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Are Foreclosed Homes a Good Option for Rental Properties?

White Southborough House with Foreclosure Sign in YardOne of the most influential reasons that people hesitate to invest in rental properties is the price of housing. While it is correct that high property prices can be an impediment 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 at first glance, those discount prices may seem like a steal. But before you start your property search, it’s important to carefully weigh both the pros and cons of buying a foreclosed home to use as a Southborough rental property.

The primary and most obvious benefit of purchasing a foreclosed property for your next rental is the price. In many instances, foreclosures can offer investors an assortment of lower-priced residential properties. Foreclosures tend to be priced below market rates because the banks that hold them don’t want to own real estate – they want their money. This makes the banks motivated to sell. Of course, it’s essential to understand why foreclosures are often sold at a reduced price because they aren’t 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.

The lower cost of foreclosed homes can end in a second valuable benefit: a high return on your investment. When you obtain a property below market value, for the most part, 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 increase. Any repairs or improvements that 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 owning properties that have an expected resale value far above the original purchase price.

While these are both great profits, there are also a few drawbacks to foreclosures that you should keep in mind. Foreclosures are often called distressed properties, and not just because the previous owners stopped paying the mortgage. Many times, they stop doing repairs and maintenance on the home, too. Because of this, foreclosed homes are often in rough shape when they are finally repossessed and sold by the bank. In some cases, the homeowners even damage or vandalize the property before leaving, necessitating extensive and costly repairs. Before you buy a foreclosure, make sure you know what you are getting yourself into and have enough cash reserved to cover the cost of getting the property ready to rent.

Another major drawback of buying a foreclosed property is the value of competition. Like you, many investors are scanning for that next bargain property. It is not unusual 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 to and out of an affordable price range. You may likewise need to offer a higher down payment or other incentives to catch the bank’s eye, which means you’ll need to have a lot of cash on hand. If you invest in your first rental property or may have difficulty getting good financing, a foreclosed property may not be your most excellent choice.

So is a foreclosed property a good option for your next Southborough rental? The answer depends on your circumstances. Would you like to know more about ways to locate and buy rental properties below the market rate? Contact us online or give us a call at 508-329-6000.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.