Our last newsletter outlined the benefits of distressed real estate investing with a company. By investing with a company, as opposed to individually, the potential for higher returns is improved. Investing with a company that specializes in REO investments allows you to take advantage of the ability to buy assets at a deep discount. Additionally, it provides you with the benefit of simplicity. Instead of being an individual REO investor who must out-bid other individual investors and manage the renovations on the distressed property that is purchased, you have the ability to allow a company to manage the real estate investment process for you.
Today we want to talk about diversity. Real estate investment asset managers at many financial institutions mix their portfolio with properties that exist in various states. This allows for the best possible pricing because restricting REO purchases to a specific geographic location can result in a higher purchase price. Diversity allows for a win-win situation for both the company and the institution. The company wants bigger discounts, and the institution wants to reduce inventory. In some situations, bulk note purchases allow institutions to clear out some of their less desirable properties. This is not necessarily a negative for real estate investors who are able to gain highly desirable properties as part of the package. The most experienced residential real estate investors know how and when to divest the least desirable assets. The end goal is benefiting from the overall profitability of the package.
Bulk note purchases are advantageous to the investor for two primary reasons. First, bulk note purchases allow for diversification. Discounts are greater while the price for renovations stays constant. Second, bulk note purchases reduce risk. By having diversification in the portfolio, a single event that may occur in one geographic location will not jeopardize the entire portfolio. Here’s an example: If a manufacturer shuts down a plant in a small town, unemployment in that area might increase dramatically. Subsequently, the residential real estate in that area might drop. If the entire real estate investment portfolio is in that one location, you can see the potential for a negative effect. By spreading the portfolio over multiple states, a single situation will be much less significant to the overall effect.
Some companies purchase only mortgage notes, and others purchase only bank owned properties – which are commonly referred to as REOs. Companies that purchase both can benefit from another layer of diversity. The overall goal is to achieve the highest possible rate of return, and diversification is one way to ensure multiple avenues for profits and success.
In our next segment, we’ll talk about the ways to invest in specialized companies.