Is Florida a Paradise for Investors?
Investing in Florida Real Estate – lucrative and rewarding – if done right.
“My problem lies in reconciling my gross habits with my net income.” Errol Flynn (1909 – 1959)
Definition of ‘Investment Property’: “A real estate property that has been purchased with the intention of earning a return on the investment (purchase), either through rent (income), the future resale of the property (appreciation), or both. An investment property can be a long-term endeavor, such as an apartment building, or an intended short-term investment in the case of flipping (where a property is bought, remodeled or renovated, and sold at a profit).” investopedia.com
When the going gets tough
When life gets tough further north and freezing rain is blanketing the streets and walkways people start thinking about options. Other options, different options or maybe better choices? Some people only buy a place in Florida and stay for good. Other people buy a vacation home and travel back and forth. Some people purchase a home, use it at a particular time and rent it out during the remaining time. Those are some of the “options.”
Yes, and there are also investors who have no intention to use the property at all personally. Maybe only for a brief period once in a while? Now we have more options. However, investors are more focused on the purchase price, income, expenses, appreciation, and return on investment after resale of the property. There is also a nice side effect: to manage the investment properly, most investors like to come down to Florida occasionally to check out the progress of their investment. How awful! Everything has a downside, right?
The answer is pretty simple: Florida is one of the most attractive markets in North America with almost 300 days of sunshine, a sub-tropical climate and temperatures averaging yearlong 80°F/27°C.
Florida is also an international hub thanks to excellent infrastructure. Numerous international airports are serving South and Central America, Europe and the rest of North America. Dynamic cities and leading industries attract businesspeople, young families, retirees and tourists from all over the world.
Florida is also the second largest tourist area in the world
The state’s tourist attractions, such as Busch Gardens, Kennedy Space Center, Sea World, Universal Studios and Disney World, and the famous white beaches attracted a record number of 105 million visitors in 2015. There are fun activities for everyone to enjoy. Simply relaxing at the beach is one “activity,” others are jogging, water-sporting, golfing, horseback riding, playing tennis…you name it, the sky is the limit.
There is more going on in Florida
Many towns in Florida offer vibrant entertainment, some of the world’s finest shopping and international eateries. If Florida were an independent country, it would have the 20th largest economy in the world. Growth has been especially strong in business services, tourism, trade, transportation, aerospace, education, healthcare, construction and, of course, real estate. The American economy and the housing market, in particular, is still having a rough time, but it is getting better every day.
The 2008 recession hit the Sunshine State hard, and Florida is still digging her way out of a deep hole. Therefore, Florida is not for those impatient investors looking for a quick return on their investment property. Nothing is happening over night. A little patience always helps.
Real Estate in Florida
Momentarily, prices for properties in Florida are in general still affordable. However, they are on the rise again – slowly but steadily prices are creeping up. At the same time, inventory is pretty low. Buyers are facing a market with not too many choices. Will we see prices like in 2008 when a rusty garden shed sold for $400 000? Probably not. This generation of homeowners/buyers has (hopefully?) learned the lesson.
Oversupply and under-supply
The real estate market is suffering from oversupply in certain areas (like Miami) and under-supply in other regions (Sarasota). These issues will probably resolve itself over time and the upswing for investors, who accept the risk now, will be substantial. One of the most attractive qualities for those looking for Florida property investment is its unique tourist-driven rental market.
Long-term, short- term rental
For investors who want to invest in short-term rentals Florida is ideal because of the many tourists who hate to stay in hotel/motel rooms. But there is a substantial long-term rental market in the Sunshine State as well. Baby-boomers are retiring in huge numbers, and quite a few want to live in a warmer climate like Florida. Some Boomers got hit pretty hard by the recession and simply don’t have the financial means to buy a home in Florida. If they want to feel the sun’s warm rays on their bellies they have to rent a place – at least for the cold winter months. There is a new trend as well: a significant number of people does not want to own property anymore. They now feel more comfortable keeping their cash in their bank account. They can always rent their new home instead.
So, what are the options a serious investor is facing?
Real estate can create returns in only three ways, rental income, tax deduction and appreciation of the property. To achieve your goal you needs to get all your ducks in a row first. You have to make decisions, decisions, decisions – and do them with a lot of thought. The key term to long-term success when investing in real estate is the location. The chosen area will later determine the type of person who will be renting or buying the property. You want to buy the right property in the right neighborhood on the right street, and this requires local knowledge.
Europeans see the word through a different set of eyes
Tourists from Europe like gated communities with pools and tennis courts. They have watched far too many Hollywood thrillers on TV, and now they believe that a bad guy is waiting for them behind every dark corner. They want to be safe and not sorry. Therefore a gate or a beautiful condo/resort complex is their choice. They want to be close to the beach and shopping also, otherwise they won’t pay top dollars (or would rent the place at all). Since your investment model requires that you rent out the property while you wait for the expected increase in value, you will need professional property management to keep the property occupied and problem-free, which will cost you money again.
Return on Investment
ROI is one of the magic formulas measuring the success of the investment. The price of the property, the incurred costs, the rental income and eventually the sales price are critical parameters. Costs, however, come from many different sources. There is the initial purchase cost, annual property taxes, insurance, HOA fees, CDD fees, upkeep/repairs, and renovations.
All that glitters is not gold
At one point you will probably sell the property – and this sale will add other costs again. When some investors talk about making a whopping 300% return selling their home, they often make the error of just subtracting the purchase price from the sale price of their investment while blocking out all the costs in the middle. What happened to the insurance costs, property taxes, HOA fees, and that new A/C for $7,800? The new roof? The new dishwasher? Did it all vanish into thin air? Being a serious investor is not that simple! Be honest with yourself. If done right you can make a decent amount of money with your investment in Florida, but not everybody will become a billionaire.
Now, let us dig a little deeper. Where is the money?
A primary reason for investing in real estate is the preservation and possible enhancement of the capital invested. Furthermore, a real estate investment may build up additional equity through tax reduction. Under the current tax code, the income derived from the rental of real estate can diminish the income tax liability substantially if done right. All expenses like management fees, property taxes, utility costs, repairs, maintenance, advertising, bookkeeping, and interest paid on the real estate loan are deductible.
Combined with the depreciation deduction, it can effectively reduce the gross income derived from the rental property. However, investing in real estate is not all about tax relief. Fundamentally, all investors seek a profit on the money they spend, right? The income generated from the tenants’ rent should pay for all the fixed and variable expenses, with enough remaining to show a return on the investment.
Keeping the Golden Mean
Real estate investments offer relatively higher yields than most other types of investments. Better leveraging opportunities, more interesting income tax-sheltering strategies, and higher degrees of personal control are additional advantages of an investment in real estate. Before an investor gets too excited about a potential investment, he should take some time and do (or let do) some serious research.
The sky may be brighter, and the sun may shine almost every day in the Sunshine State, but when it comes to investments, the rules are pretty much the same all over America. Let us use a business model very common in Florida. Because there are millions of tourists looking for accommodation, it is a profitable investment in certain areas to buy a property and lease it to sun seekers on weekly or monthly terms.
There may be rules that can sour your business model
Another business model would be renting it to snowbirds on a long-term basis (3-4-6-12 months). However, the number-one issue an investor is facing in the Sunshine State are the deed and subdivision restrictions. Those restrictions are covenants that run with the ground. Once recorded they remain in effect for 50+ years or until changed through a time-consuming and costly legal procedure.
Be aware of any “restrictions.”
Therefore, each new owner buys “subject to” the restrictions, and, most important, the restrictions supersede any zoning restrictions on the property. The developer usually establishes those subdivision restrictions on all of the lots in a new subdivision to maintain their homogeneity of use as well as the value. The HOAs (home owner associations) need to enforce the restrictions strictly, and they will not be afraid to sue those who do not observe the requirements.
Don’t try to fight the HOA
If the rules and regulations of a particular HOA state that short-term rentals (1- 3 months) are not allowed – they are not allowed even if the zoning would allow such activity. There are many subdivision and condominium associations in Florida with very strict lease restrictions! Some of them do not even allow rentals at all – only family can stay.
If an investor buys a property in one of those stricter communities thinking that he can somehow circumvent the rule – he will easily find out that he is in hot water. Under no circumstances will he be allowed to lease his property. The HOA will close down his business with severe penalties. And they have to. If not enforced over a given period of time the regulations could be ruled as non-existing by a court.
Whom do you want to attract?
The community profile is another important parameter for a successful investment. The investor should determine the following carefully before buying a rental property: The neighborhood economy is a major factor. Is the economy thriving or in bad shape? Are there many other rental opportunities in the area? What is their occupancy rate? Is the market already saturated? What about ransportation and utilities (Cable TV, public water/sewer, sidewalks, street lights)? Are there neighborhood facilities (Parks, playgrounds, theaters, restaurants, etc.)?
The successful investor also needs to examine carefully the physical characteristics of the property he is going to buy. The initial image or initial impression created by the building is of considerable importance to the prospective tenants. Age, style of the property, as well as the condition of walkways, landscaping, and overall exterior appearance are an important factor. However, the interior of the building is not less important. Layout, the number of rooms, closets, bathrooms – and the view – are important for the future tenants. The short term renters (tourists) are usually more picky than the long-term tenants.
Keep an eye on the expenses
The investor also needs to keep an eye on the operating expenses, of course. Taxes, Insurances (rental is a higher risk); upkeep, repairs, and renovations are not priceless. If a rental/management company has to do the job another expense needs to be added to the cost sheet as well. Summary: An investor who is interested in the relatively high yields offered by real estate in Florida will have to sacrifice a certain amount of safety and liquidity and be willing to take a more active role in managing such an investment. Needless to say, there is always risk involved in real estate. Therefore, it is crucial to know that investing involves decision-making: a choice of what you should buy and when and where you should buy.
“Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.” James F. Byrnes (1879 – 1972)