Five Questions to Ask When Evaluating a “Value-Add” As A Limited Partner

As a limited partner, you’ve heard the term “value-add” a few times by now.  It’s probably the most overused term in multifamily investing today.  If a property was built prior to 2020, there’s a good chance that the sponsor will label it as a value-add.  But is it really though?

That term references the incoming investor’s opportunity to improve the property, grow its income stream, and increase its market value.  This can be accomplished either through renovations and upgrades, operational cost reductions, or both.  If executed properly, a combination of these implementations would result in an increase in net operating income, and a subsequent higher market valuation.

But just who is the “value” being created for?  I ask myself this when looking at many of the recent offerings.  Is it for the seller?  Or for the contractors, brokers, lenders, lawyers, or any other vendor involved in the transaction?  These folks are all going to make out just fine and find a lot of value in this market when they cash-out or provide their services.  Worse yet, is it the sponsor using the asset to derive value for themselves through acquisition and asset management fees to support their lifestyle?

If you are the limited partner, YOU better be the one getting the value, as well as the residents of the community you’re investing in!

In today’s market, it’s not uncommon for a property to be on its fourth or fifth value-add cycle.  Each sponsor takes a crack at making some improvement or simply rides the appreciation wave for a year or two, and then tries to convince the next potential buyer that there’s a proven plan that just needs continued execution to add to the already lofty market price.

So, how are the limited partners to know whether there’s really any meat left on the bone in a deal?

It comes down to the scope of the project, understanding a few key metrics, and applying them to the specific market and asset class in question.  The following are the questions I ask when evaluating a value-add deal.

 What is the asset class?

What class of property are you underwriting – A, B, C or D?  The location, age, condition, and operational status of the property are all going to dictate its class and, ultimately, give you an idea of the scope of renovations and upgrades needed.

 What is the market cap rate for the class of property in the specific market?

Here in Indianapolis, for example, Class A new construction is trading at sub-5-cap prices.  Class C is trading closer to a 6-cap.  Knowing the market you’re investing in and understanding what other properties around your potential investment are trading for is paramount.  Verify this beyond the offering documents.

 What is the yield-on-cost?

With the information above, you can take it a step further.  You have heard of the big three metrics that are advertised on every deal – IRR (internal rate of return), cash-on-cash return, and equity multiple.  Lesser published is the yield-on-cost metric.  Yield-on-cost is extremely useful to begin to measure a potential value-add project’s viability.  When calculating an in-place cap rate on a value-add project, you divide the current net operating income by the purchase price.  But what if the deal has a $400,000 renovation budget that will result in higher rents?  That cap ex budget is not accounted for in the sale price of the property.  Yield-on-cost will, however, take this into account.

Example: A value-add project has an NOI (net operating income) of $120,000 and a purchase price of $2,000,000, which comes out to a 6% in-place cap rate at acquisition.  The operator injects $400,000 to update the property, which brings the total project cost to $2,400,000.  The improvements allow for higher rents and lower expenses, bringing the NOI up to $200,000.  This results in a yield-on-cost of 8.33% (YOC = pro forma NOI / Total Project Cost ($200,000 / $2,400,000)).

 What is the development spread?

Having this knowledge is critical as a point of comparison between yield-on-cost and the market cap rate for the specific asset class in question.  This difference is called the “development spread.”  In the example above, if the market cap rate was 7%, with a yield on cost of 8.33% (a development spread of 133 basis points), you can be confident that the renovations are leading to actual value to you as an investor.  The higher the development spread, the better.  Notice that the in-place cap rate of 6% differs from the 7% market cap rate in the example.  The acquisition will be at a premium for the upside potential you gain, but the sponsor group should not be paying so much for it that the development spread gets wiped out.

Sometimes it’s worth taking a step further if there are some operational implementations that are relatively easy to execute.  For example, let’s say the seller is paying 4% for property management and your sponsor has a great management team that can implement your plan for 3% on day one.  By calculating NOI using trailing effective gross income minus stabilized expenses (the projected expenses), you can look at the development spread from a different lens – one that just measures the value created from the renovations and updates planned.  This tweak can potentially better measure the effort and sweat equity required for the sponsorship team to get the desired outcome and exclude the low hanging fruit.

 How do they weigh risk-adjusted returns with the scope of the project?

Now that you’ve got some data, there’s a qualitative component that enters the equation – is the risk and scope of the project worth the upside potential?  This is all in the eye of the beholder.

If the deal is a light value-add, 2015 build, that just needs some paint and a few amenities to achieve a rent bump, maybe a 50-basis point development spread is going to provide a solid risk-adjusted return.

Alternatively, if it’s a distressed asset that is 70% occupied and will be a total reposition because it has a ton of deferred maintenance, 50 basis points isn’t worth the risk.  Even if the project is executed perfectly, I’d argue interest rate risk could wipe out that spread through a cap rate expansion.  It would be a real disappointment if you took significant risk in repositioning a distressed property, only to find out no value was added.  For a big project like that, you may want a development spread of at least 200-basis points.  Again, this is subjective, and the upside should be carefully weighed against risk.

 Putting it all together

Here is how I calculate the future valuation of a property.  I take the pro forma NOI (which I sometimes adjust if I think the assumptions are too aggressive) and divide it by two different multipliers, then compare those values with the total project cost:

  1. Current market cap rate for the property class
  2. Projected exit cap rate

The total project cost should be at a discount compared with the market and exit cap valuations.  When calculating these, you will be able to see the dollar amount of the development spread and the equity being created through the “value-add” process.

Let’s go back to the value-add example discussed earlier in the post in Section “3”. In that example our pro forma NOI was $200,000.  If that were the case, the following would be true:

*Market cap rate valuation at a 7% cap rate – $2,860,000

*Assumed exit cap valuation at a 7.5% cap rate – $2,600,000

*Total project cost = $2,400,000 (which resulted in a YOC of 8.33% and a development spread of 133 basis points).

This tells us, at project completion, if we were to sell in today’s market, our 133 basis point development spread would result in a net gain in value of $486,000 (not accounting for transaction costs).  If we apply a reversion cap rate of 50 basis points (exit cap of 7.5%), we still have created $200,000 in equity, indicating the project has a buffer to withstand market headwinds, without giving back all the equity created through the value-add plan.



So, when you see or hear the term “value-add” in webinars, offering documents, and executive summaries, please approach it with a critical eye.  The value-add potential should be reserved for the sponsor and investors.  Get out your calculator, cut through the fluff, and apply your market knowledge to hard data.  Numbers never lie, but they can be presented in a way that tells a story benefiting the storyteller.  Underwriting is as much qualitative as quantitative.  If you strip it down, you’ll be able to identify the true value-add deals and make the right passive investments – ones that balance upside and risk.  Capitalize on those. 


Paul Shannon is a full-time active real estate investor, as well as a limited partner in a number of syndications.  Prior to leaving the corporate world, Paul worked for a medical device company, selling capital equipment to surgeons in the operating room.  After completing a few rehabs employing the “BRRRR method”, he saw scalability and more control over how he spent his time, and left to pursue real estate in 2019.  Since then, Paul has completed over a dozen rehabs on both single-family and multifamily properties.  He currently owns over 50 units in Indianapolis and Evansville, IN and is a limited partner in larger apartments and industrial properties across the US. You can connect with him at

Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.

Chris Franckhauser

Vice President of Strategy & Growth, Advisory Partner

Chris Franckhauser, Vice President of Strategy & Growth, Advisory Partner for Left Field Investors, has been involved in real estate since 2008. He started with one single-family fix and flip, and he was hooked. He then scaled, completing five more over a brief period. While he enjoyed the journey and the financial tailwinds that came with each completed project, being an active investor with a W2 at the time, became too much to manage with a young and growing family. Seeing this was not easily scalable or sustainable long term, he searched for alternative ideas on where to invest. He explored other passive income streams but kept coming back to his two passions; real estate and time with his family. He discovered syndications after reconnecting with a former colleague and LFI Founder. He joined Left Field Investors in 2023 and has quickly immersed himself into the community and as a key member of our team.  

Chris earned a B.S. from The Ohio State University. After years in healthcare technology and medical devices, from startups to Fortune 15 companies, Chris shifted his efforts to consulting and owning a small apparel business when he is not working with LFI (Left Field Investors) or on his personal passive investments. A few years ago, Chris and his family left the cold life in Ohio for lake life in the Carolinas. Chris lives in Tega Cay, South Carolina with his wife and two kids. In his free time, he enjoys exploring all the things the Carolinas offer, from the beaches to the mountains and everywhere in between, volunteering at the school, coaching his kids’ sports teams and cheering on the Buckeyes from afar.  

Chris knows investing is a team sport. Being a strategic thinker and analytical by nature, the ability to collaborate with like-minded individuals in the Left Field Community and other communities is invaluable.  

Jim Pfeifer

President, Chief Executive Officer, Founder

Jim Pfeifer is one of the founders of Left Field Investors and the host of the Passive Investing from Left Field podcast. Left Field Investors is a group dedicated to educating and assisting like-minded investors negotiate the nuances of the passive investing landscape and world of syndications. Jim is a former financial advisor who became frustrated with the one-path-fits-all approach of the standard financial services industry. Jim now concentrates on investing in real assets that produce cash flow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth.

Jim not only advises and helps people get started in passive real estate syndications, he also invests alongside them in small groups to allow for diversification among multiple investments and syndication sponsors. Jim believes the most important factor in a successful syndication is finding a sponsor that he knows, likes and trusts.

He has invested in over 100 passive syndications including apartments, mobile homes, self-storage, private lending and notes, ATM’s, commercial and industrial triple net leases, assisted living facilities and international coffee farms and cacao producers. Jim is constantly looking for new investment ideas that match his philosophy of real assets producing cash flow as well as looking for new sponsors with whom he can build quality, long-term relationships. Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.

Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.

Chad Ackerman

Chief Operating Officer, Founder

Chad is the Founder & Chief Operating Officer of Left Field Investors and the host of the LFI Spotlight podcast. Chad was in banking most of his career with a focus on data analytics, but in March of 2023 he left his W2 to become LFI’s second full time employee.

Chad always had a passion for real estate, so his analytics skills translated well into the deal analyzer side of the business. Through his training, education and networking Chad was able to align his passive investing to compliment his involvement with LFI while allowing him to grow his wealth and take steps towards financial freedom. He has appreciated the help he’s received from others along his journey which is why he is excited to host the LFI Spotlight podcast and share the experience of other investors and industry experts to assist those that are looking for education for their own journey.

Chad has a Bachelor’s Degree in Business with a Minor in Real Estate from the University of Cincinnati. He is working to educate his two teenagers in the passive investing world. In his spare time he likes to golf, kayak, and check out the local brewery scene.

Ryan Steig

Chief Financial Officer, Founder

Ryan Stieg started down the path of passive investing like many of us did, after he picked up a little purple book called Rich Dad, Poor Dad. The problem was that he did that in college and didn’t take action to start investing passively until many years later when that itch to invest passively crept back up.

Ryan became an accidental landlord after moving from Phoenix back to Montana in 2007, a rental he kept until 2016 when he started investing more intentionally. Since 2016, Ryan has focused (or should we say lack thereof) on all different kinds of investing, always returning to real estate and business as his mainstay. Ryan has a small portfolio of one-to-three-unit rentals across four different markets in the US. He has also invested in over fifty real estate syndication investments individually or with an investment group or tribe. Working to diversify in multiple asset classes, Ryan invests in multi-family, note funds, NNN industrial, retail, office, self-storage, online businesses, start-ups, and several other asset classes that further cement his self-diagnosis of “shiny object syndrome”.

However, with all of those reaches over the years, Ryan still believes in the long-term success and tenets of passive, cash-flow-focused investing with proven syndicators and shared knowledge in investing.

When he’s not working with LFI or on his personal passive investments, he recently opened a new Club Pilates franchise studio after an insurance career. Outside of that, he can be found with his wife watching whatever sport one of their two boys is involved in during that particular season.

Steve Suh

Chief Content Officer, Founder

Steve Suh, one of the founders of Left Field Investors and its Chief Content Officer, has been involved with real estate and alternative assets since 2005. Like many, he saw his net worth plummet during the two major stock market crashes in the early 2000s. Since then, he vowed to find other ways to invest his money. Reading Rich Dad, Poor Dad gave Steve the impetus to learn about real estate investing. He first became a landlord after purchasing his office condo. He then invested passively as a limited partner in oil and gas drilling syndications but quickly learned the importance of scrutinizing sponsors when he stopped getting returns after only a few months. Steve came back to real estate by buying a few small residential rentals. Seeing that this was not easily scalable, he searched for alternative ideas. After listening to hundreds of podcasts and attending numerous real estate investing meetings, he determined that passively investing in real estate syndications was the best avenue to get great, risk-adjusted returns. He has invested in dozens of syndications involving apartment buildings, self-storage facilities, resort properties, ATMs, Bitcoin mining funds, car washes, a coffee farm, and even a Broadway show.

When Steve is not vetting commercial real estate syndications in the evenings, he is stomping out eye diseases and improving vision during the day as an ophthalmologist. He enjoys playing in his tennis and pickleball leagues and rooting for his Buckeyes and Steelers football teams. In the past several years, he took up running and has completed three full marathons, including the New York City Marathon. He is always on a quest to find great pizza, BBQ brisket, and bourbon. He enjoys traveling with his wife and their three adult kids. They usually go on a medical mission trip once a year to southern Mexico to provide eye surgeries and glasses to the residents. Steve has enjoyed being a part of Left Field Investors to help others learn about the merits of passive, real asset investments.

Sean Donnelly

Chief Culture Officer, Founder

Sean holds a W2 job in the finance sector and began his real estate investing journey shortly after earning his MBA. Unfortunately, it could not have begun at a worse time … anyone remember 2007 … but even the recession provided worthy lessons. Sean stayed in the game continuing to find his place, progressing from flipping to owning single and multi-family rentals to now funding opportunities through syndications. While Sean is still heavily invested in the equities market and holds a small portfolio of rentals, he strongly believes passive investing is the best way to offset the cyclical nature of traditional investment vehicles as well as avoid the headaches of direct property ownership. Through consistent cash flow, long term yield and available tax benefits, the diversification offered with passive investing brings a welcomed balance to an otherwise turbulent investing scheme. What Sean likes most about the syndication space is that the investment opportunities are not “one size fits all” and the community of investors genuinely want to help.

He earned a B.S. in Finance from Iowa State University in 1995 and a MBA from Otterbein University in 2007. Sean has lived in eight states but has called Ohio home for the last 20+.  When not attending his children’s various school/sporting events, Sean can be found running, golfing, shooting or fly-fishing.

Patrick Wills

Chief Information Officer, Advisory Partner

An active real estate investor since 2017, Patrick Wills’ investing journey began like many others – after reading the “purple book” by Robert Kiyosaki. Patrick started with single family rentals, and while they performed well, he quickly realized their inability to scale efficiently while remaining passive. He discovered syndications via podcasts and local meetups and never looked back. He joined Left Field Investors in 2022 as a member and has quickly become an integral part of the team as Vice President of Technology.

An I.T. Systems Engineer by trade, he experienced the limitations of traditional Wall Street investing firsthand in his career and knew there had to be a better way to truly have financial freedom.

Unfortunately, that better way is inaccessible to those who need it most. His mission is to make alternative investments accessible to everyone who seeks to take control of their financial future and to pursue their passions in life.

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