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In any market, good or bad, there are always problem properties (to someone). Take another look at troubled properties in your area. With fresh new ideas and a re-structuring of the mortgages, the troubles may go away, leaving a profitable investment
January 01, 2007 -- Most are only troubled or problem properties because of the current ownership. Some may be neglected only because the present owner has failed to do fairly simple things that can solve the problems. Buying property and solving problems is a profit-making business.
The number one requirement is location, as it always is in real estate. Even if you spend a great deal of money refurbishing a structure in a questionable location, it will always be in that bad location. The successful turn-around property is a property that can be improved to attract more tenants at higher rents, a building that can be changed to another use, or a building that can be torn down and successfully rebuilt to a better use.
Here are some of the signs on the property that will lead the an investor to further investigation:
• Run down (uncared for) landscaping.
• Partially vacant rentals.
• Collection problems of rents.
• Rental units in poor condition.
• Obvious mismanagement of property.
How to follow up on such a find. (We presume the property is on the market.)
Start with the neighborhood. Check rent levels in buildings like the target property (in condition like it will be after a makeover). Make a list of the needed repairs that your property will need and get bids. Add a generous percentage to the resulting figures since bids are usually low.
Interview current tenants. See if any will stay, particularly if the property is improved. Check the existing rental agreements or leases. Make sure that current tenants are paying amounts in the agreements.
Plan to create amenities that make the property a better place to live or work.
Older apartment units, the usual target for a turn-around, need to be upgraded to stay competitive. Modernize, installing dishwashers, microwave ovens, disposals, and new and more electrical service. Today's tenants have so many electrically powered gadgets, i.e. computers, TV's, hair dryers etc. that even in small units you should consider supplying 100 amps of power and in larger units 200 amps.
What Are The Risks?
Knowledgeable property developers and managers (especially those familiar with empty or near-empty office, hotel, and apartment buildings) caution that buying troubled property requires taking a risk.
The profits can come from any one or a combination of circumstances.
• A market turnaround caused by a boom in the local and/or national economy.
• An improved system for promoting and operating the property. Some syndicates are being formed solely to manage the troubled property with an option to buy when and if it hits a specified profit level.
• Purchase of the property at a bargain price, often combined with imaginative and untraditional financing techniques. Some lenders are asked to share the financial risks by accepting a low initial interest rate in return for a big share of the profits later on. Sometimes the seller of the troubled property is asked to retain a financial stake in the property and to help turn it around. The seller's experience and involvement in the project from the start can be valuable.
• Including the troubled property in a larger development plan. An office building that sits empty might become part of a new industrial park with hotels, conference facilities, and residential apartments, all of which are successful.
Take another look at troubled properties in your area. With fresh new ideas and a re-structuring of the mortgages, the troubles may go away, leaving a profitable investment for you.
What is the upside in a turn-around project? It is in the form of increased rents, lower vacancy rates, happier tenants, and a project you can sell easily because most buyers of investment property want to have "Pride of Ownership" investments. |
