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Are Foreclosed Homes a Good Option for Rental Properties?

White Melba House with Foreclosure Sign in YardOne of the primary reasons that people hesitate to invest in rental properties is the price of housing. Although it is relevant that high property prices can be a challenge for some, for other investors, the approach is to look for reduced-price residential properties. Several properties that sell below market value are foreclosed homes. And at first glance, those discount prices may seem like a good value. But before you start your property search, it’s advantageous to carefully weigh both the pros and cons of buying a foreclosed home to use as a Melba rental property.

The first and most obvious benefit of acquiring a foreclosed property for your next rental is the price. In various cases, foreclosures can offer investors an assortment of lower-priced residential properties. Foreclosures tend to be priced below market rates because the banks keeping them do not need to own real estate – they only want their money. This makes the banks motivated to sell. Obviously, it is important to understand why foreclosures are often sold at a reduced price because they aren’t regularly in good condition. But if you’ve got some skills or budget to conduct a little fixing up, a foreclosed home may be the right approach for you.

The lower cost of foreclosed homes may result in a second valuable benefit: a great return on your investment. In general, if you buy 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 increase. Any repairs or improvements that 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 that have an expected resale value far above the original purchase price.

Even though these are both great advantages, there are also a few drawbacks to foreclosures that you should keep in mind. Foreclosures are generally termed as distressed properties, and not just because the previous owners stopped paying the mortgage. Many times, they stop doing repairs and maintenance on the home, too. This is why 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 decide to get a foreclosure, make sure you understand what you are going to purchase and have enough cash reserved to cover the cost of getting the property ready to rent.

One more significant drawback of buying a foreclosed property is the level of competition. Like you, many investors are waiting for the 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 to and out of an affordable price range. You will also need to offer a higher down payment or other incentives to catch the bank’s eye, so you will need to have a lot of cash on hand. If you invest in your first rental property or find it difficult to obtain good financing, a foreclosed property may not really suit you.

So is a foreclosed property a good option for your next Melba 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 208-960-0660.

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.