Troubled property, or sometimes distressed property, is a polite way bankers and investors talk about a borrower who can’t or won’t make his or her mortgage payments on time. The term has nothing to do with the property itself.

Residential

Most investors start with single-family residential. It’s generally used to describe a house, but could include a condominium. Smart buyers will usually limit themselves to a particular price range. Finding tenants or buyers for a $50,000 house is entirely different from finding them for a $500,000 house. Fixing up the more modest home can generally be done yourself, while the larger one will require hired professionals. The profit on an expensive house should be larger, but the risk is usually proportionately greater. Single-family residential properties are typically owner/occupied, meaning the owner lives there.

Sometimes they’re investment properties, used for rental income. Knowing this makes a difference in how you evaluate whether you want to buy the property. Some investors specialize in owner/occupied foreclosures because they think it provides a ready-made tenant when the former owner wants to stay and pay rent. Other people avoid them like the plague. They think single-family residential is too much work, and owner/occupied presents too much risk of something going wrong at the last minute. There’s no wrong answer here.

A condominium is a type of single-family residential property. What makes it special is that it’s an ownership arrangement in which each person owns a particular area, and the condominium association owns all the common areas, such as hallways, elevators, sidewalks, and lawns. Condominiums generally have strict rules, and owners are responsible for their proportionate share of some potentially expensive repairs, or for improvements like new roofs and landscaping. As a result, buying a condo in foreclosure requires additional homework on your part.

Multi-family residential property could be a duplex (two units in one building), a fourplex (four apartments—usually two upstairs and two downstairs), a sixplex, or something larger, which is called, simply, an apartment building or apartment complex. Even if all you own is one duplex, and you live in one side of it, you can legitimately tell people, I invest in multi-family residential properties. If, on the other hand, you own 250 houses that you rent out, these are all single- family residential properties, even though you, personally, rent to multiple families. You invest in single-family residential properties.

Commercial

Commercial property is typically an office, retail space, a sit-down restaurant, or a fast food establishment. Except in small towns, people further specialize within commercial property. I, for example, know all the office buildings in my part of town—about six million square feet of office space. I know what the market rents are, whose leases are expiring, and who’s coming to town and looking for space. I know how much it costs to build an office building, and what rents someone would have to charge in order to justify new construction. I could confidently invest in a small office building, but would be lost trying to figure out what to do with a restaurant site.

Retail

Retail further breaks down into single- or multi-tenant buildings, convenience stores, strip centers, anchored and nonanchored shopping centers, regional malls, lifestyle centers, and big boxes. Most investors specialize within a price range rather than retail category.

The C-Store Shelter

Professionals call a convenience store a C-store. These are very desirable investments because you can get bigger tax deductions than for other properties. If you find an opportunity to buy a convenience store before foreclosure, you can probably find all sorts of partners to help with the money for the investment. Here’s why. The IRS allows you to write off a portion of the purchase price of your property every year. It’s kind of a game everyone’s agreed to play. The premise of the game is this: dirt never gets less valuable over the years, but anything on top of the dirt declines in value the older it gets. This could be buildings, roads, fences, light poles, or peach trees. The IRS has rules for how long it takes different things to eventually wear out and become completely worthless. Sometimes they really do wear out in that time period; sometimes it takes longer; and, sometimes it happens much more quickly. It doesn’t matter— this IRS game bears no relationship to reality. It’s just a system that everyone has agreed to pretend is real.

The process of wearing out is called depreciation. It’s a deductible expense on your taxes. Depreciation lets you write off large expenses for real estate, even though you don’t have to write checks for those expenses. That’s called sheltering income because other income (such as from your job) can hide under the shelter of the depreciation tax deductions and not be taxed by the IRS. High-income professionals, like doctors and lawyers, are always looking for ways to shelter income. That’s why they make logical partners if you need someone to put up the cash while you contribute the time and know how to buy foreclosure properties.

The ability to write off depreciation deductions is one of the major advantages of investing in real estate instead of other things. Because of that, it’s critically important to understand. The central concept to depreciation deductions is knowing the IRS’s opinion about the useful life of different kinds of property. Useful life is an estimate of how long something will last before it becomes completely worthless. The IRS does not care that a rental house worth $50,000 in 1976 might be worth $150,000 in 2005. You are allowed to pretend it will be worthless in 2005, and to write off depreciation every year until 2005. (In 2009 is different)

According to the IRS, most commercial buildings will decline evenly in value over the course of 39 years and then be worthless at the end. They are also of the opinion that residential properties will last only 27.5 years. For some odd reason, the IRS has decided that convenience stores will last only 15 years. So, you can write off 1⁄15 th of their value every year. That means you can shelter over twice as much income with a C-store as you can with a dry cleaners occupying the exact same building at the exact same spot.

That’s what makes them such hot investments. Doctors, lawyers, and other highincome people love to invest in convenience stores. You’ll be able to find lots of partners if you run across such an opportunity.

Shopping Center

A typical strip center has five to ten tenants on a single story with parking out front. Each tenant usually has a small space—around 1,000 square feet. In shopping centers (strip centers and malls), anchor refers to a big tenant that attracts customers, who will then also visit the smaller tenants. An anchor might be a grocery store, a department store, or a decorating center. It anchors and holds steady the constant stream of visitors. Because anchors are so important to the well-being of the other tenants, many anchor leases will prohibit the anchor tenant from closing during the term of its lease. In the trade, we say the lease has a prohibition against going dark. In other words, even if the anchor were willing to turn out the lights, move to another part of town, but continue paying rent at the old location, it wouldn’t be allowed. That’s because, if the anchor closes, the traffic flow to the shopping center dries up and the smaller tenants eventually go out of business, too.

If someone tells you about a shopping center opportunity, you can start your due diligence right away and ask two questions, “Who’s the anchor?” and, “Is there a prohibition against going dark?” These questions, all by themselves, let people know you’re an intelligent investor.

Regional malls are the huge, multi-department store centers with access via interior corridors lined by other stores. They’re not as popular as they once were. That means you’re going to see more prospects to buy these out of foreclosure. They can present fabulous opportunities if you’re energetic and creative. People are buying them cheaply and turning them into antique malls, training centers, city halls, medical complexes, and megachurches.

The newer lifestyle malls are all the rage in temperate climates like California and the South. People park in front of each store and walk or take trams between stores. There’s generally artwork, entertainment, multiple specialty restaurants, and other amenities to attract people and encourage them to linger. Think of a lifestyle mall as being the suburban equivalent of 5^th Avenue in New York City or Rodeo Drive in Los Angeles. I doubt you’ll be in a position to buy one of these, but it’s always nice to be able to fling around the right terminology when talking to friends at a picnic. You never know where your prospects might come from, and credibility is critically important for getting leads on properties.

Big Box

A big box is a large, plain vanilla building suitable for a Wal-Mart, Target, or something similar. Vanilla is another real estate investor’s term, meaning “easily changeable into anything.” Many big boxes formerly occupied by K-Mart or Sears are being converted to climate-controlled self-storage, fitness centers, or craft malls. The opposite of a vanilla building is a purpose-built building. A bank, a car dealership, or a widget factory are all built in a specialized way for a particular purpose. It’s hard to adapt them for something different. You need to think about that when looking at a foreclosure. The greater the variety of things you can do with a property after you buy it, the less your risk is going to be.

Industrial

Industrial properties are usually manufacturing, assemblage (putting together components manufactured some place else), high tech, or warehouses. Most people tend to think of these as high-risk investments to buy out of foreclosure, but that’s not always the case. A great industrial property, with a terrific tenant who always pays the rent on time, might be in foreclosure because the landlord takes all the money from that property in order to pay other bills. Or, the owner might have given a mortgage on that property as additional security on another site that was in trouble and unable to pay its bills. (This is called cross collateralization.) As a result, the lender is foreclosing on one troubled property with a bad tenant or no tenant, and on a good property that’s a terrific investment.

You don’t have to buy both of them at the foreclosure— you can buy just the good property.

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