Distressed properties are quickly becoming an investors dream, but are they profitable? According to many real estate experts, the answer is a resonant "Yes"! -- as long as you know the secrets to success.

Experts propose distressed properties, including foreclosure and real estate owned (REO) houses, could very well be the next hot real estate market. However, they warn this type of real estate investment will not create overnight wealth. Instead, investing in fixer-upper properties is primarily for the investor who prefers a slow and steady growth for their portfolios or those who engage in house flipping.

To be successful in this arena, it's important to locate properties in an area that is affordable enough to cover the mortgage payment with rental income. This income can be derived by using the property as either long- or short-term.

Seek out properties in family communities if you are interested in renting to individuals on a long-term basis. If you'd rather work with short-term tenants, look for houses that can be used as a vacation rental. The right home in the perfect vacation destination can potentially yield a higher return than a long-term housing rental. Only you can decide if you prefer long or short-term tenants.

Engage in due diligence before investing in distressed real estate. Obtain estimates for repair work and renovations. Investigate if the property has any unpaid tax or creditor liens. Most importantly, make certain you can afford the mortgage payment if you are unable to rent out the property.

Investing in foreclosure properties can carry a higher risk than investing in bank owned properties. Occasionally, investors are lucky enough to discover a home that requires little repair. For the most part, foreclosures require considerable work to get the house back into livable condition.

In order to purchase foreclosure property, investors must place a bid on the property through auction. At the time of bid, investors must be prepared to cover the balance due on the mortgage note, along with any outstanding debts attached to it. There may be instances where the investor will be forced to evict the previous homeowner. If you don't want to deal with these types of issues, you might want to consider investing in REO properties instead.

When property is returned to the bank it becomes real estate owned. The mortgage is eliminated and the bank negotiates with creditors to remove liens. They will also take care of eviction. Banks aren't known for 'giving away the bank', so you can bet they will drive a hard bargain to obtain top dollar.

Typically, it takes two or more counter-offers before a deal can be struck. Additionally, many banks require minimum bids of ninety five cents on the dollar. If the mortgage note is $100k, investors must offer at least $95k. In reality, you'll probably end up paying $97k or more to seal the deal.

A more profitable way to invest in REO properties is to buy from private investors who purchase bank portfolios in bulk. Buying in bulk allows the investor to purchase properties below market value. They then pass a large percentage of their savings to you, creating a win-win for all parties involved.

It's reasonable to purchase REO property from a private investor and have an instant 25- to 30-percent equity. Even if you invest 10- to 15-percent into repairs and renovations, you still walk away with profit in your portfolio. In order to triple or quadruple your investment, experts recommend holding onto these properties for a decade or more before selling.

There is money to be made in investing in distressed properties, but it generally is not easy or quick. If you take time to make informed decisions, investing in foreclosures and REO houses can eventually make you a very wealthy person.

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