Real estate investments that can increase value quickly with rehab work beat many other comparable real estate ventures. This method of real estate investing is purchasing a home with some kind of unfinished work or physical degradation, repairing it, and then reselling it for a profit.

With multifamily specifically, another two instances where new ownership may be able to come in and potentially enhance value without really changing the property are if the property has poor management or below-average tenancy rates for the neighborhood.

The property often needs greater capital investment to upgrade it, which tends to employ more borrowing, making it riskier than standard “core” and “core plus” real estate investing. The returns are, however, typically significantly higher.

But what precisely qualifies as a decent, if not excellent, real estate investment is a value-add property? How do you decide which properties to pick and whether the higher risk is worthwhile?

How does Value-Add work?

One of the greatest predicted returns is in the value-add sector, at around 12–19%. This is due to how distinct the risk and return profiles are for each sort of investing. Simply said, value-add investing offers greater expected returns since generating better returns involves more effort, capital, and execution skill.

The needed labor has a larger execution risk, but when done correctly, it pays dividends. This contrasts with the sort of investment that is common in core and core plus, which focuses only on stable, older buildings in heavily populated urban areas.

Key Tax Benefits

Expected ROI only reveals half of the picture because the advantages of real estate investing are undoubtedly not confined to the returns themselves.

One is that value-add real estate investing frequently falls under the 1031 exchange rules. As long as they use the money from their prior real estate investment to support the subsequent one, this tax method enables real estate investors to postpone paying capital gains tax on real estate.

This is a good alternative for funding their interest in the new business for regular investors wishing to transition out of managing single-family rentals and into something that is a bit more passive, for example.

Additionally, if you have real estate professional status, you may be eligible to deduct some of your total income from value-add investment depreciation. Even if you don’t hold the designation of real estate professional, you can still use that depreciation to reduce profits from passive income.

There are a multitude of potential tax benefits for real estate investors, but we’re only addressing a few factors here.

Conclusion

Partnering with a reputable team and firm to generate cash flow via value add is a great investment vehicle. Stocks do not have the tax benefits, not the resiliency that real estate does. When you fix up properties that need repairs you can achieve higher return profiles because you can leverage every single tax benefit in real estate from precision, and the 1031 exchange. 

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