The largest barrier to investing in real estate is high property prices. With the US housing market labeled as a very hot seller’s market, it is becoming more difficult to find affordable real estate, on a national level. As a result, many investors have turned their attention to foreclosed homes for sale. You might be asking yourself, “Should I buy a foreclosed home and rent it out?” In this blog, we’ll provide the information necessary for you to make that decision.
The Benefits of Buying a Foreclosed Home
The best way to start this discussion is by listing the pros and cons of buying a foreclosed home. So why should I buy a foreclosed home? Above all, there are 3 main benefits of buying a foreclosed home.
1. Foreclosed Homes Are Priced Below Market Value
As previously alluded to, foreclosures provide an affordable way to buy an investment property. This is because foreclosed homes are sold for a much cheaper price than their original purchase price. Banks do their best to sell foreclosed homes as quickly as possible. They, therefore, list them on the market well below their market value. In addition, foreclosed homes are typically in distressed conditions. This further reduces their potential purchase price. As a result, buying a foreclosed home will offer plenty of savings for interested property buyers.
Related: Buying a Rental Property Below Market Value
2. They May Be Easier to Finance
The second advantage of buying a foreclosed home is that real estate investors may find it easier to finance such properties compared to conventional real estate. The reason for this is threefold.
Firstly, because they are cheaper, you may be able to finance a foreclosure with cash. But if you need a loan, you will end up borrowing less for foreclosed properties, since the properties are already below market value. This translates to lower down payments and monthly mortgage payments.
Secondly, when buying a foreclosure directly from a bank, the bank may be willing to offer better financing deals. As mentioned previously, banks want to rid themselves of foreclosures as soon as possible.
Finally, it is also possible to buy foreclosures with little capital. While you could turn to mortgage lenders or private loans, partnering up is one of the best methods of how to buy foreclosed homes with no money. Because many real estate investors are interested in buying foreclosed homes, you may be able to find a partner if you manage to find a good deal to share with him/her.
3. You Can Enjoy a High ROI and Appreciation
When it comes to renting out a foreclosed home, real estate investors can expect a high return on investment (ROI). ROI measures the profitability of an investment property relative to its purchase price. Since foreclosed properties come with a low price tag, their potential for high ROI is substantial. However, it is worth noting that some foreclosures are in distressed situations and suboptimal conditions. Thus, investors might have to conduct some renovations and improvements. Although it will increase the total cash needed for investment, it will also increase its market value, which leads to a higher rental rate, and ultimately to higher ROI. In addition, this will result in forced appreciation or an increase in property value. Real estate investors will then generate profit in two important forms- cash flow and appreciation.
The Disadvantages of Buying a Foreclosed Home
Despite the benefits of buying a foreclosed home, there are a few drawbacks to consider.
1. Foreclosed Properties Are Often Neglected
When buying foreclosed homes, you are purchasing the property “as is”. This means that, more often than not, the property will be in a distressed condition. As a result, real estate investors will have to perform repairs and improvements before renting out the property. Of course, this will increase the property’s value. However, it comes at an obvious cost. If you are not well-versed in renovations and planning, this can be quite financially taxing. To mitigate such pitfalls, be sure to have the property inspected. A home inspection before the purchase will provide you with estimated repair costs. This will eliminate any hidden expenses and help assure you that the property will ultimately have a high rate of return on rental property.
Related: Why You Should Get a Home Inspection Before Investing in Property
2. There Is High Competition Among Real Estate Investors
If you’re eyeing a cheap foreclosed property for sale, chances are you aren’t alone. While it is true that banks want to sell foreclosed properties as soon as possible, this does not mean that every interested investor will be able to get their hands on one. In addition, with high competition, the process might drag out longer than necessary, due to many offers from investors. Typically, the best offers are higher offers, which helps to set yourself apart from the competition.
3. Foreclosed Homes Are Not Beginner Investor Friendly
Above all, foreclosed properties are not very beginner-friendly. This is due to the reasons mentioned above. Generally speaking, experienced investors are the ones who could consider buying foreclosed properties. Beginners, on the other hand, are recommended to look into conventional rental properties or turnkey investments.
So, Should I Buy a Foreclosed Home and Rent It Out?
Is it a good idea to buy a foreclosed home? Foreclosed homes can make for profitable rental properties. But ultimately, the answer will depend on the real estate investor. Weigh the pros and cons to come up with the right answer for you.
How to Find Foreclosures in the Best Way Possible
If you’re interested in buying a foreclosed property, you need to know how to find them. With Mashvisor, you will be able to learn how to find foreclosures in a matter of minutes! Not only that, but Mashvisor also provides the necessary tools to analyze the rental potential of foreclosures for sale. This allows investors to find out if a foreclosure listing will provide good cash flow, a high occupancy rate, and return on investment, and more.
To quickly find foreclosures, sign up for an Expert Plan so that you can access the foreclosure filter. Once set, you will only see foreclosed properties for sale in the city of your choice.
Mashvisor provides the following foreclosure data:
- Traditional and Airbnb monthly rental income
- Traditional and Airbnb cash flow
- Airbnb occupancy rate
- Traditional and Airbnb cap rate
- Traditional and Airbnb cash on cash return
- Optimal rental strategy (traditional or Airbnb)
Essentially, you will get the complete investment property analysis you need for buying foreclosures. Mashvisor is the best tool for buying foreclosed properties for sale! So to maximize the profits, mitigate issues, and speed up the search and analysis, use Mashvisor. CLICK HERE to start your FREE trial!