Distressed Properties: An Investor's Dream or Worst Nightmare?

Distressed properties include foreclosure and real estate owned (REO) homes. As a general rule, these types of houses typically require considerable repairs to return them to livable condition. Unfortunately, many people evicted from their homes have a tendency to vent their anger on the house. It's not uncommon to find holes in walls, ripped out carpet, broken windows or smashed cabinets.

Approximately 25-percent of distressed properties require major repairs and renovations. This includes structural damage, mold, asbestos removal, lead paint and other environmental hazards. Unless you possess considerable knowledge, these types of homes are better left to professional investors who have the resources for safe and proper renovation.

The next 25- to 30-percent require new roofing, windows, carpet, tile, interior and exterior paint, appliances, landscaping or pool maintenance. These renovations can be quite costly and take a big chunk out of your profit-margin.

However, this should not discourage you from seeking out distressed properties. Persistence and patience can pay off in massive profits. Keep in mind this type of real estate investing normally does not result in overnight profits. Instead, distressed properties are best for investors who plan to keep the property for an extended period of time or those who flip houses.

Seek out affordable properties located in up-and-coming areas. The goal is to purchase property with a low mortgage payment. Doing so will allow you to charge a reasonable amount of rent, which increases your chance of finding quality tenants.

Another option is to look for distressed properties located in popular vacation destinations. By renting the property on a short-term basis, you can charge a higher rent. This can be a risky venture, but the right house in the right location has the potential to yield a tidy profit. Only you can decide if long- or short-term tenants are best for you.