Foreclosure Essay -- Real Estate

Recent setbacks in the mortgage and financing sectors of the economy have modified the process of real estate acquisitions. Specifically, entry level investors with un-established or insignificant credit history have experienced difficulty securing collateralized loans with competitive interest rates. This is not to say that a weak credit history was disregarded prior to the real estate and bond market collapse in 2008, though, it has certainly become more difficult to attain financing for the purchase of real property.1 Fortunately, the proposed scenario for this essay indicates that I, the investor, acquired $150,000 cash to purchase a distressed property, which presents a unique opportunity from both investment and financing perspectives. However, achieving the greatest return on my investment requires a solid financial strategy, which includes: 1. Defining my risk parameters, familiarizing myself with the process of purchasing a distressed property, and performing thorough due diligence, prior to engaging in the purchase. 1. Exploring my financing options 1. Estimating a potential return on investment (ROI) For this exercise, I will focus on purchasing a distressed property to generate rental income, as a long-term investment. Therefore, the following sections of this essay will discuss my financial strategy as is relates to a distressed real estate purchase. DEFINING RISK PARAMETERS A Brief Discussion of Risk Management Regardless of investment type, an investor’s portfolio must account for risk. Whether it relates to stock or real estate acquisitions, risk directly correlates to the returns one can expect on an investment. Accepting higher levels of risk typically indicates that potential returns c... ...ategy, given $150,000, I chose to pursue an all-cash purchase of a distressed property, located in a generally stable area along the outskirts of Philadelphia. The property will likely be a two-story, 2 bedroom, tenant- occupied row home, priced between $115,000 and $125,000. The purchase price leaves approximately $25,000 - $35,000 cash, which I can use towards capital expenditures, and as a financial buffer in the event of tenant default. Additionally, from my knowledge of rental rates in the area, I am confident that I can earn $800 - $950 per month, which yields a ROI of 8% to 12%. My decisions were based on a logical and well-planned approach. Although accounting for risk is imperative, and success is never guaranteed, following my detailed financial and investment approach for acquiring a distressed property can maximize my present and future returns.