When pondering what properties are best suited for investment, do not overlook single-family home foreclosures in good to excellent neighborhoods. While many of these neighborhoods have vacancy rates, the remaining home owners and association maintain the landscape, fund good schools and keep properties looking great in spite of the economic downturn.
Houses bought through Fannie Mae and Freddie Mac are in just about every neighborhood in the country. Most of these homes are in areas with great schools, walking trails and neighborhood parks. Most upper-middle class neighborhoods still carry a certain amount of clout based on these and other factors. Displaced former home owners typically attempt to stay within the area to keep their lifestyle as close to what it was before as possible. If they have children, they want them to stay in the same schools and close to their friends and activities. These home owners may not be able to make their own mortgage payments but are quite capable, and willing, of paying reasonable rents that cover the investor's mortgage, Home Owner's Association (HOA) fees and property taxes.
The reason for this is that their mortgages may have tripled through variable mortgage rates, but they are quite able to afford their original mortgage of $1,500 or $2,000 a month.
Rents in most middle-class and upper-middle-class neighborhoods have remained steady with some negligible declines. Purchasing an investment property that has been foreclosed will typically sell for 30% to 50% less than its initial cost if it has been sitting on the bank's books for a long time. The rental on these properties more than offsets the monthly expenses and tends to yield a reasonable profit.
In this area, there are bank owned properties that were initially sold above $600,000 and are being sold slightly above $300,000. These homes range from 2,600 to 5,000 square feet. These are executive homes in great areas with good schools and amenities, and the rental on these properties will easily cover the investor's mortgage and expenses while the market rebounds. It is likely that these well maintained and built homes will yield a $200,000 to $300,000 profit upon resale in less than 10 years. This is in addition to the profits generated while renting the properties until the market rebounds.
Do your due diligence. Know the neighborhoods well and the type of residents that tends to inhabit these areas to maximize profits and eliminate costly mistakes.