Distressed properties are a great investment opportunity for real estate investors. However, it’s important to remember a few things before investing in these properties.
For starters, distressed properties are often cheaper than the market average. They can be an excellent option for first-time home buyers or those looking to buy a property in an affordable neighborhood.
Don’t Go Too Cheap
Regarding real estate investing, distressed properties can be a great way to earn cash flow while accumulating sweat equity. But they aren’t without their risks.
First, these properties often need a lot of work to fix. They also might need to be in a different location, making it challenging to attract renters or buyers.
Second, they might be subject to environmental contamination that can be very expensive to mitigate. It might put a property at a significant discount to market value, negatively impacting your returns.
Finally, distressed deals may need help securing financing than value-add investments. They require speed and efficiency in underwriting and strong connections in the lending community. It can be challenging, especially if you’re an individual investor. Peter Hungerford is a New York City-based real estate investor and executive with more than 15 years of experience in the industry. He dealt with the risk and discovered the key to avoiding overpaying, ensuring he works with experienced, knowledgeable individuals. It includes real estate agents, attorneys, accountants, title companies, contractors, and home service professionals.
Don’t Go Too Far
Real estate investors often turn to distressed properties for their low prices and profit potential. However, investing in distressed property requires more research and due diligence than other types of investment.
The first thing that investors should do when looking for distressed properties is to partner with a real estate agent who knows the neighborhood well and can give them an inside track on upcoming opportunities.
One of the most common problems newer investors encounter when rehabbing distressed homes is scope creep. It is where needed repairs extend far beyond the initial renovation plans, causing budget overages and lower profits.
Don’t Be Too Optimistic
Distressed properties have a lot of upside potential, but it’s essential to be realistic about their potential. These assets have a lot of work and money that needs to be invested into them, which can significantly reduce an investor’s returns.
These investments also have a much higher execution risk than core property investments. You have to be sure you’re working with a team of contractors who can complete the needed repairs on time and under budget.
Another significant risk of investing in distressed properties is that they tend to be in poor neighborhoods, which can harm their rental performance. It would be best to consider the costs associated with renovating these investment properties, which can be a significant expense.
The temptation to overpay can be vital when it comes to distressed properties. Investors often covet distressed homes because they come at lower-than-market prices, allowing them to profit from their investment.
However, these deals can also take much work to get right. They can be a lot of work and require different services, such as property inspections and repairs.
Don’t Ignore the Risks
Distressed properties can be a great way to boost your bank account, but they also come with many risks. Awareness of these risks is essential to avoid making a bad investment. One of the investors’ biggest mistakes when investing in distressed properties is paying attention to the risks. It can lead to a costly mistake in the long run. In addition to the risk of foreclosure, you should be careful not to miss any hidden problems. For example, look for mold, water damage, and electrical issues. These can cost thousands of dollars and turn a profitable property into a lemon in a blink of an eye.