The Great (Investor) Debate: Distressed vs Turnkey Properties - Which has higher ROI?

[Michael Farinello]

As a loan officer, I’ve often seen the potential in both distressed properties that need rehab, as well as turnkey rental properties for passive income potential, but which is the better option for returns? Both options have their unique benefits and drawbacks, but for the sake of this debate I believe that buying distressed properties has more potential for long-term profitability.

The primary benefit of buying distressed properties is the potential for a higher return on investment (ROI). These properties are usually sold at a lower price due to their ‘poor' condition, and with some rehabilitation and renovation they can be transformed into valuable assets. This often results in a higher profit margin compared to turnkey rental properties, which are typically sold at a higher price due to their ‘good' condition. Additionally, with a well-executed renovation project, the value of the distressed property can be significantly increased, providing a solid foundation and equity position.

Another benefit of buying distressed properties is the ability to customize the property to meet the needs of your target market. With turnkey rental properties, you are limited to the existing design and layout, which may not appeal to all potential tenants. With distressed properties, you give yourself the opportunity to make changes to the layout, design, and finishes to better meet the needs and preferences of the local market. This not only increases the property's appeal to tenants, but it can also increase its rental income and overall value.

Furthermore, buying distressed properties allows you to take advantage of government incentives and programs that can help offset the cost of rehabilitation and renovation. These programs often provide financial assistance, tax incentives, and low-interest loans to encourage investment in revitalizing communities and promoting affordable housing.

It is important to note that buying distressed properties requires a significant investment of time and resources. Renovation projects can be complex and time-consuming, and it is essential to have a clear plan in place and the right team to execute it. Inexperienced investors may find the process challenging, and it is important to be well-informed and prepared before making such an investment.

In conclusion, buying distressed properties that need rehab and renovation offers the potential for a higher ROI, the ability to customize the property to meet the needs of the target market, and the opportunity to take advantage of government incentives. While it requires a significant investment of time and resources, the potential for long-term profitability makes it a worthwhile consideration for investors seeking to diversify their portfolios.

Always remember to consult your realtor, a market expert or a loan officer (like me) to understand the risks, benefits and ROI of any opportunity.