5 Questions to Ask Before Taking a Risk on Distressed Real Estate

There are lots of ways to invest in real estate.

Personally, I think distressed investing is a fantastic calculated risk for new investors. Why? Distressed real estate allows you the most room for error. In my experience, this has helped me build back my life and create a better foundation moving forward.

So what the heck is distressed real estate? “Distressed” real estate refers to the developer’s distress. As the investor, you are picking up an opportunity cost where the previous owner couldn’t finish what they started. Truthfully, this could happen to any of us. The reality is, real estate investing is risky! There are so many uncertainties and it’s foolish to think any of us have a crystal ball that can predict the future. Instead, we need to take calculated risks and understand how micro and macro events can impact real estate.

For example, we’re still experiencing the effects of the pandemic in today’s market. That’s a macro event that is causing widespread distress and a potential disconnect from the intrinsic value of certain properties. But there are also micro events such as unfortunate life situations, like a divorce or a medical condition. Distress is happening all the time. So how do we find these opportunities and structure a deal?

Here are 5 key questions to ask before taking a risk on distressed real estate:

1 – What is your dream?

Let’s start at a high level. It’s important to know what you want. Your dream impacts the investment risks you should take. And truthfully, this looks different for everyone. Do you want to make 3 million dollars by the time you are 35? Understand exactly what you are aiming for with your investment.

2 – Why is this your dream?

Clarity on the “why” behind your dream can bring clarity to the types of risks you take. Do you want to make an arbitrary number like 1 million dollars because it sounds good? Do you want to be able to live abroad for half of the year? Are you saving for something specific? Be clear about your why. There may be a much more accessible way to achieve your goals.

3 – What do you need to make this happen?

Put an actual value on what you need to make in order to achieve your goal. How much of that needs to come from one particular deal? This will clarify for you the number and types of deals you will need to pursue.

4 – What aligns with you as a person?

Now that you understand how much you need to make and why, take a look at the projects you are currently considering. Figure out which projects and tasks align with who you are as a person. Are you willing and able to be highly involved in a renovation? Do you enjoy flipping properties? Once you clarify these elements, you are empowered to be passionate about them without fear of getting in over your head! You want all your effort to be aligned with your core values.

5 – How can you incorporate others into your systems?

You have taken a fearless inventory of what you want, why you want it, and how you’re going to get it, and you understand the role you are willing to take to accomplish it. Who do you need to come alongside you? You do not have to do it all – this mindset is key to taking calculated risks. You do not have to be the smartest person or do the most things. Real estate investing is a team sport. Start building your team today.

I’ve made a lot of mistakes. I’m still making mistakes, but over time they are less likely to be fatal. If you want to learn more about my own pitfalls so you can avoid them yourself and make your own calculated investment risks, check out my YouTube channel.