Atlanta Legacy Homes is a design-build residential construction company specializing in remodeling, new construction of homes in the Atlanta area as well as acquiring, remodeling and managing income properties for our investors. This blog is all about tips, ideas, and innovative approaches for the remodeling division of the company.
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
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
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.