Investing is the key to building wealth, but what’s important is where you invest. Buying a foreclosed home is one of the best investment options, and if you do it right, you can get returns as high as 20% per year.
But in order to get such gains, you’ll need to pick the right property. This guide can help.
Table of Contents
Buying a foreclosed home: Location is everything
The value of a property depends on tons of factors, the location being the most important. You might have the most desirable property in the city, but if it’s not located in the right area, its value will plunge. People tend to purchase or rent a property on the basis of how far it is from their office, their kids’ school, and amenities like shopping centers, restaurants, etc.
Properties amid prime amenities will be in higher demand, and thus, their prices will appreciate over time. Therefore, try looking for a property in a prime location of the city. You can also invest in an area that is developing and has the potential to show growth in the upcoming years.
Vicinity to public transport is important in real estate
Another crucial factor that can affect the value of a property is its closeness to public transport. Most people rely on public transport for their day-to-day office commute, so a property away from the local bus stand or railway station is the last thing they’ll choose.
Before buying a foreclosed home, make note that an ideal investment property is a 10-12 minutes’ walk from all major public transportation units. However, be wary of the location of the railway station or the main road. No one wants to listen to the music of honking vehicles and train engines all day.
Prime Real estate: Stay close to other amenities
As discussed, amenities also play a critical role in the valuation of a real estate property. Easy access to shops, gyms, restaurants, and other amenities make a property more desirable to potential customers and tenants. However, be sure not to choose a property solely based on any of these factors. You should weight the amenities with public transport, location, condition of the building, and other factors to make your final buying decision.
Buying a foreclosed home: Keep scarcity and supply-demand in mind
Location plays a key role in determining the demand for an existing property. The availability of rentals in a particular area determines supply. Let’s understand this with a quick example.
Think of two apartments, both located near to public transport, amenities, both have great interior, and both are in great condition. But one of them has a lot of apartments and houses nearby, whereas the other is near a large complex with dozens of tenants.
While both real estate properties will have a similar demand, the supply will be better for the second one. More supply means more competition among the tenants to get a spot, which translates into higher rent prices and favorable property terms.
Research the area before buying a foreclosed home
Before investing in a property, be sure to understand the neighborhood. This is important, especially if you’re thinking of investing in an area where you don’t spend a lot of time. Here are a few points to investigate in an area:
- Average rent
- Rental rates
- Information on home sales
In addition, find out if there are any large development plans in progress, including shopping complexes, business hubs, factories, and new apartments. Any new constructions can impact the value of your investment. Therefore, it’s wise to do some research beforehand rather than getting surprised afterward.
Don’t go for off-the-plan properties
Off-the-plan properties are properties that have similar features. They’re built by the same developer at the same time and often have identical designs. Since they’re identical, they’re cheaper to build, and thus, cheaper to buy.
And since off-the-plan properties are not unique, they lack scarcity. They don’t experience a significant value appreciation over the years, and you won’t be able to leverage the location and amenities the property offers.
Be aware of rental return guarantees
Sometimes, you don’t need to find tenants yourself. In rental guarantee programs, you rent your apartment or property back to the developer. The developer then fills the apartment with a tenant and pays you a fixed amount per month for the privilege. It’s more like using some sort of property management service, but it has some downsides. For instance, you don’t have control over your tenants, repairs, maintenance, agreements, etc.
In addition to these risks, rental return guarantees are a poor investment. Developers use them as a way to raise capital for a project. While you’ll get guaranteed rental every month, the chances are that you’ve already paid for an inflated price, and it might take some years before the property reaches the price paid. All in all, there are pros and cons of rental return guarantees, but you’ll be better off if you avoid these schemes altogether.
Find a balance between property, price, and position
These three factors – price, property, and position – are weighed against each other. An excellent property in a prime area will be extremely expensive. You’ll need to keep the rent high to get the desired ROI, which will limit your pool of potential tenants. When you’re considering an investment property, make sure property, price, and position are aligned together and not separately.
Shop for your tenant after buying a foreclosed home
You can skip this point if you’re investing in a property to reside in it. But if you’re planning to rent it out, you should make sure you keep your ideal tenant in mind. You might not be fond of east-facing balconies, but most tenants will prefer it over anything else. And tenants may be willing to pay a premium just to get that east-facing balcony.
If you’re not certain of what the tenants want, do some research. Take some time and talk to a few tenants in the area to figure out what are the features and characteristics tenants look for in a property. Are they more interested in the first floor or the tenth floor? Do they prefer a fully-furnished or a semi-furnished flat? Are they more concerned about public transport or amenities? Having answers to these questions will ensure you know what exactly your tenants are looking for.
Pay attention to the loan terms
Once you’ve picked a property, there are a few ways you can raise capital. But let’s talk about the two common ways: either you have the money to invest, or you’ll take a loan. If you shop around for a loan, make sure to pay close attention to the details. A bad loan can make all the difference between a poorly chosen and profitable investment property venture.
One thing to keep in mind is to opt for an interest-only loan. In this type of loan, you’ll make an interest payment every month for around five years. After that, you can refinance the loan and pay off the principle lump sum.
Conclusion
Finding an investment property can be more confusing than you might think. Several factors come into play, and you need to make sure all of them align with the interests of your ideal tenants. And once you pick a real estate property, you’ll need to handle loans and other agreements. So, follow these steps to ensure you stay on the track.
