How To Turn A Foreclosed Home Into A Lifetime of Monthly Income

How To Turn One Foreclosed Home into a Lifetime of Monthly Income

Previously, it was very challenging to invest in NJ foreclosures. This was 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.

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 dilligence. 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 large, make that a huge, supply of foreclosed homes in New Jersey right now. You can probably find a great deal within a matter of hours, instead of months.  Banks are now willing to negotiate, which means you can get a fantastic deal on a foreclosure today. A Buyer’s Agent is the best person to help you negotiate. Don’t go directly to the Bank’s REO agent.

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. 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 for multi-family properties.

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. When the mortgage completely paid off 9can do it in 9 – 15 years if not sooner), you get to keep the majority of the monthly rent. Depending on your living expenses, you can become financially independent with just three or four homes free and clear.

You can use this debt-free rental income to:

• Offset your living expenses.
• Pay towards other debt.
• Re-invest into additional self-financing assets.

I have a two-part strategy that I want to share with you.

The first part of the strategy entails buying a foreclosed home below value and using a short repayment period. The foreclosure crisis has magnified the opportunity available to apply this strategy. Investors acquiring foreclosure properties are buying homes, in some markets, for pennies on the dollar.

Obviously, these price discounts differ from area to area and also depend on the condition of the house.

The lower purchase prices available in foreclosures will allow you to set up shorter loan repayment periods.

For example, instead of getting a 30-year mortgage, consider getting a 10-year or 15-year mortgage. Pay this property off very quickly and then enjoy monthly income for life.

You could obviously sell these houses when the market rebounds for massive profits. If you buy it cheap enough, you could even turn around and sell it after your renovations and walk away with a nice tidy profit. Will that help offset any stock market losses you incurred the last couple of years? Sure it would.

Remember, you don’t have to make back any money you lost the same way you lost it. This means you don’t have to make back the 50% drop in your retirement plan by buying mutual funds again. You can use a different approach to recapture your wealth. You must also decide to become active with your investments. It will take you a very long time to recapture money lost as a passive investor trusting your investment activities to others.

Let’s assume as an example a $100,000 foreclosure investment.  Just multiply the numbers by 2, 4 or whatever makes you comfortable… But bear in mind, you don’t have to buy investment property in the town you live in if it’s too pricey.

A $100,000 mortgage amortized over 30 years at 7% interest would require a monthly payment of $665. This same mortgage amortized over 10 short years at 6 percent (the interest rate would be lower because of the shorter repayment period) would generate a monthly payment of $1110. Add in $300 for taxes and insurance, and your total house payment is around $1410 a month.

You can run this calculation online with your own numbers, for free at: http://www.yona.com/loan/

Basically we want to buy a foreclosed home and pay it off almost like we would a car. I would personally try and get the shortest repayment period possible. The faster you pay off this property, the faster you’ll enjoy income for life.

Another benefit of this approach (buying foreclosures at a discount), is that you’ll need to bring less money to the table at closing to buy these properties. Most lenders today require investors to put 20% down to buy an investment property. 20% of $100,000 is a down payment of $20,000. 20% of $200,000 is a down payment of $40,000.

Now for part two of the strategy …

Because this mortgage payment is low, I would consider renting this using the Section 8 program. Depending on the price range and how much rent you can charge in that area, you may have to either put more money down or lengthen the term of the mortgage to avoid a negative cash flow situation. The goal would be to collect rent directly from the government and use this rental income to pay your mortgage off within 10 to 15 years. Less if possible.

The Section 8 Program was very difficult for us to use in the past because the rents offered were significantly lower than our monthly mortgage payment, insurance and taxes; PITI.

The lower prices available through foreclosures have changed this game dramatically.

We can happily accept Section 8 tenants and pay our mortgages off within a few years at the same time. Here’s an example of an investor in St. Louis combining a foreclosure investment with Section 8:

The investor purchased a home in pretty good shape for $33,000 put another $2,000 in for cleanup and minor repairs

.

The mortgage payment on it is $703 per month for a six-year mortgage, and the investor will receive $725 per month in Section 8 rent.

Imagine having a free and clear rental property in just six years that was paid for by the government!

The reason I’m suggesting that you consider Section 8 for this strategy is because evictions and non-payment of rent have spiked due to the economy. Some tenants are struggling from job loss, work hour reductions and lower pay. If your Section 8 tenant loses their job because their company decides to lay off 20,000 people, you’ll be protected.

The bottom line is that we don’t want to have to chase our rents because we have elected a higher monthly mortgage payment. Section 8 gives us the ability to automatically collect this rent from month to month. But to be on the safe side always put away some reserves, infact the mortgage company is going to want to see some.

If you have considered this strategy or have any questions about it, please ask in the comments section below.

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