Sunday, December 28, 2014

The Risks of the 'Buy and Hold' Strategy

"Buy and hold" is a common strategy among investors of foreclosures. It involves buying foreclosed property and then holding on to it until its market value appreciated, at which point it is sold for profit. 

Waiting for the foreclosure to increase in value has its pros: to flip it and sell it off immediately would possibly yield a lesser profit. Waiting for the current market to change -- or for the neighborhood to appreciate, for instance -- allows for a larger sale, brought about by much better economic conditions.

However, problems and risks might arise during the holding phase. Chiefly, this is because holding the foreclosure idle comes with its own share of costs. There are property taxes, for instance. And there's the mortgage, of course. Should you opt to upgrade and maintain the foreclosure's condition, the costs of maintenance and upkeep would also pile up on our expenses as well. Under this scenario, your supposed asset might become a liability instead. It'll cost you money rather than provide you with a positive cashflow.

Secondly, waiting for the market to change might entail years. Investors also have no guarantee that they'll be able to sell the property when they need to. Should a financial crisis befall the investor -- or should he find that he can't maintain the property any longer -- selling the foreclosure at that juncture might not yield the profit he so desires, or that he needs.

Thirdly, an idle property may attract vandalism, break-ins, or squatters. It would only cost the investor to attend to repairs, security measures, or eviction.

As a safety measure, many investors therefore rent out their foreclosure during the holding phase. It's a viable alternative. Just make sure that the foreclosure, as a rented property, will generate a positive cashflow to cover for your taxes, mortgage, and other costs.


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