Florida Real Estate

[Packer16]

What are boards thoughts on purchasing Florida residential RE for a vacation spot or a long term investment.  Clearly there is cheap financing and the market is depressed.

 

Packer

[ragnarisapirate]

First and foremost, just how depressed is the real estate market in Florida?

 

From my own perspective, a lot of what you should be willing to pay would depend on the rents and utility that you think you could get... say, you can fix the mortgage at 5% for 30 years, and gross, say 50K in rent, which, once you take into account fees for real estate services, repairs and such, will leave you with, 5K, 10K, or even 15K. What is that worth to you? Additionally, would you want to go to the same place for vacation for a significant period of time (or, use the proceeds to go elsewhere). What about budgetary issues that the state will probably end up facing? will that hurt the long term value of the house?

 

I would advise you to be be mindful of where you go to buy. My family likes to vacation in the area surrounding Port St. Joe and, maybe 6 years ago rented a placed called "the Bayou Belle". By Port St Joe, I am referring to the place with the paper mill that Einhorn hates- which I tend to agree with; the town is super shitty, but, the beach is relatively secluded and nice. What if St Joe does develop a ton of houses down there? the additional supply could really hurt you. But I needn't digress from my story. :D

 

The specific house we rented for the week was a nice vacation rental, called "The Bayou Belle", which was named for the bayou that was, maybe 50 feet from the house when we were there. My brother and I noticed an aerial photograph of the place which was probably 5 years old at that time- the bayou was probably 150 feet away from the house. Last summer, when we were in the same area, when strolling along the beach, we noticed that the bayou had, quite literally, gone through edge of the house, which, took out one of the decks AND walkway that went directly to the beach... The place had to have a bunch of concrete pillars installed, and honestly, I don't see how there wouldn't have been a bunch of settling throughout the thing (which is really unfortunate, since the whole thing had tile floors). I would be scared to buy anything close to that house for anything close to a "fair market price"- which says a lot, considering the types of project houses I have been willing to buy in the past. ;)

 

It's all about weighing options, goals, and risks. As a rule of thumb, I wont even think about touching a house (even for me to live in, as a residence) if I can't get it for 100 months worth of rental payments. My last house, was bought for 60 months rent, and the one before that, 30 months rent. Though, I will also caution that with this thinking, you often times shy away from what are traditionally referred to as "growth properties", which, may be what you are going for in Florida, and would price you under what the market is still at.

 

Here are some pics of what I was talking about with the bayou belle.

 

New pics of the outside, which, strategically hide the bayou (apparently, they recently added a new walkway)

http://www.homeaway.com/vacation-rental/p213457

 

Here is an old pic, with the old walkway.

http://www.flipkey.com/properties/view/110295/bayou+belle/

 

here is a google map, you can see in the sand where the bayou has moved... from the middle, to the far left.

http://maps.google.com/maps?oe=UTF-8&q=port+st+joe&ie=UTF8&hq=&hnear=Port+St+Joe,+Gulf,+Florida&gl=us&ll=29.684441,-85.285674&spn=0.002792,0.006539&t=h&z=18

[ericd1]

Packer,

 

I'm sitting in Hilton Head Island SC thinking the same thing. Using numbers from Zillow.com the price of the average property on HH dropped from $603k to a current $323k. Because HH is one of the primer east coast vacation destinations I believe a lot of the carrying costs could be offset with rental income. It's not a slam dunk, but I think property returns here could exceed the market over the next five year to ten years. If I were ten years younger I'd lever up and give it a go...That said we bought a property here this year.

 

Any ideas on how I could raise $25-$50M for a property investment vehicle?

 

As to FL RE, I think a vacation destination or resort area property (i.e. close or on the ocean) would do better than other areas.

 

 

 

[SmallCap]

Eric,

 

what kind of rental income could you get on a 323K home in HH and do you have any idea what the RE taxes and insurance would be?

 

SmallCap

[ericd1]

SmallCap

 

"It depends" -- $323K would buy a nice two-bedroom condo/villa. $500-600k for nice house walking distance to beach and $4M for a very nice beachfront home!

 

If the condo has a good rental history you could get 15-20+ weeks of rental ~$15-20k, taxes ~$1.5k, ins ~$1.0k. You would also likely have association/condo fees $300-400/mo and then there's rental agency/housekeeping/maintenance. 

 

The p/l and roi obviously depends on the size of the mortgage!

 

The downside to the rental program is you are limited to 14 days per year for personal use.

 

 

 

 

[biaggio]

"The p/l and roi obviously depends on the size of the mortgage! "

 

I think one should look at ROI by dividing net by cost of condo...in this case return could be $7500 divided by $323000. I think you should make decision on the total cost + how much return you will get

 

I would have a cut off of 10%. In other words I would demand at least 10% return before tax or $32000 after expenses you mentioned.

 

Even with a 10% return, you have to think about the odd headache when the roof leaks, dishwasher breaks down etc...I have been there + I did not think it was worth it.

 

Oh, you can also expect your condo fee/associate fee to grow in the future as well

[ericd1]

I don't think most RE investors would look at the total price vs net to determine their returns. It could be a back of the napkin analysis, but the actual return depends on the net profit (after all expenses including interest expense) compared to the amount invested. While it is true most expenses will go up, so will rents, yet the interest expense is usually a fixed expense, which at today's rates is pretty attractive.

[biaggio]

I don't think most RE investors would look at the total price vs net to determine their returns. It could be a back of the napkin analysis, but the actual return depends on the net profit (after all expenses including interest expense) compared to the amount invested.

 

Exactly. Most do a "cash-on-cash" calculation because there is almost no money to be made in real estate without the use of massive amounts of leverage.  If you are doing all cash purchases, you'd be insane to deal with the headaches of real estate when bonds/equities offer similar returns but are 100% passive.

 

I understand your points.

 

I think most RE investors look at cap rate to judge if price is reasonable. To me minimum cap rate has to be close to 10%. With low interest rates you can otherwise fool yourself into thinking you re getting a great a deal.

 

Best point IMO is that "you'd be insane to deal with the headaches of real estate when bonds/equities offer similar returns but are 100% passive."

[Guest dealraker]

I agree that Florida vacation property is a very difficult place to invest and make it work.  All kinds of issues.

 

Still, today I have a pretty crafty friend, a self-made scrapper with a few million of net worth, who has a bid in on a 4 bedroom waterfront home.  It has its own pier, boat ramp, pool, patios (covered ones too), etc.  Appraised for $775,000 in 2007 (rediculous) and he thinks the 90 day process is about up on this short sale propery and that his bid of $125,000 is going to be successful.

 

It has an in-law suite where he plans to stay and he says he'll rent out the 3 bedroom part.

 

With deals like this around St. Joe and its new property out back just looks a long way out.

[SharperDingaan]

 

Use a 5yr fixed rate mortgage, & you're really hoping that either 1) the market rate in 5 yrs is lower/same as it is now 2) inflation takes hold in a big way, 3) the rental income increases dramitcally (rate/week, or more weeks rented), 4) or there are minimal upkeep costs over the holding period that will not change much. To achieve it you're willing to go back to the same place for each of 5yrs.

 

1) & 2). If refinancing costs go up significantly (european 1st half 2011 debt roll-overs crowding out the market), the NPV will materially decline unless there is significant offsetting inflation in house prices. Very high inflation may eventually happen ... but most people would expect a time lag untill it does occurr - & if you cant hold until then you're dead.

3) & 4). Additional rent would be primarily because you to rented more weeks, vs more rent/week -& unlikely to occurr for at least 2-3 years - people need the money to spend, & everyone else in your area has to have allready rented out their extra weeks. One significant repair bill & your property could give you a negative carry cost.

 

Why be another seller when everyone else is also selling - isn't it better to be the buyer & have the flexibility to go wherever you want? If you want the investment why isn't a REIT with a geographic concentration in the area not a better choice ? (liquidity, positive income, diversified risk, etc.), & why would you not you roll in over time to exploit the expected rate increases that will drive down the REITs price?

 

SD 

[SharperDingaan]

"Still, today I have a pretty crafty friend, a self-made scrapper with a few million of net worth, who has a bid in on a 4 bedroom waterfront home.  It has its own pier, boat ramp, pool, patios (covered ones too), etc.  Appraised for $775,000 in 2007 (rediculous) and he thinks the 90 day process is about up on this short sale propery and that his bid of $125,000 is going to be successful.

 

It has an in-law suite where he plans to stay and he says he'll rent out the 3 bedroom part."

 

Your friend is hoping to get the property at a low enough price such that most of the cost of ownership is what he/she would otherwise have paid out in shelter costs for him/herself. He/she can afford to wait a very long time for house inflation to occurr. If he/she is willing to live there year round, & can actually do the property management side they will seem to do very well.

 

Then ask yourself how many mom/pop motel/B&B owners do you know, who 10 yrs later, would probably have been better off ($ &/or quality of life) if they had never bought the place to start with? And didn't they all see a similar business logic? Your friend may not be considering all the relevant metrics.

 

SD

 

 

[rmitz]

I agree that Florida vacation property is a very difficult place to invest and make it work.  All kinds of issues.

 

Still, today I have a pretty crafty friend, a self-made scrapper with a few million of net worth, who has a bid in on a 4 bedroom waterfront home.  It has its own pier, boat ramp, pool, patios (covered ones too), etc.  Appraised for $775,000 in 2007 (rediculous) and he thinks the 90 day process is about up on this short sale propery and that his bid of $125,000 is going to be successful.

 

It has an in-law suite where he plans to stay and he says he'll rent out the 3 bedroom part.

 

With deals like this around St. Joe and its new property out back just looks a long way out.

 

I'm not in a position to do the research, but that kind of money would be tempting just to have a vacation place on the water.  Plenty of trouble in upkeep though.  That might just get a crappy lake house around here.  I wouldn't view it as an investment though. 

[Guest dealraker]

My friend if far different from me.  I wouldn't touch it even at his price.

[hyten1]

dealraker, wow 125k for a beach fromt property! i would like to get one, where is this specifically in florida?

[Guest dealraker]

hyten,

 

Although I've heard him talk about it at two parties now till I'm well-versed on some of the details I for the moment can't recall where.  Asked my wife and she can't either.  It is on the west coast middle of the state on a bay.  He's toured quite a bit of the east coast there.  One other thing I have had drilled in me is him saying: "There are 60 thousand homes in this county (or whatever entity it is) and 12,000 are in foreclosure."

 

Who the hell knows?  I'll ask him again.  We just looked at a map and I still can't recall.  Age I guess.  I think the reason I can't remember is that I'm really not interested in his conversation except to be stimulated by his enthusiasm about it all.  He and his wife are real scrappers.  They wake up thinking making money and go to bed discussing it.  Not my style of life- but they love it.

 

 

 

[Myth465]

The more I think about Realty the worst it looks. I love REITs but with personal or commercial realty you need massive leverage and price appreciation to really make money. Stocks dont call with broken toilets.

[ericd1]

I'm not a fan of RE, except REITs, for all the negative reasons mentioned, but I do consider myself a value investor. With that thought in mind along with "buy when there's blood in the streets" I think it is a terrific time to buy real estate. But not just any real estate. Personally I believe resort, vacation, waterfront property will do better than most anything else. There are some terrific deals out there, but you have to be a "scrapper" like the guy in FL making a low-ball bid on a nice property. He may just get the deal!

 

Using rental income to defer expenses and lower the cost of ownership is a good reason for some folks to think about making the plunge. I have two friends that have recently picked up distressed real estate and are doing just that. One in South Fl, the other in Las Vegas. Both got attractive foreclosure properties from banks at what appears to be really good prices and so far have had good success in renting them out.

 

 

[ericd1]

Interesting article in the WSJ online today...

 

"Market for Vacation Homes Is on the Rise"

 

Basically said number of sales are up quite a bit, but for most areas prices are not...

 

Excerpt...Still, in most markets where demand has improved, prices haven't. For Realtor Andy Twisdale in Hilton Head, S.C., it is too soon to rejoice; prices are down almost a third over the past five years. "People are buying at the very low end of the product," he said. "The financing is very difficult. Banks are requiring 25% down and crystal clean credit."