One of the biggest barriers for new rental real estate investors who want to buy their first rental property is the cost. Yet while high property prices can be a problem for some, for other investors, the solution is to look for reduced-price residential properties. Many properties that sell below market value are foreclosed homes. And, those discount prices may seem like a great bargain. But before you buy one, it is important for you to thoroughly assess both the pros and cons of securing a foreclosed home to use as a Southborough rental property.
Pro: Lower Prices
The first and most noticeable benefit of buying a foreclosed property to use as a rental is the price. Foreclosures tend to be priced below market rates because the banks that hold them don’t want to own real estate – they do want their money. This often makes the banks motivated to sell. Of course, it’s also important to understand why foreclosures are regularly sold at a reduced price. The most common reason is that the properties are not always in good condition. But if you have the skills or budget to do a little fixing up, a foreclosed home may be right for you.
Pro: Higher ROI
The lower cost of foreclosed homes can lead to a second valuable benefit: a high return on your investment. When you purchase a property below market value, you will have a good amount of available equity in the property. As homes in your area increase in value, your property will appreciate, and your equity will grow. Any repairs or improvements you make to the property will only accelerate this process. A good cash flow property is ideal, but real estate investors’ real wealth comes from having properties with an expected resale value far above the original purchase price.
Pro: Flexible Financing
Every so often, the banks holding foreclosed properties are eager to unload them to buyers. Depending on the bank, they may be prepared to offer lower interest rates, closing costs, or other financing incentives to a solid buyer. Obviously, this isn’t necessarily the case, and some foreclosed properties are sold on a cash-only basis. For this reason, gather as much information as possible about a property prior to making an offer.
Con: Expensive Repairs
Along with the benefits, there are also a few drawbacks to foreclosures to know about. Foreclosures are often called distressed properties, not just because the previous owners stopped paying the mortgage. They frequently stop doing repairs and maintenance on the home, too. For this reason, foreclosed homes are often found in poor shape when they are finally repossessed and sold by the bank. Sometimes, the homeowners even damage or vandalize the property before leaving, necessitating extensive and costly repairs. Before you buy a foreclosure, Southborough property managers need to know what they are getting themselves into and they have enough cash reserved to cover the cost of getting the property ready to rent.
Con: Slow Closing
The foreclosure process can leave your property in a real tangle of legal and financial difficulties. From liens to title issues and beyond, there are many reasons why buying a foreclosed property from a bank often takes longer than a regular sale. For this reason, investors who want to purchase a foreclosed property should be prepared for a lengthy process and many hurdles that will need to be overcome.
Con: Lots of Competition
Another significant drawback of acquiring a foreclosed property is the amount of competition. Like you, many investors have been looking for that next bargain property. It is not uncommon for there to be a lot of competition for the same property. If the competition becomes especially intense, it could delay the purchase process or even drive the property’s price up and out of an affordable price range. You may also need to offer a higher down payment or other incentives to catch the bank’s eye, which means you’ll need a lot of cash. If you are investing in your first rental property or have trouble getting good financing, a foreclosed property might not be the best option.
So is a foreclosed property a good option for your next Southborough rental? The answer depends on your circumstances. For some investors, a foreclosure could offer a bargain property that will make a great rental. But for others, the difficulties of buying a foreclosure make it a less desirable path to investing. Would you like to know more about ways to locate and purchase rental properties below the market rate? Contact us online or give us a call at 508-329-6000.
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