Do Foreclosures Make Good Rental Real Estate

There are many ways to invest in real estate. Even in an economic downturn…and I would say especially in a downturn, sophisticated investors profit immensely in real estate. Flipping homes and rental property used to be and still is a great way to make money in real estate. Finding profitable properties has been and still is the most challenging aspect of the process. Therefore, investors look for multiple ways to invest in real estate. One way is to buy into foreclosures. But are they worth it? Let’s take a look.

Finding a Good Property Isn’t Easy

It’s not like shopping; you can’t go into a real estate store and grab the first house off the rack that looks good on you. It’s a process of investigating, gaining knowledge and being realistic. This is especially true when looking at foreclosures. 

Homeowners who suffered foreclosure were unable to pay the mortgage. But what people usually don’t think about is that the homeowners were probably also unable to pay for upkeep of the property. This means that you, as the buyer are presented with great opportunity to buy a house for pennies on the dollar, fix it up, and sell it for a handsome profit. Keep in mind that you must educate yourself properly, do your due diligence thoroughly, and not to take too long to get started, otherwise you might not ever. Here are sure fire ways to invest in real estate when it comes to foreclosures or just about any house for that matter.

1. Location – Bear in mind when running the comps that if there are many foreclosures in the neighborhood, then the house will likely not be appraised for slightly less than the highest comparable comes. You will need to be conservative with your after repaired value estimates. This will affect what you can sell the property for and how much of a loan you can get on the property.

For areas unaffected by foreclosures, you can ask your real estate agent for a list of areas with less people moving out and more moving in. As well, look at areas with surrounding retail development. New shopping malls, theatres and restaurants will bring in more people to an area.

2. Cash Flow and Profit – It’s time to do the math. Conduct your own rental comps and ask your real estate agent to do the same. You’ll need to find out if the rent you can charge will take care of all the expenses and debt service as well as bring you a monthly profit for rentals and profit from the sale for flips. Figure the monthly income you can expect to make and then subtract mortgage payments and operating expenses. Only buy rentals if you have cash flow.

3. Taxes – Once you pay expenses, your cash flow income is deferred in most cases. However, if you are just crushing it and exceeding the norm with cash flow you will owe taxes at the end of the year. On the other hand, this could mean that you have put a very large down payment into the property. Evaluate doing a cash out refi at some point. This will lower your cash flow, but at the same time free up cash to invest into another property.

See this article if you want to generate motivated seller leads and find great deals.

If you follow these three tips and remember to pay attention to the amount of repair needed, you might just find some fantastic deals on foreclosures. Take time to learn more ways to invest in real estate and a community of like minded people that you can go to for support and resources. Make sure you are well prepared before renting or flipping homes.
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