Distressed property: to buy or not to buy?

Commercial real estate investors see opportunity in distressed property despite compressed rental yields.

According to Duncan Miller at RE Business Online, there are still opportunities for investors looking to purchase distressed commercial real estate properties – they just need to know a few things first.

"If you're looking at a distressed property, you're looking at something that from a real estate point of view is broken," Tom Fink, senior vice president of Trepp, told RE Business. "And so you have to be able to say, 'I will address the real estate issues' relating to this property. I would not try and do it on your own, if you don't understand real estate."

The delinquency rate for U.S. commercial real estate loans in commercial mortgage-backed securities fell to 9.42 percent in February, and it is expected to continue declining, Fink noted. And while the default rates are still high in the industrial segment, this sector may provide the most sound investment.

"If you can get your hands on a good, well-located industrial property that's got high ceilings and the ability to bring in big trailers, I think you've got something that's going to be profitable," Fink said. "Particularly if you're near a knowledge center like Denver, Houston or Pittsburgh."

Look to rent?
After the most recent S&P/Case-Shiller Home Price Index was released, Robert Shiller, a Yale University economics professor, told the Daily Ticker that the housing market was operating in an "abnormal economy" where the Federal Reserve is buying $40 billion worth of mortgage securities and $45 billion worth of Treasury notes each month, but that the government will eventually stop buying, and rates will rise.

The biggest home price increases are being observed in the multifamily sector rather than single family homes, says Shiller, reflecting a shift from homeownership to renting. The buyers are investors who rent their properties to businesses or individuals.

"Most of the increase in households in this country has been met by an increase in renting," Shiller added. "My own survey data with Chip Case confirms that people feel more positive about renting." He suggests that those investing in real estate buy homes that are most suitable to convert to rentals."

And while, at first glance, Shiller's statement supports Fink's assertion concerning industrial properties, the rental yield might give pause to any investment.

According to counterpunch.org, investors who saw easy money in bank-owned properties aren't making the money they thought they would. Rental-yields on single-family homes only average a rental yield of 5 percent.

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