Have you ever seen a distressed property (a really distressed property) and be really thrilled with the idea of purchasing it, refurbishing it, and renting it? Such ideas can be really appealing, particularly if you’re a real estate investor with a great imagination. The idea of purchasing a cheaper distressed property and renovating it into something valuable in an up and coming market seems attractive but does it really worth it?
A distressed property, in this context, is one that has more damages than your typical fixer-upper. Those damages could be, water damage, fire damage, foundation issues, and years of abandonment and vacancy. A distressed property comes with its own unique issues. And with all of the damages, the risks and the questions, these very distressed properties hold promises that are very enticing.
What does a real estate investor need to know before taking up a challenge like this?
Here is a list of things to know:161
Many new investors often times make the mistake of purchasing the cheapest properties on the market with the thought that they are going to make the best investments. A low cost price on a property does not mean the property is not valuable. In a bad area, a cheap property is still going to demand the same low rents no matter how great you make it which make your cash flow bad. Apparently, a distressed property has nice low prices because it has some issues and those problems have to be fixed but don’t forget, highly distressed properties hold secrets. You just have to budget and account for them.
In terms of renovation costs, handling a distressed property really takes so much more investments and involvements than normal investment properties. A distressed property don’t need to spruce up, they majorly need overhauls that mostly take long renovation timelines, you might be totally renovating the, foundation, sub-flooring, roof, , electric, plumbing and flooring.
Even if the distressed property is old or neglected, this rental properties can be full of hidden risked that are not visible immediately. There are many property problems you could run into like molds, asbestos, septic issues, foundation problems and many other costly problems which might not be seen during inspections. There are also other things we do not take note such as, neighbor issues, unforeseen bank issues, unclean title and also zoning issues. There will be so many problems, be ready to deal with them.
Typically, investors who buy and hold properties (buy and hold investors) are not the ones who buy highly distressed properties. One major reason is that when a flipper takes a distressed property, they have very few merits when they flip it and when they try to rehab it as a rental. They look in the present, don’t need to worry about the future market fluctuations, and wonder if their current investment is going to profit them. These investors pretty much know what they are going to gain out of it in the end, understanding the risk connected with the unknown.
Inexperience can cost you when it comes to dealing with these types of properties, but knowing how to handle them can bring great rewards.