When you’re shopping around for a new property to purchase, you’re probably drawn to listings with polished photos, sophisticated interiors and manicured land. But, it’s worth it to consider investing in a distressed property instead. While it’s essential to exercise caution when you approach a distressed property, you can get a great return on this type of investment if you play your cards right.

What is a distressed property?

A distressed property is distinct from a regular fixer-upper in a number of ways. A fixer-upper is a home or property that requires some basic renovation or restoration work to increase its value and boost its appeal to prospective buyers. Projects on fixer-uppers typically include new paint, re-shingling, landscaping and new flooring. These renovations are relatively inexpensive and they improve the profitability of the property.

Distressed properties, on the other hand, require more extensive work before becoming marketable to buyers or profitable to an investor. Distressed properties may have fire damage, foundation problems, flooding or other issues that require costly, extensive renovations and repairs. These problems are usually enough to give potential investors pause, but distressed properties have the potential to deliver a much more substantial return on investment than other properties.

How distressed properties can be profitable

While there are certainly a number of risks associated with investing in distressed properties, these deals have the potential to garner a much greater return than other real estate investments. In many cases, the greater the risk, the greater the potential reward.

When you buy a distressed property, you have the opportunity to make an investment at a low cost, completely overhaul the property and sell or rent your updated property for a major profit. When these deals go right, you’ll see a significant return on your investment of money, time and energy in a matter of months.

Tips for investing in distressed real estate;

·Prioritize planning: You shouldn’t rush into any investment decision, especially not one with as many potential risks as distressed property. There are certain aspects of distressed property investments that can be unpredictable. The more prepared you are going into a deal, the more likely you are to get the outcomes that you’re hoping for. You should become familiar with the market where you’re buying, research the costs typically associated with renovating a distressed property and monitor property value trends. By doing all of this background research and prep work before you make an investment, you’ll be ready to pull the trigger when the right deal comes along.

·Strategize: It’s important to consider how you will approach your investment. Determine how long you want to hold your property, when you want to sell or whether you want to rent or lease your property to tenants once it’s been renovated. Having a strategy as you approach real estate opportunities will enable you to find properties that are ideal for your investment goals.
Get involved directly: Because of the amount of work that’s required to renovate a distressed property, you should be prepared to invest a lot of your own time and energy into this project. While you will have to outsource much of the work to contractors, you have to be on hand to manage issues as they arise and make decisions about your property on the fly.

·Make conservative calculations: Everyone hopes their remodeling or construction project will be completed on-time and on-budget… but this rarely happens in reality. When you’re considering whether an investment in distressed real estate will be profitable, you should make conservative estimates and consider potential complications and difficulties that may increase your costs and timeframes along the way.

·Accept the risk: Even if you do everything right with your investment, there’s still a level of risk that you simply can’t avoid in a distressed property deal. You should do everything that you can to minimize the risks associated with distressed property investment, but you should accept that risk is unavoidable and ensure you’re prepared to accept the potential of the deal to go south.

Even if you’ve never thought about investing in a distressed property before, it’s a viable option that can be even more profitable than investing in a property that doesn’t require any work. With sufficient preparation, the right strategy and an understanding of distressed property investment, you can invest with confidence and cultivate value in your real estate portfolio.