A growing number of real estate investors are pursuing value-added opportunities, either by repositioning existing assets or undertaking new development. It's a bold approach that requires ingenuity, but which can generate big yields, ranging anywhere from 20% to 200%.

Value-added investors are increasingly feasting on real estate that is overlooked or rejected by a traditionalist mentality. The strategies in value-added real estate investing are designed to mitigate risk, but demand a higher level of due diligence.

Institutional investors are generally risk-averse; they prefer to invest in well-stabilized assets. Consequently, the developer with a penchant for value-added deals enjoys a less-crowded playing field on which to work, and more often than not that leads to bargain pricing.

The new owner of a problematic property can immediately begin to create value through repositioning, and perhaps refurbishing. In time, the owner can completely improve the performance and quality of the asset. Typically, the owner will sell the enhanced property to an institution, or directly to a user at a handsome profit.

Know your target audience

When a large corporate tenant recently vacated a 420,000 sq. ft. office/tech building in Plano, Texas, a northern suburb of Dallas, the new owners devised a solid business plan. Two brokerage firms were hired: one to launch a sales and leasing program locally, and the other to market the building nationally. The building is located in a distressed high-tech corridor.

An effective, yet modest on-site marketing center was created, and collateral materials were produced, all targeted to large tech users. Additionally, the owners and brokers worked to develop a new understanding of tech users in the marketplace in order to showcase the property in new ways. In short, the property was completely repositioned, and aggressive marketing ensued. Within six months, the building was sold to a user at double the investment as a result of timely marketing and smart positioning.

Pursue companies with large portfolios

Value-added investors also like to keep an eye on non-real estate companies that have sizable real estate portfolios. The large corporate real estate owner generally looks at real estate holdings differently than someone who is solely in the real estate ownership business. Often when they decide to vacate or sell properties, corporations just want the problem solved so that they can get on with the core business.

When a large lumber company decided to sell its national portfolio of 12 buildings, there was no desire to reposition the properties. The goal was simply to sell and move on. With a value-added strategy in place, the properties were purchased at a favorable price and re-introduced as viable buildings. In fact, six of the buildings were sold within days as part of several sale-leaseback transactions. A $750,000 profit was realized on the first sale alone. The new positioning created significant profits within a very short time.

Contrarians enjoy big pay day

Value-added investors also believe in buying properties that are out of favor. In 1991, an investor group paid $600,000 for an old, abandoned railroad terminal, circa 1924, in downtown Dallas with the idea that one day it might be attractive for residential use. The building contained 380,000 sq. ft. in 11 stories. Dallas had almost no downtown residential properties, but one could reasonably envision that eventually the city would discover that its CBD would appeal to a growing segment of the employee base.

In 1997, the owners invested $18 million to completely refurbish the building and introduce it as a loft apartment community. Today, Dallas has discovered its central core, and residential offerings are springing up everywhere. The old railroad terminal is going through yet another life — as a condo conversion. New financing is in place and sales are occurring at a brisk pace.

Here are a few proven strategies for value-added investors:

• Look beyond the building. Is the land strategically located?

• Small multi-tenant office buildings are ideal if you manage them properly.

• Maintain a consistent on-site presence. Tenants love responsiveness.

• Look for inefficiencies in a prospective property, such as parking and ingress/egress problems, and capitalize on those inefficiencies.

Value-added investing can be daunting, but many lenders eagerly provide financing for, and participate in, these types of projects.

Clifford Booth and Stephen Kanoff are partners in Dallas-based Westmount Realty Capital, LLC, a value-added real estate investment and development company.