Why we prefer value-add deals and long-term holds

Why we Prefer Value-Add Deals and Long-Term Holds

Joe Stampone Featured, Start a Career 7 Comments

Real estate firms and investors each form their own investment strategy based on their risk-tolerance, desired hold period, expertise, and target returns. Some prefer core or core-plus investments which are typically high-quality assets in primary markets with little unrealized upside, while others prefer opportunistic investments such as ground-up development.

Here at Atlas, we target primarily value-add transactions where we can execute a specific strategy with the aim of refinancing upon stabilization and holding long-term.  Value-add transactions possess upside through a variety of potential improvements; renovation, lease-up, new management, or recapitalization. That said, value-add deals also possess more risk. We do everything we can to limit our downside exposure by vetting the opportunity, putting a great team in place, and utilizing conservative debt; low LTC, interest rate caps, and 7-10 year terms.

Value-add deals require expertise and a hands-on approach and are less reliant on the market. Upon stabilization, we aim to refinance the deal and return a significant portion of the equity to investors. Now, we own a coupon clipper with less risk, consistent cash flow, and long-term fixed-rate debt at today’s attractive rates. Each time we refinance a deal, it’s effectively moving a deal from the value-add bucket to the coupon clipper bucket. Over time, a majority of our portfolio consists of lower risk coupon clippers achieving value-add returns for our investors. Investors are content holding long-term as they typically receive a majority of their equity back through the refi and are clipping attractive yields on their remaining equity balance.

While organic market growth and cooperating capital markets can amplify the returns, our deals are not reliant on these outside factors to be successful. When executing value-add deals, we control our own destiny and success is dictated by our ability to buy right, assess the opportunity, and execute our business plan. This is by no means easy, but it’s what makes real estate investing a skill. If you’re not adding value, you’re simply betting on the market. We’re largely compensated on the backend, so our success is fully aligned with the deal’s success.

When acquiring core or core-plus investments, you’re likely competing with many firms in what is becoming an increasingly frothy market. The heavy value-add deals we target, on the other hand, often scare buyers away due to their complexity and the work and expertise required to execute the investment.

Although there is an appetite for all investment strategies, we prefer value-add deals where the success is in our hands. The harrier and messier, the better. Bring it on!

  • Joe your approach of turning value add deals into long term holds is a key difference in building wealth through real estate. To paraphrase Trammell Crow; you can get rich flipping real estate, but you can only get wealthy by holding it. Was in a meeting this week with an outfit who takes the exact same approach but focuses on historic rehabs of mixed use buildings in smaller to medium sized cities all over the West. The real kicker for them is that they have permanent capital so when the rehab, stabilize and refinance on one building is completed they use the cash to buy another building. Thanks for another great piece Joe-

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  • @Giovanni_Isaksen:disqus wise words from Mr. Crow. The challenge remains accessing permanent capital sources. While real estate is best held long-term, in my view, it’s difficult to find capital that enables that business plan. What’s the name of the group out west you’re referencing? I love seeing different business models…

  • Hi Joe, great minds think alike! I am writing a piece on the outfit I mentioned, so maybe a guest post… or? These guys built their own capital one project at a time and over the years have assembled a nice portfolio of properties by taking the refi proceeds and buying the next property. Potential JV?
    Cheers, Giovanni

  • Matt Zaverucha

    Joe- thanks for the article. I work for a company that believes in this strategy as well. Feel free to reach out: Matt@advenir.net.

  • Thanks Matt. I see your firm owns a multi deal that’s a comp to a deal we own in FL. I’ll shoot you an email. It’d be great to connect.

  • Hi @Giovanni_Isaksen:disqus, sorry for the slow response. I’ll shoot you an email directly.