Value-add investing targets properties below their potential — through physical improvements, operational improvements, or simply correcting below-market rents. The investor creates equity by increasing NOI, which directly raises the property's value.
Example: Renovate units to justify $200/month rent increase on a 20-unit building = $48,000 additional annual NOI. At a 6% cap rate, that creates $800,000 in new value.
Value-add deals carry execution risk (rehab overruns, tenant disruption) but offer higher return potential than stabilized core properties.
Related Terms
NOI
Net Operating Income — a property's income after operating expenses, before mortgage.
Cap Rate
Capitalization Rate — annual return on a property if purchased all-cash.
BRRRR
Buy, Rehab, Rent, Refinance, Repeat — a strategy to recycle capital into multiple properties.
Internal Rate of Return (IRR)
The annualized return rate that makes the net present value of all cash flows equal to zero.