The real estate market is a dynamic system, and market trends in this sector are closely watched as indicators of larger economic trends. This sector is in a constant state of change, and those who take the time to understand the trends may profit from this knowledge in different ways. Nowhere is this more obvious than in the niche sector of foreclosures and rental investment properties.
Why Invest in Real Estate
Real estate should be part of every investment portfolio. It is the type of investment that is fairly easy to understand even for those who are new to the investing game, but it does require that you perform thorough due diligence on your properties of interest. In most states, no special licenses are required to buy, sell and manage real estate assets that are in your name. Most importantly, real estate investments can yield returns in various ways:
- Buy low, sell high – Investing experts say that when it comes to real estate, profit is made when the property is purchased rather than when it is sold. Find property with distinct upside potential in a growth market, and your equity grows quickly. Whether you plan to flip in a fast-moving market or to buy-and-hold in a steady market, capital preservation is assured along with some investment returns, the size of which depends on various factors, including timing efficiency.
- Use of OPM or Other People’s Money – This is a reference to financing efficiency for real estate investments. Investors with the right credit background can take control of a property valued at ten times, or even more, of their actual capital by obtaining a mortgage, using the property as collateral. Five sources of OPM include seller financing, banks, private lenders, investors, and government tax credits.
- OPM Part II – The mortgaged property above can be used to collateralize another loan.
- Income property – Residential properties can be converted and managed as rentals to create a steady yet passive income stream.
Niche Opportunities in Foreclosure Properties
In many cases, properties that are in some stage of the foreclosure process offer excellent investment opportunities. These properties may be priced below market to create momentum that will hopefully lead to a quick sale.
- Pre-foreclosures – Property owners are delinquent in making their monthly mortgage payments and may not have the means to recover from such a delinquency. To prevent a foreclosure, which would have a medium-term impact on credit standing, homeowners may opt to sell the property at a price lower than the prevailing market rates.
- Short sale – A property marked as a short sale is one that is being offered at a price below the actual mortgage balance. The sale will require the approval of the lender.
- Bank-Owned – A bank-owned property is a property that has reverted back to the beneficiary, or the lender, after the property failed to sell at the foreclosure auction. These real estate assets present the most upside potential especially for new investors seeking rental investment property.
Strategies for Buying Distressed Properties for Rental Property Conversion
When it comes to buying distressed properties, it is important for real estate investors to weigh the risks over the potential returns. Foreclosed properties present tremendous buying opportunities because they may be undervalued, but the savvy investor would do well to pay attention to details that may not be readily available. Here are some precautions and practices that may save you some grief when considering distressed properties.
1. Research, Research, Research
Unlike other homes offered for sale, foreclosed properties are not subject to buyer inspection. On Auction.com, the premiere site for foreclosure properties nationwide, many of the distressed properties listed for auction or sale are not available for interior inspection. Property descriptions may be available on the county’s property appraiser website or on real estate websites if the property has been listed previously. For newer properties, you can also try contacting the developer for details of the property’s interiors or using floor plans of similar homes in the same neighborhood. Buyers are typically asked to refrain from contacting or disturbing current occupants.
2. Location, Location, Location
Location determines growth potential as well as how efficiently you can manage your investment rental property. Use information from county and state databases to determine the ratio of owner-occupied vs. rental properties. A large number of rental properties in the community may be both a good and bad indicator. It may reflect stiff competition for tenants, which may affect rental rates to some extent. It may also be an indication of a neighborhood in transition that may or may not be favorable for property values. Consider factors such as the presence of highly-rated schools, employment hubs and entertainment facilities to ensure that the property is well-located and leasable.
3. Assess the Condition of the Property
When you purchase a distressed property, you will likely be doing so without the benefit of a professional inspection report. Even bank-owned properties may not include warranties for the condition of the home, and most properties are sold on as-is contracts anyway. Stories abound of investors who end up with foreclosed properties that have been rendered uninhabitable by owners upset over the loss of their home. Be prepared for these circumstances. Have a professional home inspector examine the property as soon as it is feasible, and prepare a rehab budget that accounts for major repairs and renovations.
4. Dealing with Tenant-occupied Properties
Some foreclosed properties may already be rentals, and tenant-protection laws vary from county to county. These are your options for tenant-occupied houses:
- Offer to buy out the remainder of the lease so that the tenant can move out quickly.
- Give the tenant a move-out incentive consisting of a fixed payout in lieu of surrendering the premises on a specified date.
- Rent the property back to the same tenants under your own conditions and contract.
- Evict the tenants if they refuse to leave. This is a process that may involve the assistance of law enforcement authorities.
5. Evaluate the Tax Impact of Being a Landlord
In states that provide a homestead exemption for the primary home, first-time landlords may be shocked at property taxes for rentals. Take this expense into account as you set your lease rate for your new property or you may end up absorbing the cost. This cost should also factor into your decision making when buying distressed properties to convert to rentals.
How to Find Rental Investment Property to Build your Portfolio
Auction.com offers a comprehensive database of bank-owned and foreclosed properties in different cities across the U.S. Currently, there are at least 12,000 auction listings for bank-owned properties and another 22,350 properties in foreclosure with a handful of existing rentals in the mix. Browse these listings to get a good sense of where the best investment opportunities can be found, and prepare a plan based on your preferences, resources and market trends as reflected on Auction.com. As a bonus tip, where properties are moving faster, price your offer on the higher end of the range to improve your chances of buying a preferred property.
The information in this blog post is being provided for informational purposes only and not for the purpose of providing legal or real estate investment advice, and no liability is assumed by Auction.com with respect to such information.
