listen to what he shares….

What Is Value-Add Real Estate Investing?

At its core, value-add investing involves purchasing a property that isn’t currently at its full potential—whether it needs renovations, improvements, or simply a strategic overhaul—and increasing its value through upgrades or better management. You might do this during a BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), a flip, or by simply acquiring a rental property that requires improvements.

But it’s not without risks. As Chicago-based investor Tom Shallcross discussed in a recent episode of the BiggerPockets podcast, value-add real estate requires significant time, effort, and skill to execute correctly. Doing it right in 2024 means staying on top of macroeconomic conditions, knowing your submarkets, and having a solid understanding of rehab costs.

Why Value-Add Investing is Popular in 2024

In a market where finding good deals is tough, value-add properties present a unique opportunity. Rather than relying solely on market appreciation, you create equity by upgrading the property. This hands-on approach has made it particularly appealing in today’s competitive market.

As Shallcross shared, he initially started by house hacking, which opened his eyes to the world of real estate investing. However, it wasn’t until he partnered with a general contractor that he started focusing on full gut rehabs in higher-end neighborhoods. These projects have significantly higher price points but allow for substantial returns when done correctly.

The Importance of Submarket Knowledge

One of the key takeaways from the conversation with Shallcross is the importance of understanding your submarket. You need to know whether a neighborhood will support the cost of your rehab. In his case, he learned that rent-to-price ratios in certain areas didn’t make sense for buy-and-hold strategies, so he shifted to focusing on flips in higher-end markets.

For example, in neighborhoods where you’re all-in for $500,000, but the property only rents for $2,200 a month, you’re not going to make money. In those cases, flipping might be a better strategy.

Shallcross shared that while flips remain part of his business, they’re done strategically to keep cash flow strong. "Flipping isn’t just about making a quick buck; it’s about intentional investment in the right markets," he emphasized.

Financing and Rehab Costs

If you’re new to value-add investing, you might wonder how to finance these projects. Shallcross shared that he works closely with his partners to structure financing and manage rehab budgets. The process often involves private lending or working with brokers and agents who understand the market.

Knowing your rehab costs and timelines is critical. Shallcross talked about one of his recent projects where they bought a property for $725,000, put in $420,000 for the rehab, and sold it for $1.64 million. While this sounds like a huge win, he was quick to point out that there are holding costs, agent commissions, and soft costs that eat into profits.

This is why it’s crucial to model out your deals conservatively. Holding times can stretch out to 15 or 18 months, and you have to plan for what happens if the market shifts while you’re mid-project.

Differentiating Your Property in Competitive Markets

In a high-end market, differentiation is key. Shallcross explained how his team goes the extra mile to incorporate unique features into their flips. In one project, they turned an underused seller area into a wine room with stained glass, which added an unexpected touch of luxury.

This approach not only sets the property apart but also helps secure contracts before projects are even complete. “We were under contract before drywall was finished,” Shallcross noted, thanks to their focus on adding perceived value with thoughtful design touches.

Building Relationships in Real Estate

Another cornerstone of Shallcross’s success is his focus on building strong relationships with brokers, agents, and contractors. For example, by offering agents the opportunity to represent the sale of a property after a flip, he ensures they are motivated to bring him deals.

Real estate investing is a long game, and your network is one of your most valuable assets. If you’re new to the industry, start building relationships now. As Shallcross pointed out, he didn’t have these connections when he started, but through consistent effort, he’s now built a Rolodex of professionals he can rely on.

Final Thoughts: Is Value-Add Right for You?

Value-add investing can be a highly profitable strategy, but it requires time, effort, and a deep understanding of both the market and the rehabbing process. If you’re considering diving into this world in 2024, remember that success comes from doing your homework, forming the right partnerships, and constantly reevaluating your strategy.

As the real estate market continues to evolve, those who can stay flexible and spot opportunities for adding value will be best positioned to thrive.

For deeper insights and expert advice, tune into the Straight Up Chicago Investor Podcast and to stay updated on real estate trends, visit our blog and explore more educational resources!