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Are Foreclosed Homes a Good Option for Rental Properties?

White Star House with Foreclosure Sign in Yard

One of the most common concerns for new rental real estate investors who wish to purchase their first rental property is the cost. Though, even as high property prices can be a hindrance for some, for other investors, the solution is to look for reduced-price residential properties. Lots of properties that sell below market value are foreclosed homes. Subsequently, those with discount prices may seem like a great deal. However, before you purchase one, it is important for you to thoroughly consider both the pros and cons of obtaining a foreclosed home to make use of as a Star rental property.

Pro: Lower Prices

The first and most apparent benefit of buying a foreclosed property to use up as a rental is the price. Foreclosures are typically priced below market rates given that banks that hold them do not want to own real estate – they are doing only want their money. This often makes the banks motivated to sell. Without a doubt, it’s just as 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. However, if you have the skills or budget to make a little refurbishing, a foreclosed home can be suitable for you.

Pro: Higher ROI

The lower cost of foreclosed homes can lead to a second significant benefit: a high return on your investment. When you purchase a property below market value, you 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 in the property is only going to accelerate this process. A good cash flow property is perfect, but the real estate investors’ real wealth is derived from retaining properties with an expected resale value far above the original purchase price.

Pro: Flexible Financing

Occasionally, the banks holding foreclosed properties are willing to unload them to buyers. Depending on the bank, they can also be willing to recommend lower interest rates, closing costs, or other financing incentives to a solid buyer. Of course, this isn’t always 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

Coupled with benefits, there are also several drawbacks to foreclosures to know about. Foreclosures are commonly referred to as distressed properties, not just because the previous owners stopped paying the mortgage. They frequently stop doing repairs and maintenance on the home, too. For this reason, foreclosed homes are often in bad condition once 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 buy a foreclosure, Star property managers need to 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 difficulties. From liens to title issues and elsewhere, there are numerous 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 should be prepared for a lengthy process and many hurdles that will need to be overcome.

Con: Lots of Competition

One more important disadvantage of purchasing 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 intense, it could delay the buying process or even drive the property’s price up and out of an affordable price range. You may also 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 if you 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 Star rental? The answer depends on your circumstances. For some investors, a foreclosure could offer a bargain property which will make it a great rental. But for others, the difficulties of buying a foreclosure make it a less desirable path to investing. Would you like to know more about ways to locate and purchase rental properties below the market rate? Contact us online or give us a call at 208-494-1800.

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