4 December De-Stressing Your Portfolio with Distressed Properties December 4, 2024 By Melisa Rana Commercial Inspection, Property Investment, Property Maintenance building renovation, business tips, exterior maintenance, interior maintenance 0 DE-STRESSING YOUR PROTFOLIO WITH DISTRESSED PROPERTIES December 4, 2024 | Property Maintenance, Property Investment, Commercial Inspection | business tips, exterior maintenance, interior maintenance, building renovation There are lots of different ways to diversify your portfolio and make a profit in CRE. One rewarding route you can take as an investor is targeting distressed properties. Sometimes properties fall on hard times either due to deferred maintenance or because another competitor down the road captures all of the attention. This doesn’t have to mark an end to this property’s potential, though! Sometimes, all they need is a new owner or investor who is willing to put in the work. While sometimes regarded as risky, distressed properties can also be a very lucrative and fulfilling investment option. Let’s discuss from a bird’s eye view how you can feel more comfortable buying and flipping properties that might need extra TLC. Defining a Distressed Property A distressed property is any property that is underperforming compared to other properties of its class–in fact, it’s likely on its way to foreclosure. Properties may become distressed due to a wide range of situations, though, by far, the most common reason is deferred maintenance. Every property requires proactive and routine maintenance to avoid costly repairs, but when commercial buildings struggle with maintenance, their sheer scale can often mean eye-popping issues. Things like leaky roofs, problems with HVAC systems, and even foundation concerns can mount due to the high costs required to address them. Sometimes, owners choose to ignore major problems instead - a sure path to the property becoming distressed. Deferred maintenance isn’t the only reason why a building might be considered distressed, though. Often, properties can become distressed due to owners no longer being able to make payments. Sources of financial strain can include (just to name a few examples): Rise of crime in the neighborhood Loss of foot traffic due to increased competition Community interests shifting away from the business Soured partnerships leading to reduced capital Lowered occupancy from a lack of updates or interest from owners Whether a property is no longer considered profitable, or it’s in dire need of TLC, distressed properties can be highly desirable to the right investor. Distressed properties tend to be available at below the standard value of a similar asset, providing an opportunity for major ROI. Identifying a Distressed Property with Potential The key to finding success with investing in distressed properties is whether an investor can identify the property’s issues and address those problems without breaking the bank. To start, investors need to learn the story of the property that has caught their interest - the full story. Speaking with the seller to learn more about the building’s history is an essential first step, followed by doing a deep dive on market conditions in the area, along with standards for similar property sales. Next, an absolute essential in any real estate purchase is to order a property inspection. Particularly important for properties that have neglected maintenance issues, an inspection helps you confirm the state of the property and ensure that there aren’t unexpected issues with structural integrity.Partnering with an industry leader like National Property Inspections means partnering with the most trusted brand in property inspections. Contact our team to schedule your commercial inspection today. With the property identified and inspected, investors also need to define a clear exit plan. Do you plan to hold and operate the property for the foreseeable future? Or is the plan to make changes and resell quickly? Many investors partner with their own team of contractors and other professionals so that they can gather repair estimates and factor in the predicted resale value, confirming whether the venture is the right fit for them. Note: Some distressed property purchases may include tax incentives. Be sure to consult with a tax professional for how these incentives may operate in your area. Repurposing Your Distressed Property A common tactic that investors employ when purchasing distressed properties is through repurposing the building, sometimes transitioning from one class to another completely. Also known as adaptive reuse, properties across the US have been finding new life in many innovative and creative ways, with some endeavors even rescuing historic properties. With the rise of remote work, many office buildings have notably found success transitioning over to luxury apartments, taking advantage of those properties’ high ceilings and easy access to natural lighting. In a similar vein, some property owners have opted to transition portions of their available space for other purposes, seeing the benefit of mixed-use properties. When repurposing a property of any kind, it’s important to look at what makes it unique and how those features can be emphasized to turn the page to a more successful chapter. Distressed properties can be a dynamic addition to any portfolio with the right research and know-how. Just like you shouldn’t judge a book by its cover, don’t judge a building by its facade! 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