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Are Foreclosed Homes a Good Option for Rental Properties?

White Smyrna House with Foreclosure Sign in Yard

One of the biggest obstacles for new rental real estate investors who want to purchase their first rental property is the cost. Yet even as high property prices can be an obstacle for some, for other investors, the answer is to seek reduced-price residential properties. Numerous properties that sell below market value are foreclosed homes. First look, those discount prices may seem like a bargain. But before you buy one, it’s important that you carefully evaluate both the pros and cons of purchasing a foreclosed home to use as a Smyrna rental property.

Pro: Lower Prices

The first and most apparent benefit of buying a foreclosed property to use as a rental is the price. Foreclosures are usually priced below market rates because the banks that hold them don’t want to own real estate – they want their money. This often makes the banks motivated to sell. Obviously, it is also essential to understand why foreclosures are regularly sold at a reduced price. The most common reason is that the properties aren’t always in good condition. Though, if you have the skills or budget to do a little fixing up, a foreclosed home can be suitable for you.

Pro: Higher ROI

The lower cost of foreclosed homes can affect 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 hasten this process. A good cash flow property is ideal, but real estate investors’ real wealth is derived from owning 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. Of course, this isn’t always the situation, and some foreclosed properties are sold on a cash-only basis. Therefore, gather as much information as possible about a property before making an offer.

Con: Expensive Repairs

Coupled with benefits, there are also several drawbacks to foreclosures to know about. Foreclosures are often called distressed properties, not only 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 in rough 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 pay for a foreclosure, Smyrna property managers should know what they are getting themselves into and have enough cash reserved to cover the cost of getting the property ready to rent.

Con: Slow Closing

The foreclosure process can leave behind a property in a real tangle of legal and financial problems. 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 must be prepared for a lengthy process and many problems that will need to be overcome.

Con: Lots of Competition

Another crucial downside of buying a foreclosed property is the amount of competition. Like you, many investors are looking 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 particularly 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 recommend 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 preference for your next Smyrna 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 possible 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 770-622-5657.

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.