Investment Strategy for Distressed Real Estate

Having a contractor on your team can be helpful.
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With significant discounts available on many distressed properties, opportunities abound for building a real estate empire. Distressed assets aren't easy to buy, fix or own, though. Relatively few are in turnkey condition, so you should expect to get your hands dirty making the property marketable. This makes them potentially risky investments.

Get Help

If you aren't an experienced investor in distressed properties, consider building a team of professionals who can support you. You need a real estate agent who specializes in investment properties and can share market information with you and find properties. A lender who specializes in distressed property lending will help you stretch your money so you can buy more properties. It's wise to have an inspector on your team so you can quickly assess the condition of properties before closing on them. And you might want to include an accountant, an attorney and a property manager on your team.

Selecting Assets

When looking at assets, determine how much work you want to do. If you have the know-how and team members who can do construction work inexpensively, buying heavily distressed assets that need significant work can be a profitable activity. If you don't have these allies, buying properties that are basically sound but just need some cosmetic work -- or don't need any work -- is a better strategy, because it minimizes your downside exposure -- the risk that a market decline or shift could hurt the investment's value.

Buying Strategy

The key to buying distressed assets is to move quickly. The best distressed homes typically attract attention from multiple investors, and it can be easy to miss out on the opportunity to buy them. When you find out about an asset, visit it as fast as you can and have your agent deliver an offer as quickly as possible. To make your offer more attractive, offer a fast closing time and eliminate any nonessential contingencies. Attaching a "proof of funds letter" that documents your ability to close will also make your offer stronger.

Financing Strategies

The two big challenges in financing distressed properties are that many sellers won't wait for you to obtain a loan and many lenders don't like lending on distressed homes. Investors who have a stockpile of money solve this problem by buying their properties with cash only. If you don't have this option, though, you'll need financing. Private lenders, sometimes called hard-money lenders, will usually make loans quickly, but they can be expensive, because these lenders usually charge high rates and origination fees. Another option is to use a personal line of credit or one tied to your home's equity. Doing this can be risky, as you're putting your personal credit or your house at risk, but it is a way to quickly, easily and relatively inexpensively borrow money.

Hold or Sell

Distressed property investors have two investment strategies with their properties -- to hold it for the long term or sell it at a profit to a traditional homebuyer. Holding it has the benefit of turning your investment into a potentially lucrative string of income for the long term. Selling it lets you get your initial investment and profit out so you can reinvest the money and buy more properties or bigger properties. The best strategy is to look for properties that will work for either option. That way, if you can't sell it, you can rent it profitably, and if you don't want to be a landlord, you can sell it.

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