(f) to our accelerated depreciation strategy, we maximize every available option to optimize realized income and tax benefits for our investors.

The full list of potential tax benefits for real estate investors deserves an article in itself, so we’re only addressing the tip of the iceberg here.