Buying a property is one of the main challenges that a beginner real estate investor will face. This is due to the delicate procedure that comes with buying an investment property in the first place. However, there is the option of buying foreclosures.
When thinking of buying foreclosures, the first thing that comes to mind is whether this is the right investment strategy. Therefore, in order for you, as a beginner real estate investor, to understand the concept, we are going to break it down for you.
First: What are foreclosures?
Foreclosed properties are those whose owner failed to make the mortgage payments. Therefore, the bank took over the real estate property and is trying to sell it because the owner failed to do so in the first place. The main goal of selling the foreclosed property is so that the bank could get back the investment it made in the house.
There are two main reasons for a person to buy a foreclosed home: they are either planning on living in the property or they are planning on investing in it. Either way, it is a great opportunity for many as it sells for lower than the original market price.
Second: Buying foreclosures is a great real estate investment strategy because:
They sell for a low price
Sure enough, every real estate investor wants to cut on some expenses when buying an investment property. In this case, buying foreclosures is best as they are selling at a price that is lower than the original market price. The foreclosed property is usually in a distressed situation. Therefore, this factor contributes to lowering its original price, which is a great investment. Another factor that contributes to the foreclosure’s price is time. As we said before, a foreclosed property is usually seized by the bank that is looking to sell it as fast as possible.
You get more in return on investment
The return on investment is a simple formula that calculates the amount of money you get in return for the cash you invest in the real estate property on an annual basis. Therefore, there are factors that play a major role in this calculation such as the property price. The thing with estimating the return on investment is that the lower the property price, the more you get in return on investment. In other words, if you manage to buy foreclosures for low prices, then you will be making good money in profit.
They are great rental properties
This one is directly related to the property price and the return on investment. If you are a beginner real estate investor, then this is the number one reason you might want to buy foreclosures as rental properties. You can fix up the real estate property and rent it out. With the right calculations on its potential, you are much likely to make more money.
Third: Buying foreclosures is not a great real estate investment strategy because:
It might not be as a great idea as you think it is
A beginner real estate investor might fall into this trap of low price property. However, the thing that you should keep in mind is that low price does not necessarily mean a good investment.
When the property is first listed for sale, it is selling at more than it is worth at that point. This does not mean that the price won’t drop. But it will take some time before it does so.
You only buy it as it is
The worst thing about buying foreclosures is the property’s distressed situation. This is exactly why it is important that you do a home inspection. A property selling for a low price with severe damages might not be the best real estate investment strategy. Even if you save up on the property price, you will spend extra on repair costs.
A home inspection is important when buying investment property. Otherwise, there is no way for you to avoid the extra expenses. Therefore, in order for you to be able to avoid any losses, you want to avoid buying foreclosures at auctions. Even though it is the best way to buy a foreclosed home at a low price, it is the worst in terms of inspection. When you are buying foreclosures in an auction, you do not get the chance to perform a home inspection.
Your chances of getting the deal depend on your financing strategy
Getting a foreclosure deal depends on the strategy you use for financing rental property. The rule that every real estate investor knows is that to get the deal, you will have to pay in cash, especially if you are buying at an auction.
There are always better deals
The biggest mistake that a beginner real estate investor could make is buying foreclosures for the price not knowing that there are so many deals out there that are better. Therefore, as a beginner, try to look for other deals that are not foreclosures.
Forth: Tips on buying foreclosures that are great investments
- Work with an agent: Working with a real estate agent who is an expert on foreclosures is the best thing that you can do. An agent is a real estate professional, and he/she knows exactly what to look for in a profitable investment property.
- Do the proper math: There is no way to go about business without the right calculations. First of all, remember what we said about taking the foreclosed property as it is. Therefore, you will have to perform the right repair cost estimation after you do a home inspection. This will save you time and, of course, money. Second of all, you will have to perform investment property analysis. This analysis deals with the capitalization rate as well as the cash on cash return. It especially takes into account the strategy you used for financing rental property. It will be a great way to estimate the rental potential of an investment property.
- Perform real estate market analysis: The real estate market analysis is basically a comparison. You look into the property for sale and compare it to other investment properties within the same area. This analysis is a great indicator of a property’s rental potential.
- Check the appreciation rate in the area: There are so many factors that contribute to the appreciation rate of a property. Check what amenities, transportation, facilities, and others factors are available in that area. These factors are a great support for the appreciation rate of the property.
Buying foreclosures might be one of the best real estate investment strategies only if well calculated. After all, you are the one to decide whether or not you want to invest in foreclosed properties or not. So, make sure you hire a real estate agent and do your part of the deal to have the best real estate investments. Meanwhile, check out Mashvisor for methods of financing rental property as well as buying investment properties.