Property in Florida: What experienced investors really look for
As a company who is constantly researching and sourcing deals, it is always tempting to latch onto the property with the best headline price and rental yield.
For example, if I emailed a promotion with "14% rental yields from $50,000" in the subject heading, a lot more people will open it compared to another announcing "7% rental yields from $80,000".
In this blog, I´d like to discuss property in Florida (or anywhere else) with low prices and high rental yields. This can be a toxic mix and the risks are often misunderstood.
While our sales team would be delighted with a "14% rental yield" the simple truth is that high yields are directly proportional to the level of risk involved. A buyer who chases the highest possible initial yield will neglect to consider several critical factors that determine the true profitability of his/her purchase.
Experienced investors don´t make that mistake, and there are many scenarios where they will deliberately choose a lower yield for a higher quality property.
Experienced property investors generally look for the following:
Predictable and stable returns
Renting to stable professionals in full time jobs earning above average salaries is the best way to ensure a continuous and hassle free income stream. People outside of these categories tend to move around more, which leads to vacancy periods.
It is much better to earn a modest but consistent rental income compared to a volatile rental income that varies sharply from year to year. In other words, it is preferable to earn $7000 every year, as opposed to $9000 some years and $5000 other years. The reason is simple: it is very difficult to plan future investments if your income stream is unreliable.
A well maintained community
It makes sense to pay more for a property in a very well maintained community (such as Notting Hill in Orlando, pictured right). This creates a lot of stability for the landlord as unexpected expenses and tenant turnover will be much less frequent. An unplanned increase of several hundred dollars per month in your community (HOA) fees can wipe several percentage points from a rental return.
While some aspects of a well maintained community are easy to spot (no rubbish, trimmed grass, freshly painted exteriors, clean swimming pool and clubhouse etc.) others take a little more investigation. For example, the roofs on all the buildings need to be replaced after 20 years, and if a reserve hasn´t been built up, all the property owners will have to pay a lot extra to get it done.
Neighborhoods with a low crime rate and a high average income
Very often, the highest yielding properties are located in lower income neighborhoods. This happens because the purchase price is proportionately much lower than the reduced rents available. For example, in a two star neighborhood, you could buy a property for $50,000 which will rent for $700 per month. That is a 16.8% gross yield. In a four star neighborhood, you could buy a property for $80,000 which will rent for $900 per month. That´s a 13.5% gross yield.
While 16.8% sounds better than 13.5% on paper, it is worth noting that properties in two star neighborhoods will have higher crime rates, higher unemployment, higher tenant turnover and higher repair costs. Not exactly a recipe for a stable and hassle free income.
Tenants in lower income neighborhoods are also much less willing to absorb rent increases - so you´ll have to suck up any increases in the running costs yourself. An extra $50 per month is a lot of money to someone on the minimum wage. On the other hand, people earning comparatively higher salaries who are happily renting in well maintained communities can and will absorb regular rent increases.
If your property is empty, you are losing money. It´s that simple. Real yields come from stable tenants.
Lower management fees
You may not notice it at the beginning, but the small print in every management contract will contain additional fees to oversee a property with high vacancy rates and high repair costs.
A professional investor will pay more to own a property in a well maintained community that attracts tenants with high credit scores to protect who are able to pay higher deposits. Tenants like this have more skin in the game and are much more likely to take care of their property. This is a virtuous circle that leads to lower vacancies, much lower management fees and a higher annual income.
A property in Florida with these characteristics will always sell for a premium in the long run.
For full details on the real estate offered by Torcana Ltd please visit www.torcana.com