Cost is one of the biggest obstacles for new rental real estate investors trying to buy their first rental property. While high property prices can be a barrier for some, for other investors, the reason 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 might seem like a good deal. But before you purchase one, it’s crucial to carefully consider both the pros and cons of purchasing a foreclosed home to use as a Newburgh rental property.
Pro: Lower Prices
The first and most evident 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 critical to understand why foreclosures are regularly sold at a reduced price. The most frequent explanation is that the properties aren’t always in good condition. But then if you have the skills or budget to do a little fixing up, a foreclosed home might be right for you.
Pro: Higher ROI
The lower cost of foreclosed homes may lead to a second crucial benefit: a high return on your investment. When you purchase a property below market value, you have a great 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 you make to the property will only speed up this process. A good cash flow property is ideal, but real estate investors’ real wealth comes from preserving 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 might be prepared to offer lower interest rates, closing costs, or other financing incentives to a solid buyer. Obviously, this isn’t always 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 before doing an offer.
Con: Expensive Repairs
In conjunction with the benefits, there are also several drawbacks to foreclosures to know about. Foreclosures are often referred to as distressed properties, not just because the previous owners stopped paying the mortgage. They will often stop doing repairs and maintenance on the home, too. For this reason, foreclosed homes are often in bad condition when they are finally repossessed and sold by the bank. At times, the homeowners even damage or vandalize the property before leaving, necessitating extensive and costly repairs. Before you buy a foreclosure, Newburgh property managers need to know what they are getting themselves into and have enough money reserved to cover the cost of getting the property ready to rent.
Con: Slow Closing
The foreclosure process can leave a property in a real tangle of legal and financial problems. From liens to title issues and beyond, there are numerous reasons why purchasing a foreclosed property from a bank often takes longer than a normal sale. For that reason, investors who want to buy a foreclosed property should be prepared for a lengthy process and many hurdles that will need to be overcome.
Con: Lots of Competition
Another important drawback of buying a foreclosed property is the amount of competition. Like you, many investors are 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 may not be your best choice.
So is a foreclosed property a good option for your next Newburgh 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 812-461-1676.
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.
