Foreclosures as an Investment In Hoover, AL

I get a lot of folks that appear interested in buying foreclosures as an investment (i.e., to rent out and later resell). As such, I wanted to provide some insight into what to consider to minimize your risk, manage your expectations and hopefully yield a return in excess of 20%. There seem to be quite a few people who want to buy investment properties but simply don't know where to start so hopefully this can be a little bit of a guide.

My analysis here, for the sake of simplicity, excludes any consideration for taxes. Second, I have made a few significant assumptions, as you should according to your appetite for risk, as follows. First, when buying a foreclosure as an investment you need to think about (1) what your rental income will be and (2) what you expect annual appreciation to be. For the former, not only do you need to have a feel for how much you can lease the home for, you need to assume some level of vacancy. For the latter, you need to understand the market, the history of the property itself and the relative demand for homes in the surrounding area (neighborhood). For my analysis, I have assumed an annual one-month vacancy factor and 4% annual appreciation which may be on the aggressive side. My thought process on the 4% is that in buying a foreclosure as an investment, you will be able to get a great deal with lots of upside. I am going by the old saying that in real estate, you make your money when you buy.

Okay, so take a look at this table and I'll provide a few observations, explanations and questions to consider. First, the obvious point is that there is a sort of "point of no return" when it comes to price as the higher the price, the more difficult it become to rent. In looking at foreclosures as an investment, there is an optimal balance between price and potential rents.

My experience has been that it is difficult to find a home in the Hoover area that offers enough in the way of features to command a reasonable monthly rental for less than $125,000. As such, the optimal range is somewhere between $125,000 - $175,000 which is not to say you can't find value above or below this range. Looking at the analysis above for example, it would seem reasonable that, assuming you can find a foreclosure as an investment for $150,000, you could reasonably expect to rent it for $1,340 per month. It would also seem reasonable, assuming you were able to get a very good deal, that if you held the property for three years, you could expect to sell it for $168,730. Of course, there is significant risk in investing and there are no guarantees; if there were no risk and absolute guarantees, everyone would be doing it!

So why a 20% return? In my opinion, if you can't at least try (expect) to get that level of return on a foreclosure as an investment, it just isn't worth the risk. What if the market doesn't rebound as robustly? What if you can't find a renter quickly enough? In order to get that level of return, you need to (1) get a good deal, (2) get good financing at a good rate, (3) find a renter within 60 days of closing, (4) have your renter pay you every month (no defaults) and (5) experience a rebound in the market.

It is a great time to buy, whether for a foreclosure as an investment or as an owner-occupant. Rates are still low, values should begin to rebound and the economy appears to be on the upswing. If you have questions or just need more information, please don't hesitate to call or email me. For a free link to Hoover foreclosures, go to markcrain.com. There are many things to consider in this process. Engage a knowledgeable and experienced agent to help!