The cost is definitely one of the most significant barriers for new rental real estate investors looking to buy their first rental property. While high property prices can be an impediment 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 to appear to be a steal. But before you buy one, you should carefully weigh both the pros and cons of purchasing a foreclosed home to use as a Fort Worth rental property.
Pro: Lower Prices
The first and most visible benefit of buying a foreclosed property to use as a rental is the price. Because the banks that hold foreclosures don’t want to own real estate, they want their money, they tend to be priced below market rates. This often makes the banks motivated to sell. Of course, it’s 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. However, if you have the skills or budget to do some minor repairs, a foreclosed home may be ideal for you.
Pro: Higher ROI
Because foreclosed homes are less expensive, they can provide 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 accelerate this process. A good cash flow property is ideal, but real estate investors’ real wealth comes from owning properties with an expected resale value far above the original purchase price.
Pro: Flexible Financing
Sometimes, the banks holding foreclosed properties are eager to unload them to buyers. Depending on the bank, they may be willing to offer a solid buyer lower interest rates, closing costs, or other financing incentives. 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 a few drawbacks to foreclosures to know about. Foreclosures are frequently referred to as distressed properties, and not just because the previous owners stopped making mortgage payments. They often 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 buy a foreclosure, Fort Worth 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 significant disadvantage of purchasing a foreclosed property is the amount of competition. Many investors, like you, are looking for the next great deal. It is not unusual to have a lot of competition for the same property. If the competition becomes particularly fierce, it may cause the purchase process to be delayed or even drive the property’s price up and out of an affordable price range. You may also need to offer a larger down payment or other incentives to entice the bank, which means you’ll need a large sum of money. If you are investing in your first rental property or are having difficulty obtaining good financing, a foreclosed property may not be the best option for you.
So is a foreclosed property a good option for your next Fort Worth 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 817-930-1160.
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