Investors in real estate diversify their portfolios to increase return on investment (ROI), minimize risk, and cushion against uncertain market conditions like fluctuating interest rates. In addition to traditional real estate investment opportunities like buying open ground for construction or purchasing new buildings, investors have invested in distressed properties.
Investing in distressed properties refers to acquiring properties below their market value for various reasons, such as the owner's insolvency, foreclosure, reduced occupancy for rentals, the need for a quick cash injection, or extended periods of unuse or disuse that require renovations for use. In such a case, the investor may choose to purchase for resale at a profit, prospective purposes on a rise of the property value in the future, or offer a distressed property credit to the borrower, typically the property owner. However, success in distressed property investment depends on several factors.
First, investors must explore the property's history and reason for the distressed status. The property history guides the investor on the viability of the investment, especially ROI, activities required to remove the distress status, and secondary fees. For example, investors must understand how to reverse low tenancy. It might require costs like property renovations, assuming some of the costs to reduce tenancy fees to attract new renters.
Similarly, distress due to the property owners' poor management may require hiring a property management team or firm. Some properties have liens, blocking them from resale due to issues like accrued unpaid property tax. In such a case, the investor should liaise with the tax agencies to determine the tax owed, lest the total cost of acquiring the property brings it to or over the market value.
Understanding the reason for the distressed status assists investors in mitigating risks due to reasons beyond fixing. For example, off-grid properties may pose a higher risk as the chances and duration of ROI may take longer compared to retail property in an area experiencing significant population growth and with dynamic demography.
Thirdly, investors should have a robust and feasible exit strategy. Distressed property owners often want to sell their property at a price closest to its market value. Thus, some tend to provide unclear, ambiguous, or false details about the property with the hope of a quick sale. Besides due diligence on the property and thorough research, the investor should have a robust plan to dispose of the property with minimal financial loss.
The plan should highlight the feasibility of investing in the property compared to other opportunities available in the market, especially for the costs involved and the ROI reason. For example, distressed property with legal complications like ownership claims or hefty financial issues may take a long time to solve. An exit strategy also defines the intention with property after a successful purchase. The typical methods include prospecting for future profits, renovating for resale, or leasing as is for long-term regular income.
Lastly, if the investor aims to work with a firm that deals with distressed property, investors must research them. They should understand the specialty of each firm and determine if it aligns with the current or desired portfolio. Reliability, history, and experience on the investor's property preference help access good deals and reduce loss.
