A couple months ago, my business partner Adam and I were sitting in Ken McElroy's conference room in Scottsdale.
Ken had agreed to spend the day helping us problem-solve various issues in our businesses, in addition to giving us an inside glimpse at how he runs his.
During our time together, we reviewed several deals we were pursuing, including a 224-unit property in Las Vegas we were planning to offer on.
We were explaining our value-add strategy for the property, specifically how we could leverage existing floor plan features to add in-unit laundry – a tried-and-true way to boost rents in multifamily.
We were expecting a pat on the back for identifying this subtle change that would force significant appreciation.
But Ken's immediate response? "Watch out for the dryer vents."
Six words that perfectly captured decades of hard-won real estate wisdom.
While the floor plans theoretically had space for the appliances (and conveniently shared a wall with a bathroom for plumbing), Ken knew from experience that fire codes, building layouts, and vent positioning could make this "simple" upgrade anything but.
That conversation got me thinking about how often value-add strategies in commercial real estate look straightforward on paper, but hide layers of complexity beneath the surface.
What Does “Value-Add” Really Mean?
Unlike residential properties, commercial real estate is valued based on the income it produces (the net operating income, or NOI).
This creates unique opportunities to actively increase a property's value through forced appreciation – the real meaning of value-add.
If you've looked at multifamily deals lately, you've probably seen plenty projecting 17% IRRs, 2x equity multiples, and 7% cash-on-cash returns. These solid, albeit common, numbers usually come from value-add strategies implemented through three main approaches:
1. Physical Improvements
Enhanced amenities (updated pool areas, grills, playgrounds)
Unit renovations (modern finishes, appliances, flooring)
Infrastructure improvements
Property exterior upgrades
2. Operational Improvements
Enhanced marketing and leasing
Better property management
Reduced operating expenses
Vendor cost optimization
Strategic rebranding
3. Market Timing
Strategic repositioning based on demographic shifts
Capitalizing on supply-demand imbalances
Leveraging emerging market trends
Red Flags for Passive Investors
Here's where things get tricky. Value-add strategies require solid operational execution to actually implement and realize the results.
And at some point, value-add plans can cross the line from realistic operational strategy into pure financial spreadsheet engineering.
When evaluating value-add deals, watch out for:
Unrealistic rent growth assumptions
No, rents are not going to increase 10% annually for the next decade
Overly aggressive expense ratios
A 40-year-old building is not going to have a 20% expense ratio, regardless of the upgrades performed
Compressed renovation timelines
All 200 units are not going to be fully rehabbed in 12 months
Reliance on "hope" rather than market comps
If comparable units aren’t achieving the target rents, the target is unrealistic
The Bottom Line
When evaluating value-add deals, focus on three key questions:
Are the numbers realistic?
Review the underwriting assumptions
Challenge any aggressive growth projections
Verify that comps are achieving the target rents
Can the sponsor execute?
Look for a track record of similar successful projects
Verify they have the right team/partners in place
Ask for examples of past value-add execution
Does the market support the strategy?
Verify the sponsor's market assumptions independently
Understand the local supply and demand dynamics
Look for multiple paths to success
Remember Ken's wisdom about those dryer vents – in real estate, the devil is always in the details.
The best value-add opportunities aren't about hoping for appreciation – they're about having a realistic plan to force it.