The Residential Mortgage Forbearance Has Expired: A New Investment Opportunity?
The coronavirus still ails our bodies and perhaps still our minds, as well as our finances. Maybe you were able to increase your savings during the pandemic and boost your investments. Or perhaps you lost a job and had to pivot to a new area of work. Regardless of how you and your finances have faired these past 2 and a half years, there are still effects of the pandemic playing out today.
The Residential Mortgage Foreclosure Moratorium expired on June 30th, 2022. Since the ending of various programs that allowed homeowners to remain in their homes, foreclosures have skyrocketed. Though the number of foreclosures is still below historic rates, we are seeing a steady rise. With most state and county laws and courts, the foreclosure process can take 6 months or more to actually work its way through the system. That means the inventory of foreclosed properties will spike this Winter.
A New Investment Opportunity?
The new wave of foreclosures could bring a new investment opportunity to your portfolio. Whether you’re already investing in real estate through your self-directed IRA or have been curious about it, now could be a great time to look into adding foreclosures to your portfolio.
Starting a real estate investment portfolio while you are young can help you increase your cash flow, hedge against inflation, generate higher returns, and build long-term wealth and equity. Using your self-directed IRA to buy real estate means you can do all these things while experiencing the tax advantages of a traditional or Roth retirement account.
Investing in foreclosures comes with inherent risks, but the payoff can be excellent if you understand the proper steps and rules.
Investing in Foreclosures
Purchasing a foreclosed property is different than purchasing a traditional property. Oftentimes, you must act quickly to secure a good deal. However, you want to understand your risk tolerance and certain rules so you don’t find yourself underwater in a bad investment.
Have A Knowledgeable Team Behind You
Approaching a foreclosure real estate investment is easier and more effective when you have an experienced and knowledgeable team supporting you.
A realtor who is experienced in foreclosures can be invaluable. These professionals can provide you with comps for pre and post-rehabilitation closed sales, get you appointments quickly, provide you with local zoning issues, and more. A realtor will also help you gain insight into the property’s neighborhood and surrounding area.
A real estate attorney who is experienced in foreclosed properties will help you with the legalities of the deal and can help prevent any slowdowns or stops in the acquisition process.
Before you make an offer, you’ll want to have your contractor, architect, and any other design professionals on speed dial. Utilizing these professionals’ expertise will allow you to focus on your investing numbers and ensure you’re making wise investment decisions.
You’ll want your foreclosure investment to be simple, fast, and compliant. That’s where a skilled SD-IRA administrator will come in. At CTAS, our experts will help you invest creatively and effectively. We simplify the self-directed process, move quickly on compliance reviews, and help you understand IRS regulations so you avoid hefty fines.
If your SD-IRA account doesn't have enough money to cover the foreclosure purchase in full, you’ll need to find a lender who will issue you a non-recourse loan.
Be Patient, But Know When To Act
Purchasing a foreclosed home should not be an emotional decision, but rather a very calculated one. You need to know the numbers and aim for a property that will produce an adequate return at resale, ideally about 25%.
Or if you’re interested in renting out the home, you’ll want a positive cash flow that will continue to increase your SD-IRA balance. You can follow the 1% rule when analyzing a foreclosure purchase. Take the price of the property and multiply it by 0.1. If you can rent the property for that amount of money or more, it’s most likely a good deal.
Not every foreclosure is going to be a good investment. Be patient, know your numbers, rely on your team, and be ready to jump when the time is right.
Get Ready to Work, Just Not Physically
Foreclosed properties can have severe damage or unresolved issues. And unfortunately, there won’t be a nice summary of the issues in a seller’s disclosure. Whether you’re looking to rent the property or flip it and sell it, you’ll want to understand some common problems associated with foreclosed properties.
If you’re investing in the foreclosed property through your self-directed IRA, you cannot perform the labor yourself, instead, you’ll need a reliable and knowledgeable contractor.
Common problems with a foreclosure property:
Poorly maintained: Homes require regular maintenance and letting routine care slip through the cracks can mount up to serious problems.
Improper Remodeling Work: Sometimes a foreclosed home can be partially remodeled or remodeled without proper permits.
Trash and Vandalism: If the property has been vacant for a while, there may be vandalism or old appliances, trash, or furniture left behind by the homeowner.
Benefits of Investing in Foreclosures
Perhaps one of the biggest benefits of investing in foreclosed properties is the deep discount. Sale prices are often much lower than market value. If the property is at auction, it’s often sold quickly and there can sometimes be little to no competition.
If the property becomes real estate owned (REO) or bank-owned, the seller is very motivated to get the property sold. This can potentially lead to concessions such as a lower purchase price, help with closing costs, and the length of escrow.
Investing in a foreclosed property through your SD-IRA can be very lucrative. Adding creative investments to your traditional portfolio can help you prepare for whatever life throws your way.
Add Foreclosure Investing to Your SD-IRA Portfolio With the Help of Chicago Trust Administration Services
Chicago Trust Administration Services understands the ins and outs of self-directed IRAs. As a custodian, we help our clients achieve their financial goals through investing in non-traditional assets, including real estate. Whether you’d like to try investing in foreclosed properties or build up a rental empire, we’d love to help.
While we can’t advise you on your investments, we will take care of the nitty-gritty paperwork, help you stay compliant with IRS rules, and avoid prohibited transactions. To get started, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.