In the world of real estate investing, everyone is out for the best deals. Buying distressed properties can be controversial among investors; while some swear by it, others are scared off. But if you’re looking for real estate deals, distressed properties can be a fantastic choice for most investors. Use this guide to find out the pros, the cons, and more importantly: how to find them.
What Is Considered a Distressed Property for Sale?
Distressed properties are often listed for sale by the lender who financed its purchase (rather than the homeowner or real estate investor). This usually means that the buyer was unable to keep up with mortgage payments, resulting in reclamation by the financial lender. This property type has become a favorite among some investors since they will often be listed for sale far below market value.
Learn More: What Is Distressed Property and How to Find One?
The Pros
1. Low Price
Buying distressed properties is attractive to real estate investors because of the low price point in comparison to other investment properties. Since sellers will often be looking to make a sale quickly, buyers are at a considerable advantage in terms of negotiating and getting the best possible price. Very often, distressed properties will be listed for sale by the lender, who has a vested interest in selling it as quickly as possible.
For beginner real estate investors, this can be a fantastic choice since the low price point will make it more attainable. Purchasing distressed real estate could be a great way to make money in real estate and have the necessary cash flow to make more significant investments in the future.
Simultaneously, this can also be an excellent choice for seasoned investors. The low price means distressed homes can be acquired with lower-than-average capital, and still provide huge returns. Purchasing one or more of these investment properties can be fantastic for anyone’s real estate portfolio.
2. Huge Potential
There is a massive potential for improvement when buying distressed properties. Typically, if the homeowner was unable to keep up with mortgage payments, there is likely also to be a lot of deferred maintenance. While most home buyers will focus on a property’s current state, investors have the privilege of seeing its future potential. While some might see a poorly-maintained property, investors can see tremendous growth potential and future market value.
If you are interested in pursuing a fix and flip investment strategy, buying distressed properties is a fantastic way to go. They are among the most cost-effective real estate options for this strategy and can often be a blank canvas that real estate investors could flip into remarkable properties. In no time, distressed homes for sale can become income property.
3. High Return on Investment
Buying distressed properties can offer a substantial return on investment. Foremost, their low price point means they won’t be as large of a financial burden as other investment properties. But that doesn’t mean they can’t sell for large sums. After the necessary upgrades are made, distressed properties can become valuable commodities and be resold for substantial rewards.
To ensure the success of this real estate investment and guarantee a high ROI, make sure that you run the numbers before purchase. Consider using an investment property cash flow calculator, such as the one offered by Mashvisor, to crunch your numbers. You’ll need to factor in the cost of your repairs, along with the asking price, to make sure that your ROI will still be good after the renovation has wrapped up.
Related: How to Calculate ROI in Real Estate
The Cons
1. High Renovation Costs
Even though renovations can have a significant impact on resale value, these costs may be too large of a burden for some real estate investors. If you haven’t fully prepared for the financial burden or factored them into your investment calculations, you may face some unfortunate consequences later on.
Aside from money, you’ll also have to think about the time investment needed to complete repairs. Upgrades can take weeks or months, and this may inhibit your ability to take on other projects. You’ll also be dealing with a negative cash flow investment property in the meantime. So be sure that you have the right amount of time and money to deal with repairs when buying distressed properties.
2. Often Found in Bad Locations
Very often, distressed properties will be in locations that are less than ideal. In some circumstances, this can place a cap on how much your property value can increase after repairs are made. Thus real estate investors need to be very cautious when buying distressed properties and make the effort to study up on the location’s real estate trends, average monthly rent, and appreciation rates.
For savvy investors, there are several online tools that could be used to find these real estate market trends. An industry leader in this field is Mashvisor, which will allow you to quickly find average monthly rent, occupancy rates, and other crucial information, in whichever location you choose. When buying distressed properties, be sure that you have the numbers to back up your investment.
3. High Competition
Due to the low average price, you will often face competition when buying distressed properties. Investors are quickly catching on to the vast potential returns of this real estate investment strategy, and the market is rapidly populating. If you have your eyes set on a particular investment property, be ready to compete with other investors.
How Do I Find Distressed Properties for Sale?
Here’s the caveat: distressed properties will hardly ever make their way to MLS services. It, therefore, becomes a lot harder to find them and a lot harder to compare your options. This property type is notorious for being just beyond the view of the general public.
Thankfully, the tech industry is right at the tail of investors, and a centralized solution has emerged. Using the Mashvisor Property Marketplace will allow you to view REO properties, foreclosures, and other distressed properties for sale, much more efficiently than ever before.
This particular tool has the advantage of offering advanced analytics that could support your decision to invest. You’ll have a whole host of important numbers that can assist in making your decision, from the monthly rent to ROI estimates. This real estate investment tool is indispensable when buying distressed properties.
Related: How to Find Distressed Properties for Sale
Bottom Line
Cheap investment property for sale sounds like every investor’s dream. But when it comes to buying distressed property, there’s an additional caveat. The time and effort needed to turn a profit are off-putting to a lot of real estate investors. But for those who are willing to put in the work, this can be a hugely fruitful real estate investment strategy.