Wednesday, September 28, 2011

How To Turn A Foreclosed Home Into Monthly Income Opportunity

How To Turn A Foreclosed Home Into a Monthly Income Opportunity

Previously, it was very challenging to invest in Atlanta foreclosures for several reasons:

1. Difficulty finding foreclosed homes. (Limited supply)
2. Pricing wasn’t very attractive. (They weren’t deals)
3. Banks wouldn’t negotiate very much.
4. Risky because you needed a quick sale after renovations to protect your profit.

The basic approach was to find a foreclosure and buy it under value. Remodel the house quickly and get it on the market for sale. Price the home well and hopefully sell this home before carrying costs ate into all your profit, especially if you are using borrowed funds to do pay for the project.

This plan carried several risks. One of the risks was “time risk.” You could spend weeks or months looking for the right property only to come up without any real deals. Sometimes the deal blows up after you’ve spent a lot of money doing due diligence. This lost time and money could have been invested into other profitable opportunities.

Another risk was that your rehab costs would usually come in higher than budgeted. Have you been watching those flipping houses TV shows? You may not have noticed but, in almost every flip, the investor ends up having to spend more money than budgeted to make repairs. In many cases, these unexpected repairs were very expensive. Bye bye profit projections!

The last and probably biggest risk was the home selling quickly. Each day a remodeled home sits on the market for sale without a buyer sucks more and more profit out of the deal. When you factor in debt service, taxes, utilities, landscaping and advertising, you’ll see that you have a ticking time bomb on your shoulders each and every day. It’s a lot harder to sell a home than it is to rent one.

These risks kept many investors away from foreclosed homes. However, the current foreclosure crisis has changed the game on this investment opportunity. The first risk has, for the most part, been eliminated. There is a huge supply of foreclosed homes in Atlanta right now. You can probably find a great deal within a matter of hours, instead of months.  Banks are still not willing to negotiate too much, but they are getting better at it, which means you can get a fantastic deal on a foreclosure property. A knowledgeable agent is the best person to help you negotiate. 

The repair risk still exists. This one we cannot avoid. However, the larger selection of foreclosed homes allows you to find homes in better condition and of course, if you are handy, you can do the work yourself; if not, you can always find contractors to do it for you. However, when you hire contractors to do the repairs for you, your costs are higher and they need to be taken into account when you are doing your calculations. In addition, the lower purchase prices available today give you some breathing room in your budget. You can absorb higher repair costs because of the lower acquisition cost.

And the biggest risk, selling the home, can be mitigated through strategies like a “rent to own” program for single family houses and the Section 8 rental program.

The goal of many real estate investors is to create monthly income. One of the best strategies for maximum monthly income is to buy a property and pay it off quickly, or better yet, use your savings to fund the purchase and remodeling costs. Once the property is complete, renting to an agency such as Section 8 will bring you income for many years to come. There are certain aspects of this scenario that you have to be aware of…having a government agency pay the rent guarantees a steady income, however, they will pay significantly less then what you could get from an individual. The flip side of that is the individual, for whatever reason, can stop paying rent and you will be faced with evicting the tenant (which takes about three months in the state of Georgia) and risk having the property sit on the rental market empty and not make you any money. Worst case scenario is that the property will be damaged by the non-paying tenant while you are trying to evict them.

Yes, there are risks involved. However, the potential is there for a non-institutional investor to make money, especially if they would occupy a part of the property and rent out the other part. For example, live upstairs and rent out the downstairs space. See our property at 2066 Ben Hill Road in East Point, GA as a great example.

If you have any questions, please contact us at your convenience.

Good luck in your investment search!

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