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Are Foreclosed Homes a Good Option for Rental Properties?

White Melbourne Beach House with Foreclosure Sign in Yard

One of the largest hurdles for new rental real estate investors wanting to obtain their first rental property is the cost. Yet even though high property prices can be an impediment for some, for other investors, the key is to search for reduced-price residential properties. Several properties that sell below market value are foreclosed homes. And at first sight, those discount prices may seem like a bargain. But before you buy one, it’s important for you to cautiously weigh both the pros and cons of acquiring a foreclosed home to use as a Melbourne Beach 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 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. Yes, 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. Nevertheless, if you have the skills or budget to do a little fixing up, a foreclosed home could be for you.

Pro: Higher ROI

The lower cost of foreclosed homes could lead to a second important 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 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

Now and then, the banks holding foreclosed properties are eager to unload them to buyers. Depending on the bank, they may be inclined to offer lower interest rates, closing costs, or other financing incentives to a solid buyer. Of course, this isn’t necessarily the case, and some foreclosed properties are sold on a cash-only basis. For that reason, gather as much information as possible about a property before making an offer.

Con: Expensive Repairs

In conjunction with the benefits, there are also several drawbacks to foreclosures to know about. Foreclosures are often called distressed properties, not just because the previous owners stopped paying the mortgage. They habitually 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 extensive and costly repairs. Before purchasing a foreclosure, Melbourne Beach property managers must 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 troubles. 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 have to be prepared for a lengthy process and numerous hurdles that will need to be overcome.

Con: Lots of Competition

Another significant disadvantage 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 extreme, it could delay the purchase process or even drive the property’s price up and out of an affordable price range. You may likewise 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 Melbourne Beach 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 321-610-8022.

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