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Foreclosures and Real Estate Investing

Foreclosures and Real Estate InvestingThe housing market, as we all know, is not exactly a bowl of cherries these days.  Lending has tightened up, prices are unpredictable at best and freefalling at worst, and people are losing their homes to foreclosure all over the place.

However, that doesn’t mean that you should run away from the idea of real estate investing.  While the market might no longer be full of oodles of real estate plums ripe for the picking, there are still great ways to get in on the market.  Real estate investing is a great way to work from home (at least part-time, at first), and the foreclosure market is a great way to do this.

Foreclosure, or bank-owned, property sales are often undervalued as compared to the current market.  Banks that find themselves stuck with empty houses are taking considerable losses by holding onto the properties and having to pay the property taxes on an asset which is generating no profit for them whatsoever.  Even though the prices in the real estate market are a little unpredictable right now, foreclosed properties usually offer a great value for your real estate dollar.

Thanks to the glut of house-flipping shows on cable channels like TLC and HGTV, you might be assuming at this point I’m going to endorse getting into flipping houses.  The short answer to that is, heck no!  Sure, if you flip right, you can generate a quick burst of income, but besides a bit of cash, you haven’t really generated any real wealth for yourself by flipping a house.  Not only that, but I would argue if you buy a house just to look for a quick sale, you’re not real estate investing – you’re real estate gambling.

If you are interested in getting started in real estate investment, here are a few tips:

1.  Don’t quit your day job. Real estate investing is not going to make you rich overnight.  It won’t even supply a good income right away.

2.  Start small. Again, those house-flipping shows are miles away from what real estate investing should look like for most people.  As you’re getting started, you’ll want to focus on smaller properties that you can pay cash for, or buy with a small monthly mortgage payment.  You’re looking for properties where you can maintain equity and rent out to cover the monthly expenses and generate a small surplus, which you can squirrel away for the next investment.  This first property should be pretty small, and not need a whole heck of a lot of work, outside of some sweat equity (i.e. smaller projects you can do yourself).

3.  Do your homework. Make sure, before you take the dive on that first property, that you really know what you’re getting into.  Make sure you know the mortgage payment, real estate taxes, and any HOA fees before you buy.  Also make sure you have a firm idea of the potential rent you could charge for the property.  You do NOT want to realize, after you are on the hook for this property, that it will cost you $1000 a month but only generate $800 a month in rental income.

4.  Add properties. Instead of going for the quick sale to generate a hunk of cash quickly, the idea here is to build wealth.  You’re not selling that first property, you’re adding to your portfolio.  Find another similar property, or maybe something a little bigger.  Something in decent shape, probably another foreclosure.  And for these first properties, you don’t have to be buying anything more than one bedroom condos… just as long as you can rent them for more than the monthly expenses you will incur.  The beauty of the whole setup is that eventually your properties will be generating a good income for you, *and* you’ll own a number of properties.  Also if a sweet investment opportunity comes along and you don’t have quite enough cash built up to jump on it, you’ll have lots of equity built up in your properties that you can always borrow against your current assets.  (You shouldn’t max out that equity or use it repeatedly, but it’s great to have it there if you really need it.)  Once you have that firm footing with a few properties, then you can getting into heavier fixer-uppers if that appeals to you.  The more property and real estate income you have under your belt, the less risk each additional investment is to your overall stability.

Sure, it’s not glamourous.  Sure, it will take awhile.  But this flavor of real estate investing will lead you down a path to real wealth.

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