Buying Value Add real estate Investments typically involves purchasing real estate a a lower price because it is moderately distressed in some way (rundown, poor management, low occupancy, etc). After buying a value add building, the next step is to improve the asset physically so it can be leased up to increase occupancy. Sometimes Value Add projects are "Fix and Flip" projects and other times they can be great long term holds that generate higher returns higher than traditional commercial real estate.
Value Add historic rate of returns are typically 10%-15% and the risk is typically considered moderate.
Here are a few examples of Value Add Investments:
1) You might invest in a rundown strip mall without many tenants and renovate it. Once it has lots of tenants, you can sell it for a healthy profit. Or you might purchase an office building that is rundown. After fixing it up, you can “flip it” for a profit.
2) You buy a property that is close to 100% vacant because it is run down due to poor management. You reposition the asset by renovating the property, finding better managing and re-tenant the building creating steady cash-flow.
The key to a successful value add project is having a strong team in place that can execute on the construction/ renovations of the project and a knowledgable leasing team that knows the local commercial real estate market.