As a licensed financial services professional, I have people approach me all of the time excited about the possibility of making a fortune through foreclosure investing.
While it is true that in the midst of the current economic recession, there are real estate bargains available for the taking, these investments do not come without their share of challenges and risks. For those individuals who have the proper experience and plan to navigate through these sometimes complicated transactions, the payoff, both short-term and long term, can be extremely rewarding.
As you start to think about becoming a real estate investor, the following tips can start to point you in the right direction for formulating a plan which will increase your odds of success exponentially.
Location
The rule is no different here than it is when investing in any other real estate. The ability to opportunistically pick up a nice property in a neighborhood which is otherwise free of foreclosures will pay huge dividends. Even though you may be able to go to a different neighborhood and purchase properties at what may seem like fire-sale prices, if you take a look around, you will almost certainly notice that you are surrounded by many other foreclosure properties. What this translates to is lower property values, slower price appreciation when the market does start to rise, and much more difficulty with property management. This leads me to my 2nd tip.
Management
Before you even take the first step toward investing in foreclosure properties, recognize clearly that immediately upon purchasing that home, that you instantly become a property manager, and hopefully, a landlord. The current mortgage market has made flipping of these properties very difficult, so anyone who enters this market now should be prepared to do so as a landlord. You will have to find the time personally, or hire a reliable resource to always be available for maintenance issues, finding and keeping good tenants, and managing the financial monthly affairs of your investment. Many people rush off excitedly into these investments based on bargain prices, and often forget that being a landlord comes with a cost.
Business Plan
All too often I see people rush into foreclosure investing with no plan at all, which at best is dangerous, but at worst, can be financially catastrophic. In order to properly complete a purchase on a foreclosed property and do so in a profitable way, you will have to develop and implement a plan. You should start with a basic profit and loss statement which allows you to know with certainty that this property’s cash-flow will at a minimum, cover your monthly out of pocket expenses. If you can do this, then at least you will have the peace of mind of knowing that your investment is growing in value without any money coming out of your pocket. You should make sure that in addition to the standard expenses such as mortgage payments, property taxes, maintenance, and utilities, that you include some provision for vacancy. Most landlords will tell you that it is not the months where tenants are in the property that hurt your overall return on investment, but rather the unexpected months of vacancy where 100% of the expenses come directly out of your pocket.
In my experience, I have seen countless people make significant incomes through real estate investing, and even more as smart foreclosure investors. With the right information, and a disciplined approach, anyone who is willing to put forth the effort can do the same thing, especially in the current market, where banks are more motivated than ever to rid themselves of these assets. Although there is much more to the process, these are the absolute building blocks to becoming a successful real estate investor.
