Skip to Content

Are Foreclosed Homes a Good Option for Rental Properties?

White Merced House with Foreclosure Sign in Yard

The cost is one of the most significant barriers for new rental real estate investors wanting to buy their first rental property. While high property prices can be a huge burden for some, the solution for other investors is to look for reduced-price residential properties. Many properties that sell below market value are foreclosed homes. And, at first glance, those discount prices may appear to be a steal. However, before you buy one, carefully weigh both the pros and cons of purchasing a foreclosed home to use as a Merced rental property.

Pro: Lower Prices

Price is the first and the most important benefit of buying a foreclosed property to use as a rental. Because the banks holding the foreclosures don’t want to own them, they tend to be priced below the market rate, banks are usually motivated to sell them for their value. It’s also critical to understand why foreclosures are regularly sold at a reduced price. The most common reason is that the properties aren’t always in good condition. However, if you have the skills or budget to do a little fixing up, a foreclosed home may be right for you.

Pro: Higher ROI

The lower cost of foreclosed homes can lead to a second valuable benefit: a high return on your investment. When you purchase a property below market value, you will have a good amount of available equity in the property. As homes in your area increase in value, your property will appreciate, and your equity will grow. Any repairs or improvements you make to the property will only accelerate this process. A good cash flow property is ideal, but real estate investors’ real wealth comes from owning properties with an expected resale value far above the original purchase price.

Pro: Flexible Financing

Every so often, the banks holding foreclosed properties are eager to unload them to buyers. Depending on the bank, they may be willing to offer lower interest rates, closing costs, or other financing incentives to a solid buyer. Obviously, this isn’t always the case, and some foreclosed properties are sold on a cash-only basis. As a result, gather as much information as possible about a property before making an offer.

Con: Expensive Repairs

Along with the benefits, there are also several drawbacks to foreclosures that you should be aware of. Foreclosures are often known as distressed properties, not just because the previous owners stopped paying the mortgage. They will often stop doing repairs and maintenance on the home, too. As a result, foreclosed homes are often in poor shape when they are finally repossessed and sold by the bank. Sometimes, the homeowners even damage or vandalize the property before leaving, necessitating broad and expensive repairs. Before purchasing a foreclosure, Merced property managers should understand what they are getting themselves into and have enough cash set aside to cover the cost of getting the property ready to rent.

Con: Slow Closing

The foreclosure process can leave a property in a real tangle of legal and financial difficulties. From liens to title issues and beyond, there are many reasons why buying a foreclosed property from a bank often takes longer than a regular sale. For this reason, investors who want to purchase a foreclosed property should be prepared for a lengthy process and many hurdles that will need to be overcome.

Con: Lots of Competition

Another significant disadvantage of purchasing a foreclosed property is the amount of competition. Like you, many investors are looking for that next bargain property. It is common for there to be a lot of competition for the same property. If the competition becomes especially fierce, it may cause the purchase process to be delayed or even drive the property’s price up and out of an affordable price range. You may also need to offer a higher down payment or other incentives to catch the bank’s eye, which means you’ll need a lot of cash. If you are investing in your first rental property or have trouble getting good financing, a foreclosed property may not be your best choice.


So is a foreclosed property a good option for your next Merced rental? The answer depends on your circumstances. For some investors, a foreclosure could offer a bargain property that will make a great rental. But for others, the difficulties of buying a foreclosure make it a less desirable path to investing. Would you like to know more about ways to locate and purchase rental properties below the market rate? [Contact us] online or give us a call at 209-722-7761.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.

The Neighborly Done Right Promise

The Neighborly Done Right Promise ® delivered by Real Property Management, a proud Neighborly company

When it comes to finding the right property manager for your investment property, you want to know that they stand behind their work and get the job done right – the first time. At Real Property Management we have the expertise, technology, and systems to manage your property the right way. We work hard to optimize your return on investment while preserving your asset and giving you peace of mind. Our highly trained and skilled team works hard so you can be sure your property's management will be Done Right.

Canada excluded. Services performed by independently owned and operated franchises.

See Full Details