Distressed Properties: Nightmare or Goldmine?
It's no secret how some of the richest property investors make their money.
They have a keen eye. They have a strategy. They know what they are looking for and finally, they know where to look.
One of my favorite strategies is distressed properties. Whether the property needs some gentle TLC or needs major updating, it always catches my eye. As professional property investors, we are looking for properties that we can pick up below market value. We know how to spot the opportunity!
Most first-time home owners dream of moving into a picture-perfect home that morning and having their friends over for a braai that afternoon. With distressed properties, there is zero chance of that happening. Which simply means more cha-ching for me since the fewer people there are walking towards the property, the more wiggle room I have to negotiate with the seller. Lower the demand, the higher the bargaining power!
The best place to find them is by walking the streets of your chosen investment area. Put on your takkies and use the opportunity to improve your health AND your financial situation. Look for properties with overgrown gardens, terrible paint jobs, old broken window frames, broken down walls. Abandoned houses smell like money!
Don’t get me wrong, this is a tough strategy to follow through on. You need to have a clear understanding of what you are getting into and you need an experienced power team on your side.
Let’s consider some of the pitfalls of this strategy:
There are holding costs while you do the refurb. The bond, water + lights, rates + taxes and if relevant, levies will still need to be paid while the property stands empty. Don’t forget insurance!
Your builder needs to have a clear understanding of what work is required to ensure your quote is accurate. Not only that, time is of the essence so if your builder quoted 3 months to the do the refurb, it is crucial that is happens within that time frame because every single additional day that ticks by after the agreed deadline costs you more and more money.
Run the numbers before you go into the deal. Do the numbers make sense? Do you have at least two exit strategies?
Do your due diligence. Speak to estate agents in the area. Make sure you understand what the demand is in the area. Will your refurb plans produce a property that will have new tenants queuing to get in?
We love converting dilapidated dumps into a dream homes in desirable suburbs. In fact, the property we are currently working on was so distressed that we had to rip up all the plumbing as tree roots has grown through all the old piping. Electrical wiring in the house? All had to be ripped out and reinstalled to meet compliancy. A large tree leaned against the wall cracking one of the outside walls. We called in our architect, Alan, who assured us the tree was the cause of the crack, there are no structural issues. So, we cut down the large tree and patched up the wall.
For every problem there is always a solution. The question quite simply is, what kind of property problems are you brave enough to tackle?