July 31, 2013

Distressed Properties Can Be A Good Investment

So I'm doing research for potentially good investments to include in my portfolio and I found that investing in distressed properties can be a good investment.  This is why:

First, I normally would pass on such an investment - but given the recent volatility in the stock market and current low prices/interest rates in real estate (soon to go up) - I noticed that distressed properties have begun to show a silver lining. While researching the state of the economy and other demographic trends - I think that distressed properties are a potential "home-run"... mostly for their income potential.

Why?  Well, I'll show you an example of a property I hope to purchase.

       Price =     +$32,000
       Rehab =     +$4,000
Down Pymt =    -$7,200
Total Financed   $28,800 @ 4.5% Fixed 30YR Mortgage

It makes sense to include the cost for repairs & rehab at these low interest rates - especially since I'm putting down 20%, which brings my total amount financed under $30K (seems almost as if I'm financing a car doesn't it...?  except this is Real Estate!)

Mortgage Pymt =    -$182.41
Property Mgmt =      -$87.00
Rent Income =       +$870.00
Net Income           +$600.59/month

The rental income above is estimated based on the area's fair market rent - because my monthly net income is so high, I could lower the rent below the fair market rate if needed and still make a hefty profit after paying the mortgage.  I don't have the experience nor the time to manage the property myself, which is why I'd rather leave the maintenance, leasing, tenant background check, etc. up to a reputable property management company that will do all of this for me (for a small fee of course - not included is the one time $250 acquisition fee).

With these types of returns - distressed properties don't look so bad...especially when they are relatively new (this one is built in 2008) and in functioning neighborhoods ( I don't want to be a slumlord!).  I'm willing to take on this type of risk because of the cash flow potential and limited downside.  If I can't get someone to rent it out - then I'm stuck paying the mortgage.  But this is what the property mgmt company is for - they specialize in getting tenants into homes.

Finally, this property will prove to be an even better investment once I include my tax depreciation, interest deduction, and expense write-offs.  It's probably better to take this risk versus getting myself locked into another car note and paying a dealership for the next 5 yrs.  Just my thoughts.