A Student of the Real Estate Game


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

Sep 29, 2017 | Asset Management, Entrepreneurship, Passive Investing, Value-Add

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!