There’s something attractive about the idea of a transformation. We see it captured in our media over and over again. It’s famously captured in Shaw’s Pygmalion, it’s on nearly every HGTV show.
We’re enamored with before and afters, fascinated with how something can be turned around. More importantly, in the world of real estate investment, we're interested in how a transformation can turn a profit.
The strategy of investing in distressed properties is not new. It’s common for buy and hold sellers as much as it’s a staple for flippers.
The idea is that one can buy a property that has significant issues—in need of significant repairs, updating, overhauling, construction, what have you—and turn a profit. Investors buy the property for a discounted price, invest in renovating the property (which forces appreciation), and either rent it out or flip it for profit.
It seems like a solid strategy—but is investing in distressed properties all it’s cracked up to be?
3 Pitfalls to Investing in Distressed Properties
It demands the right resources to be profitable.
Saving significant amounts of money is a key part of this investment strategy. It’s not just about getting a good price when you purchase the property, it’s about saving during the renovation process, too. As an investor, you have to have the right resources and connections to keep your costs low when repairing and renovating a distressed property. Otherwise, you could very easily erase your profit margins.
Building those contacts takes time. Rehabbing distressed properties is something that demands a lot of experience, more than many other types of real estate investments.
It’s highly competitive and face-paced.
Despite its demands for expertise, rehabbing distressed properties is very popular. As such, any distressed property that hits the market is going to attract attention very quickly. If your intent is to buy, you’ve got to be agile. Visit fast, offer fast, and be responsive. If you want to make your offer more attractive, cut the fat—no nonessential contingencies and close as fast as you can. Make sure your financing is all in order or have proof of an all-cash offer.
In the world of buying and rehabbing distressed properties, you have to be prepared to make a lot of offers and run against steep competition.
Hidden issues may be lurking.
People who are selling distressed properties know that their properties have issues. They know that you know that their properties have issues. What they might, in some cases, be banking on, is that you might be so focused on seeing certain obvious issues that you don’t see the less obvious issues that they tried to cover up, so you paid a higher price for the property than you should have.
Hidden issues are not uncommon in distressed properties. Sometimes no one knew about them, sometimes the previous owner tried to cover them up. Some of the more common problems are electrical (re-wiring an entire property? An easy $10,000), mold (check out any fresh paint), and water damage. Check for caulking issues, like dry or cracking caulk, lots of caulk in one area, or peeling as indications of water damage.
If you miss something in your initial budget, it could turn a profitable investment into a lemon in a flash. Investing in distressed properties, especially if you’re inexperienced, is always somewhat of a gamble.
The Turnkey Alternative
Even if real estate investors aren’t investing in distressed properties, most investors expect to buy a property with “good bones” that are in need of a little updating and TLC. It may have some minor issues that need dealing with and hopefully, there will be no unpleasant surprises.
And still, there’s an alternative that’s even less risky: turnkey real estate.
When an investor goes through a turnkey real estate provider, they are buying from someone who has done all of the heavy-lifting for them. They’ve bought the distressed properties. They’ve given the TLC. By the time the investor arrives on the scene, they can buy and begin to profit without the fear that their new property is going to spring an unpleasant and expensive surprise on them.
As a turnkey real estate investor, you can step in and start earning passive income: hassle and headache-free.