Buying a new property on a budget? If you are thinking of renting out your new property, consider buying a foreclosed home.
People often remark that you can never go wrong with real estate investments as the price of land is bound to increase in the long run. However, many such investments can turn into a huge short-term loss if we aren’t careful.
If you want to get into real estate and are thinking about buying another property, you might want to consider it for renting out. A rental property comes with numerous benefits.
Such properties can make good money in the long run, especially if you buy a property in a popular location or a tourist destination. People often make up the money they invested within a year. This is particularly true for real estates that are in highly sought-after areas.
Buying a foreclosed home can be a great investment strategy if done right. This guide can help ensure that you invest in the right foreclosed homes for rent-outs so that you make the most out of your investment.
But, First, What Exactly Are Foreclosed Homes?
For those who have no clue about foreclosed homes, these properties are houses that the lender or the bank has taken over. This happens when the buyer fails to pay off their mortgage and the debtors take possession of the property and to compensate for their loss, sell it.
When a home buyer fails to pay off their mortgage, it is already a lost investment for the lender. The property is put up for sale or even auctioned to get some of its investment back. Buying a foreclosed home is an investment strategy that many real estate investors use. This is the vital benefit of buying a foreclosed property.
Why Buy A Foreclosure?
When selling a foreclosure, the lender is trying to cut their losses. Some of these properties are sold way below market price. You get the opportunity to secure a home for a price tag that is much lower than the initial price due to the price cut.
Your mortgage amount would also be low as you are buying the foreclosed property at a much lower rate. You will need to borrow less money and also pay it off faster. But, remember, foreclosures are not all rainbows and sunshine.
A foreclosed home would be sold to you in the same state it was possessed. Hence, it can be in dire condition, and in need of huge repair work, making you spend more for repair than what you gained from buying at a cheaper price. But, don’t be discouraged, as foreclosures can still be a highly profitable investment!
What Makes Foreclosures Perfect For Renting?
Oceanfront foreclosures are great examples of what can make foreclosed homes great rental properties.
Oceanfront homes are expensive, no matter which area you choose. If a person moves somewhere near the ocean, they would love to live in a place where they can see the ocean whenever they desire. This is why the prices of beachside and oceanfront condos and houses skyrocket in the real estate market.
When you buy an oceanfront foreclosure, you get the chance to acquire a property at a cheaper rate. These discount rates can be as high as 20 to 25%.
Even if you have to do some repairs, the extra cost wouldn’t bother you as much, since any house you choose for rental purposes will always need extra work for the upgrade.
By choosing to buy a foreclosure in a location that has high buyer/renter demand, you make an investment that costs less yet gives you a greater output in the long run.
Follow These Steps To Make The Best Foreclosure Investment For Rent Outs
Foreclosures are risky, but if you take all the right steps, you can win this real estate investment. The following steps can help you zero in on the best-foreclosed investment you can make for rental properties.
Understanding Foreclosures
Foreclosures are categorized into various types, but here we will discuss foreclosures sold only by owners and lenders.
By Owners
When these properties are being sold by the owners, these fall into two categories, which are pre-foreclosures and short sales.
Pre-foreclosures are properties that have not been taken over by lenders yet. The owners will be open to negotiation and willing to sell the house at a lower price. A good side of these pre-foreclosures is that the owners might be willing to let you check the house, so you can estimate the needed changes and repairs and determine if it is worth buying the house.
Short sales occur when the lender is willing to accept a repayment that is less than what is owed by the owner to their financial state. If the lender is convinced, the owner will get to sell the house at a lower price than what is owed, to avoid becoming a defaulter.
By Lenders
There are three ways you can buy foreclosures being sold by lenders. First are auctions, carried out by local authorities or the lender
If the properties do not sell during auctions, the property goes back to the bank. These foreclosures are called REO or Real Estate Owned properties. Some banks might be willing to sell these properties at a lower cost if they want to shrink their loss.
If the home loan was provided by a state-owned institution, the foreclosure goes back to the government. These properties are sold by brokers who work for the federal agency.
Property Research
Since you are looking for a foreclosure that you wish to rent out, the location of the property is crucial. You would want to find a location that has a high demand so that it becomes easy to find a renter.
If your rental property has high demand, you can charge higher rent and get your money back. Check out the local rental market and see how the competitors are doing. If there are many vacant rental properties available in any area, it is better to avoid investing in foreclosure in such an area. A good neighborhood with high demand for rental property will be your best choice.
Work With An Agent
If you are a first-time foreclosure investor, consider working with an agent. Not only would an expert agent have all the right connections, but they will also help you find the right properties. Opt for an agent who has worked with foreclosures before and has the expertise to help you seal the deal.
Learn As Much As You Can About The Property
Don’t just say yes to any property. Find out everything you can about the place. Learn about the past owners and how long they owned the place. Since the lenders have no obligation to repair or fix anything in a foreclosed home, you can also ask for a home inspection.
A home inspection will give you a better idea of what the final cost of owning that house would be. Some foreclosed houses can be too far gone and not worth the purchase.
Not every foreclosure will need something simple like better plumbing. If it is a beachside property with extensive flood damage, it will probably not be worth purchasing. So, make sure about the home inspection before making a bid.
Estimate And Set Aside Funds For Makeovers
For any property you wish to use as rentals, you have to make some changes. It doesn’t matter whether it is something as minor as changing blinds. Having an estimate of all the hidden costs will help you understand whether you are actually saving on your foreclosure investment.
Win Against Competition
A good foreclosure will have multiple bidders. So, how to stay on top of matters? If you are planning to buy the foreclosure on a mortgage, make sure to get your mortgage approval beforehand. Being the most prepared bidder will always have its perks. If you are readily approved by your bank/lender, the seller will be more confident to sell you the property.
To avoid a tough bidder situation, shortlist multiple properties and make more than one bid. Having a few options will help you avoid disappointment if you fail to win the bidding war.
Final Thoughts
Buying foreclosures is an excellent option for rental properties. Not only do you get to buy houses that would otherwise be unaffordable, but you also get the money back fast that you have to spend on the rent. So, what are you waiting for? Get prepared, find a good neighborhood and the best foreclosure you, and make a bid today.
