February 23, 2019
Joe Fairless

The Pros and Cons of Investing in a Distressed Property

One of your fiscal goals is to get more money flowing into your bank account through your real estate investing business. Specifically, you want to thrive in the world of property flipping.

Not a bad goal.

The question is, should you flip properties that are in fairly good condition, or would a distressed property be a better investment?

The reality is that distressed properties offer both pros and cons that you should consider before getting started with distressed real estate investing. Here’s a rundown on a few of these advantages and disadvantages.

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Pro: Low Pricing

One of the biggest benefits of purchasing a distressed property is the low pricing often associated with it. That’s because homeowners who are about to experience foreclosure are generally eager to unload their properties, and the same is true for the lenders and banks that already possess foreclosed homes.

When you are working with highly motivated sellers, you’ll likely end up with bargain prices—or prices under market value. You can capitalize on this to renovate your new property with the goal of increasing its value, then unload the property for a nice profit. With home prices moving in an upward direction in the current market, your distressed real estate’s value has a good chance of increasing—or appreciating—in the months and years ahead.

Pro: High Profit Potential

Although you can certainly sell a distressed property to make a profit, this is not the only way you can generate profits with these types of properties. You can also turn these properties into income-generating rental properties.

The return on your investment, or your ROI, can be high if you choose distressed properties that are in good neighborhoods with high rental demand. So, even though such a property may be a negative cash flow deal, you can make it a positive cash flow when leasing it out.

Pro: Better Financing Opportunities

As mentioned earlier, lenders and banks are very interested in selling their properties. For this reason, they’re often open to giving real estate investors better financing if they’re interested in buying their distressed properties.

What does this mean for you? It means you may end up having lower closing costs, interest rates, and home mortgage payments.

Of course, distressed real estate investing has its share of cons, too, like anything else. Let’s take a look at a few major ones.

Con: The Paperwork and the Competition

When you’re purchasing a distressed property, this may take longer compared with the purchase of a conventional home. Why? Because lenders own many of the properties that are distressed, and their plates are so full that they usually can’t give your properties of interest their undivided attention. Alternatively, they could be searching for better deals, or their properties have second mortgages attached with different lenders.

Also, because distressed investment properties happen to be cheaper, more investors/homebuyers will compete with you to claim ownership of these properties. So, even if a bank is willing to sell you a property that is distressed, it may reject your offer because of the fierce competition in the marketplace. (Of course, if you’ve got an excellent team of people who can help you to find these properties before others do, you can overcome this obstacle.)

In light of all of the above, patience is a necessity if you want to close on a high-potential distressed property.

Con: A Potentially Lackluster Location

Another important consideration when dealing with distressed properties is their locations. Unfortunately, the majority of distressed homes are not in high-income neighborhoods, which can have an adverse impact on your homes’ values.

The ideal situation is for you to find an investment property in a decent neighborhood with a high demand for rentals. You also want a neighborhood where the occupancy rates are good, and where the potential property appreciation is good. Rehabbing your property won’t matter much if it’s in a subpar part of town. Your property’s location will ultimately dictate how much you’ll be able to charge a future renter or buyer.

Con: The Maintenance Requirements

In some cases, distressed homes are in okay condition. However, in other cases, foreclosed properties are abandoned by their previous owners or are not maintained. For instance, some might require extensive plumbing or electrical repair. Meanwhile, others may have foundation issues or damaged walls.

These properties can be costly to fix up to make them livable, and they can also be time consuming to renovate. So, factor this in before purchasing them.

Consider Purchasing a Distressed Property and Making Money from It Today!

If you’re excited by the idea of making distressed properties look brand new, then investing in such properties may be a smart move for you this year. The potential for profits is high; you just need to know what you are getting into before you move forward with any deal. You also need a little patience when you discover an excellent piece of property. After all, like any other aspect of the real estate business, investing in distressed properties is not a get-rich-quick scheme.

If you know how to play the distressed real estate investing game—and if you have the necessary resources, energy, time, planning, and hard work ethic—you’ll end up with good properties that will make good investments for you long term. To learn more about fix-and-flip real estate strategies, check out other articles in my blog!

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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