Good, Bad and Ugly: Hunting for Real Estate DealsBy JD Esajian on October 30, 2015
Which are the best types of properties to invest in today?
Is it better to invest in brand new construction, distressed houses, or somewhere in between?
There are many different types of real estate investment opportunities out there. There is a wide range of property conditions, and they can make a big difference in how much real profit there is. So which is the best? What are the pros and cons of the different choices?
Finding the Real Estate Right Fit
The risks, benefits, numbers, and what it takes to turn opportunity can vary widely on the type and quality of property being invested in. In a moment we’ll dig into how this can vary between good looking, lack luster, and downright ugly houses. However, it is also about finding the right fit for you. What might be a dream deal for one real estate investor might be a nightmare for another, and that can have nothing to do with the looks on the surface. Before picking your targets it is important for real estate investors to really take inventory of what time, money, and skill resources they have, and don’t. It is also important to look at your real estate investment strategy, current demand, and where the market is headed, and align your tactics with your longer term goals.
There is an increasing amount of new and like new real estate inventory coming on line. Some investors would never consider investing in this type of property because they believe they need to find ugly and deeply distressed properties to make a profit. Others won’t invest in anything but new and beautiful properties; believing that they are easier to deal with and more desirable to end customers.
Beautiful properties can certainly stand out to prospective renters and end buyers. However, the extent to which this really pays off can still be limited to the numbers. It is possible to break and surpass sales and leasing records with a great product, if end prospects can afford it. In many cases a newly remodeled house or brand new condo building may offer less maintenance costs and time consumed in property management. They may even hold their resale value better over the next 5 to 15 years. They can even be faster to sell, and rent, depending on other market factors.
However, for every pro there can be a con. Sometimes this reveals itself in this niche when investors are fooled into not completing thorough due diligence. Many don’t get that the newest and most expensive properties can also have the biggest and most expensive flaws. A major design flaw in a new condominium can render $10M condos to scrap that cannot even be sold. A new luxury home with a major leak can cause mold and rot the place from the inside out. Faulty products like Chinese drywall can make mansions death traps.
Finally; the resale and rental spreads can be far thinner on new properties. If you are 5 years ahead of the wider market in pricing when you buy, that can mean a while before having enough equity to exit. So complete thorough due diligence and watch your numbers carefully.
Then there are properties which aren’t quite as new or shiny looking. They might look ugly on the surface. They might need a lot of makeup to attract buyers or even to be able to rent. Priced well these properties can be a gold mine for real estate investors. With smart renovation planning, good negotiations, and great marketing their value and appeal can be elevated quickly. Equity and cash flow value can be injected and often within just a week to a few months these ugly step sisters can become fairytale dreams homes and rentals, with royal returns.
However not every property that looks a little run down really falls into this category. If they are overpriced or have deep issues that are expensive to cure they can be nightmare money pits. To make sure these investment opportunities are truly profitable investors must really know their local market figures, thoroughly inspect properties, and know which improvements will really deliver a positive return.
Ugly deals aren’t always hard to look at on the surface. Some brand new properties can definitely fall into this category for the reasons above. This category is really about properties that are really going to need a lot of work and heavy investment to turn around. They may be gut rehabs, need structural repairs, be teardowns, or have quirks that are just going to be too consuming to fix profitably. Unfortunately the last housing dip left a lot of these mines in the field. It really has nothing to do with price. These can be multi-million dollar commercial properties, or $100 houses. The point is that they can cost too much time and resources to actually make a profit on for many investors.
However, those real estate investors that are good at handling bigger issues and can find an edge in the market, may find some of these properties offer the best profit margins. Just know all the costs, and don’t underestimate the job ahead.