One of the major obstacles for new rental real estate investors looking to buy their first rental property is the cost. So far while high property prices may be an obstacle 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 bargain. But before you buy one, it’s important to fully weigh both the pros and cons of purchasing a foreclosed home to use as a Denton rental property.
Pro: Lower Prices
The first and most obvious 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 keep them don’t want to own real estate – they do want their money. This often makes the banks motivated to sell. Of course, it is also important 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. But if you have the skills or budget to do a little fixing up, a foreclosed home may be right for you.
Pro: Higher ROI
The lower cost of foreclosed homes can result in 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 speed up this process. A good cash flow property is ideal, but real estate investors’ real wealth comes from having properties with an expected resale value far above the original purchase price.
Pro: Flexible Financing
At times, the banks holding foreclosed properties are eager to unload them to buyers. Depending on the bank, they might be willing to offer lower interest rates, closing costs, or other financing incentives to a solid buyer. Of course, 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 making an offer.
Con: Expensive Repairs
Along 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 frequently cease 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 widespread and costly repairs. Before you buy a foreclosure, Denton property managers need to 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 a property in a real tangle of legal and financial difficulties. 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 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 Denton 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 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 940-323-0505.
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