In the video, Jack explains the concept of value add in commercial real estate. Value add refers to purchasing a property and making improvements or changes to increase its value. He provided examples such as raising rents, converting buildings into smaller units, and developing empty land. He highlights the importance of creating more value to receive greater compensation. Value add in real estate brings a sense of accomplishment and financial gain:
Hi, this is Jack Miller. I hope you’re having a great day. I wanted to make this video to educate those who want to know on what is a— What does it mean when people say value add in the context of real estate? And in its pure sense, value add in real estate is when someone buys something in its present form and does something to create value. So, the more they do or are not necessarily the– more, but the bigger the value they create, the more they’re going to be compensated. So, it’s again when someone takes something in its current form, does something to create something else.
So, let me give you a couple of examples on the opposite ends of the spectrum. And both I’ve been involved with multiple, multiple times. But I’ll give you a couple examples, and you’ll start to get the point. Let’s say you have someone who buys a house, or an apartment building and he thinks the rents are a little below value. He– as the tenants leave, he repaints them, maybe re-carpets them, and raises the rent 50 or 100 dollars. So, he’s created some value. You know, you could argue how much he’s created value, or you could argue and say, well, the rents, you know, in 2022 and 2021, are just going up every year, a lot. But that guy or gal or whoever is creating value, and the value is determined. So, if he raises the rent roll, for example, let’s say $1,200 dollars a year, if it’s a six cap, you know, you just do the multiplication, you can see the value he created. That’s a value. But I consider that a very—- personally, I don’t even consider that value-added. That’s just normal real estate. But a lot of people say that’s a value add. And I’ll give you some other examples of deals we’ve been involved with.
We were involved with the deal, and I personally was involved with this. I led the charge. We bought a 25,000 square foot building. We condo’d it into 5,000— 5, 5,000 square units. We sold three off, we kept two. That was the value add. We really, we paid, I think back then it was a long time ago, we paid like 34 bucks a foot, and we wound up selling them for 150 a foot. But also, the big value add was on the side of this was a four-and-a-half-acre piece of land that was just empty land. It was zone general commercial. We got the township to approve a site plan for self-storage. I think it was 72,000 or 78,000 square feet. We got the approvals on that, and we sold that off to a developer who was going to put up a self-storage. So, that was a big value add. We created a lot of value. A deal we’re involved with right now, a guy came to us about a year ago, a very good guy who I’ve done a lot of business with over the years. He knew of a tenant who was called a credit-grade tenant who needed a certain square footage that happened to be a fairly large non-profit, a certain amount of square footage. He knew they needed a 10-year deal. He went out and found a building that met their specifications. He knew how much it would cost to fix up the building. He bought the building. He bought the building for, I think it was like 350/375, spent about 150 into it into the deal for about 550. And because this tenant, he was lined up ahead of time, you know, it’s now valued at about a six and a half cap rate, and the value is about 1.2 million. So, this guy created tremendous value. This is a real value-added opportunity. He did a lot more than the paint and the carpet. He created big value. Now, in the real estate business, you know, nobody cares about who you are, they care about what you have to deliver. So, he and all those who create big value are compensated based on more value they create.
So, the more value you create, the more you’re compensating. It has nothing to do with work. It has to do with you, really. Your foresight, your vision, and your drive, and your ability to think outside the box to find these deals and to go the long road as opposed to the short road. So again, value add is when you take something and make more than what it is into something else. So, if you take one and one, you know you’re not making two, you’re making four. It’s creating value in something by usually it’s doing something.
It could be converting to condos. We’ve been involved with a million. Another great example is office condos. It has been a big play for us over the years, where someone buys an office condo, diminishing let’s say a 30,000 square foot building for a hundred dollars a foot, and they’ll condo it out and sell it for two hundred dollars a foot. That’s a real value add play. So again, I think I’ve given you some good examples. I’m sorry to drone on long, but we’ve seen, and we’ve been involved with both as the developers, the general partners, limited partners, lenders, in every size, shape, value add. You can go to a light value add to a heavy value add. But the short answer is, what is a value-add property? It’s when you create, when you take something and create something else by adding value to someone. And it’s really not so much you, it’s the end user who’s going to pay for that value. Because you’re paid and you’re compensated based on the value that you’re creating. So, that’s what value add is.
I hope I didn’t confuse you. If I did, you can let me know in the comments. Make sure you like the YouTube channel, subscribe to it, leave your comments and/or criticisms, and I’ll get back to you. Thank you, have a wonderful day. And I love real estate. I love doing this, I really do. I love hearing about value ideals. I love being involved with them. There’s such a sense,— I’m sorry for droning on. Accomplishment, and you feel so good when you take from nothing, and you create something. You know, when you create something and you make something and add real value to something, there’s an unbelievable sense of accomplishment beside the financial gain. And that’s what I love about it. Take care, have a wonderful day.
Category: Borrowers
