How to Make Money From Foreclosures

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While the real estate market will always have its ups and downs, there is usually a way to make money if you know which areas are most profitable. Foreclosures still provide a way to enter the market and make money off your investment, provided that you work hard and have good luck.

  • Invest your money wisely when you are renovating or repairing properties that you have purchased. If you intend to sell the property, you will get the best return on your money by updating kitchens and bathrooms. These are the rooms that usually matter most to buyers and enable you to price your property higher than comparable properties that lack these improvements.

  • Keep repair costs as low as possible. Although many foreclosures will require work, you don't want to spend outrageous amounts of money on repairs or upgrades. One way to save money on repair work is to contract a local company to handle all of your investment properties in exchange for a sizable per-project discount. This way, the company has guaranteed work, while you maximize your profits.

  • Use caution when participating in an auction, which is one of the most common ways of purchasing foreclosed properties. You should investigate the property carefully, in advance, to determine its condition so that you won't end up paying for expensive repairs. You should also make sure that the title is clear, so that you won't be responsible for previous liens (legal claims on a property for money owed) on the property that can cost you money after purchase.

  • Rent or lease out property that you have purchased instead of re-selling immediately. If you can rent out the property and cover the costs of the mortgage, real estate taxes and property insurance, you can still make money over the long term as the property appreciates in value (usually about 3 percent per year). In addition, you can write off the costs of repairs and other miscellaneous expenses on your income taxes.

  • Try to have multiple foreclosure deals going at one time, once you have mastered the process. This enables you to have a steady flow of cash coming in throughout the year and keeps you from being wholly dependent on the sale or lease of any one property.

  • Read "The Everything Homebuying Book" by Mark B. Weiss and Ruth Rejnis, available at Amazon.com, for more information on how to make money with foreclosures (see Resources below).

Tips & Warnings

  • Choose properties located in the best areas you can find, which includes up-and-coming areas. The more upscale the neighborhood is, the more you can expect to make off the property when you sell it. However, you can often get an even better return if you buy in a neighborhood that's just in the beginning stages of gentrification and hang onto it for several years until the area is more desirable.
  • In almost all cases, you should make sure that any residential property you purchase has been vacated by the previous tenants. You don't want to have the expense of either evicting tenants or paying a mortgage in the event the tenants don't meet their obligations.
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