Could rising interest rates and market volatility create a unique window of opportunity for real estate funds in 2025? We think it’s possible. As some residential property owners face financial strain, distressed assets are increasingly becoming available. This shift may open the door for savvy real estate funds to acquire valuable properties at discounted prices, with the goal of generating returns over time.
With proper execution, distressed real estate funds may offer more than just the potential for returns. They also may enable certain knowledgeable investors to play a constructive role in stabilizing neighborhoods, revitalizing housing stock, and turning short-term uncertainty into long-term potential gains.
Here’s how some real estate funds may try and make the most of distressed residential properties in today’s market.
Targeting the Right Distressed Assets
Success begins with precision. Not every distressed property may offer upside potential. As a starting point, real estate funds may want to consider these criteria when selecting investments, along with any unique considerations applicable to a specific opportunity:
- Located in high-demand markets experiencing job growth, population inflows, or limited housing supply
- Structurally sound but mismanaged, undercapitalized, or outdated
- Priced below replacement cost which may offer a solid margin for repositioning or resale
By narrowing the acquisition scope to these types of properties, funds may begin to reduce risk. Of course, there are many other factors funds may want to consider when selecting properties with the most potential for growth, but these may provide a strong starting point.
Capitalizing on Short Sales and Foreclosures
Traditional homebuyers and individual investors may struggle to move quickly enough to take advantage of short sales or foreclosures. Real estate funds, however, may be better positioned to act fast, which may offer liquidity to distressed sellers and banks eager to clean up their balance sheets.
Why Funds May Have an Advantage…
- Funds may be able to negotiate better purchase terms than individual buyers by offering cash or quick closings.
- Banks may prefer working with professional investors who understand the foreclosure process.
- Given their pooled resources, funds may be able to purchase multiple properties at once and negotiate discounts.
Speed and efficiency may give funds the edge, especially if they have local partners or on-the-ground teams identifying opportunities in real time.
Repositioning for Higher Yield
Distressed properties rarely shine in their current state, but that may create an opportunity for buyers to add value. Some real estate fund strategies include targeted renovations and adaptive reuse:
- Renovation for long-term rentals may be an option in areas with high renter demand
- Conversion to short-term rentals may be considered in markets with strong tourism or remote work flexibility
- Subdivision or redevelopment may be chosen for large lots or outdated multi-unit properties, with an eye toward creating more modern configurations
This strategic repositioning may improve an asset’s marketability and/or create income opportunities.
Creative Financing to Enhance Returns
While not always an appropriate strategy as it may increase risk, leverage may be a powerful tool when applied carefully. Even in a higher-rate environment, some real estate funds may choose to use leverage or other financing strategies to improve returns:
- Seller financing may be an option, particularly from owners eager to exit distressed situations
- Bridge loans may be used to cover acquisition and renovation, followed by permanent refinancing once stabilized
- Joint ventures with local operators who bring market knowledge and operational expertise is another potential financing option
After aligning capital structure with project goals, real estate funds may choose to use leverage or other creative financing when purchasing properties.
Mitigating Risk Through Diversification
Diversification across regions, asset classes, and holding periods is one way some real estate funds may work to mitigate risk. Some examples may include:
- Investing in multiple distressed assets across several geographies to spread exposure
- Mixing short-term flips with long-term holds to balance liquidity and the potential for longer-term appreciation
- Blending single-family and small multi-family properties to hedge against pricing or vacancy swings that may impact each segment differently
This diversified approach may offer more stability even if certain markets or strategies underperform.
Aligning with Market Trends
The 2025 housing market continues to evolve. High interest rates, tighter lending, and affordability pressures are shifting homeownership patterns. Real estate funds may consider the following macro trends:
- The homebuyer pool is shrinking, particularly for buyers with limited budgets. This may mean funds find themselves selling properties to other investors rather than end users
- Rental demand is rising which may make value-add rental conversions more attractive
- Undersupply in affordable housing may create room for creative repositioning of distressed properties
By anticipating these shifts as well as other factors, and aligning their acquisition and renovation plans accordingly, funds may aim to stay ahead of the curve.
Distressed residential properties aren’t without complexity, but for certain funds equipped with the right strategies, they may be an attractive investment. With a disciplined acquisition process, smart repositioning, and flexible financing, real estate funds may begin to work toward turning today’s distressed assets into tomorrow’s successful investment portfolio.
The investment information provided by this Blog Post is for general informational and educational purposes only and is not a substitute for professional advice. Investment in residential real estate involves significant risk, and there is no guarantee that an investor will achieve the results described herein. Accordingly, before taking any actions based upon such information, we encourage you to consult with the appropriate professionals. Domicilium does not guarantee the success of any investment recommendations or strategies discussed or provided by this Blog Post. The use of, or reliance on, any information contained in this blog post is solely at your own risk.
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