Investment Strategies What You Need to Know Before Investing in a Distressed Property by Ranah Asad September 27, 2018February 21, 2019 by Ranah Asad September 27, 2018February 21, 2019 There are many different types of real estate investment properties like multi-family homes, single-family homes, condos or townhouses that real estate investors invest in to generate a profit. However, a very important type of investment property that many investors seem to leave out is distressed property. Most experienced real estate investors who are familiar with these types of properties would agree when we say that investing in a distressed property can be a very smart investment strategy that allows you to quickly make money in real estate. What is a distressed property? How can investors benefit from this type of property and what do you need to know before investing in a distressed property? All of these questions and more will be answered throughout this blog. What Is a Distressed Property? Many people tend to confuse a distressed property with fixer-uppers. Everyone knows that a distressed property is typically sold below market value. Furthermore, these types of properties are in poor condition and are usually at risk of foreclosure generally because the owner was unable to keep up with mortgage payments. On the other hand, a fixer-upper is a property that needs some renovations and improvements in order to increase its value and sell it for a higher return on investment. A distressed property generally needs more work than a fixer-upper. Why would real estate investors even consider investing in a distressed property if it needs a lot of work and why do some real estate investors avoid these types of properties if, in fact, they offer a good reward? What are the advantages and disadvantages of investing in a distressed property? Let’s find out! Related: The Advantages and Disadvantages of Investing in a Distressed Property Advantages of Investing in a Distressed Property Lower Price Like mentioned previously, it is known that distressed properties are generally sold below market value at very low prices. This is one of the many reasons why real estate investors choose to put their money on a distressed property. The seller of a distressed property or the bank generally want to get rid of these properties as fast as possible. That is why the price of the property is less than the market value. Furthermore, the buyer has the ability to negotiate the price even more. This is a great opportunity for investors looking to buy for cheap and sell for high after renovating the property. High Profits A distressed property has the ability to generate high profits. Not only can real estate investors increase the property’s value by renovating it but like any other investment property, distressed properties also increase in value over time. This is known as real estate appreciation. Additionally, real estate investors can also generate high profits from distressed properties by renting them out. You can achieve a high return on investment from the rental income and cash flow that your rental property generates. This is especially true if you are able to find a distressed property in a great neighborhood that has a high demand for rental properties. Mashvisor can make your search much easier! With our various real estate investment tools like our heatmap analysis and rental property calculator, you can easily locate the best-performing neighborhood in your city of choice. Related: Mashvisor: The Best Rental Property Calculator You Could Ask For To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here. Much Better Financing It is known that banks and lenders are typically interested in getting distressed properties sold as fast as possible. This is a great opportunity for real estate investors looking to get better financing methods. You can end up with much lower interest rates, closing costs and mortgage rates than you would for a regular investment property. Real estate investors not only need to know the advantages of investing in a distressed property but also the disadvantages to ensure that they are making smart investment decisions. Disadvantages of Investing in a Distressed Property More Competition Distressed properties are much cheaper compared to other types of investment properties. For this reason, there is more competition among real estate investors to get ahold of such properties. However, if you can find the right real estate agent, you can find distressed properties easily. In Very Bad Condition Probably the main disadvantage to distressed properties is their bad condition. You may be able to find properties that are in “ok” situations, but that is very rare. Most distressed properties are in very bad conditions and suffer from neglect. Many real estate investors try to avoid these properties since they require a lot of repairs such as electrical or plumbing. Some distressed properties have damaged walls or suffer from foundation issues. All in all, these repairs can be costly and can take a long time to finish. The Location of a Distressed Property Location plays a vital role in real estate investing regardless of your chosen investment strategy or type of property. The bad thing about distressed properties is that most of them are located in low-income neighborhoods. These neighborhoods often have a very low demand for real estate properties. No matter how much repairing you do to a distressed property, if it’s found in a bad location then there is no way you’re going to be able to generate a profit. Related: Location Location Location: What Makes for the Best Place to Invest in Real Estate? Must-know Tips Before Investing in a Distressed Property Smart real estate investors know that distressed properties offer high returns if purchased correctly. Beginner real estate investors, on the other hand, can be reluctant to purchase these properties because of the various risks involved. However, if you follow these tips, you can easily purchase a distressed property with a big profit potential. 1. Set a Budget and Stick to It Knowing how much you’re able and willing to pay for an investment property is the first step to any successful real estate investment purchase. You need to first determine your budget before making any offers. Make sure you look at the full financial picture and take into consideration any extra expenses that may be required. You need to know the amount of money you can afford to spend on a distressed property and stick to it, no matter what temptations may arise. 2. Carefully Consider the Neighborhood Like I mentioned previously, the location of your distressed property is very important. Do your research and familiarize yourself with the neighborhood before jumping in and making any deals. Remember to look for distressed properties that have fallen into distress in neighborhoods that are not declining. This will allow you to obtain a better return on your investment. Watch out for failing business, high crime rate and whether or not there is demand for properties. 3. Find a Trustworthy Inspector A home inspection is definitely something that must be done before investing in a distressed property. Find a trustworthy home inspector that is willing to inspect the home. When you have a clear idea of what the property lacks and what renovations need to be done, you can easily determine whether or not the property falls within your budget. A Final Word Before diving into any type of investment property, you need to be aware of the risks involved. While many real estate experts try to avoid distressed properties since they believe that they come with too many risks, these properties at times offer the best returns. Feel free to check out Mashvisor’s knowledge center to learn more about distressed properties and many other types of properties. To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here. Start Your Investment Property Search! START FREE TRIAL Distressed PropertiesFinancingHome InspectionLocationProperty PricesReturn on Investment 0 FacebookTwitterGoogle +PinterestLinkedin Ranah Asad Ranah is a long-term content writer at Mashvisor with a degree in strategic studies who enjoys writing about all aspects of the real estate investment business. Previous Post Should You Let a Cash on Cash Return Calculator Make Investment Decisions for You? Next Post How to Buy Your First Rental Property in 8 Steps Related Posts Learn How to Wholesale Real Estate Properties for the Maximum Profit Will the Fix and Flip Strategy Be Profitable in 2021? Cities with Highest Airbnb Rental Income in 2018 What Is Driving for Dollars in Real Estate? Airbnb Investment vs. Traditional Investment: Which is The Optimal Strategy? 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