Prepare for "Returns for US Stocks be Dismal" with Investing in Foreclosures

Buying foreclosed properties is the ultimate value investment.  With Rob Arnott, Chairman of Research Affiliates LLC, predicting that stocks will return 4-6% in the future, investing in foreclosures is a very appealing alternative for investing rather than a stagnant stock market.

Arnott made that prediction in a Money magazine article by Penelope Wang, "The Long Term Returns for U.S. Stocks and Bonds Turn Out to be Dismal."  Wang's informative and cautionary piece about investing in the securities markets was in the Investment Guide 2013 issue of Money magazine. As the head of a research entity that is highly regarded, Arnott's warning that "Stock returns are likely to average 4 to 6%" should not be discounted.

What is discounted, however, is the price of real estate when buying foreclosed properties.  

Investing in foreclosures is the ultimate in the value school of investing, mastered by the legendary Warren Buffett.  Considered to be the greatest investor in history by many, Buffett, who is worth over $50 billion, likes to buy companies that the market undervalues.  Eventually, the market will recognize the true value of the asset, and the price will rise.  From that, the investor profits.

That is what investing in foreclosures seeks to accomplish.  When a property goes into foreclosure, the market obviously attributes little value to it.  If it did, the property would have sold before it went into foreclosure.  No one on the sell side wants real estate to go into foreclosure, that is for sure.

Like all assets, investing in foreclosures carries risks.  There are very significant risks with investing in foreclosures.  Passive investing with a long term approach is the best way to profit from buying and selling foreclosed properties.  Jerry Cohen, President and Founder of EquityBuild, a real estate investment firm, has been a principal in more than 1000 transactions since 1984, many of which have been foreclosure deals.

There are many ways to profit like Cohen and EquityBuild has over the decades from investing in foreclosed properties.

Foreclosed properties can be fixed up and then flipped for a profit as one way of real estate investing.  Or a foreclosure could be fixed up and rented out, if investment income was desired.  That is particularly attractive for multi-family properties that have gone into foreclosure.

To enhance the profits from investing in foreclosures, funds from retirement accounts can be utilized.  That way the investment income and capital gains are tax free.  If a foreclosure is part of a retirement account such as an individual retirement account (IRA) and then sold for a profit, there are no taxes on the gains.  Should the foreclosed property be rented out, the rental income is tax free.  With a retirement account, high yield real estate investing in foreclosures is a tax free way to profit.

While there are many ways to profit from investing in foreclosures, the most sensible way is passively investing for the long term.  The 4-6% returns predicted ahead for the stock market by Rob Arnott have been easily topped by Jerry Cohen with profits from foreclosed properties.