Orlando Property: Due diligence I performed on a low income neighborhood
Let me describe one of these lower income communities that came across my desk recently. I did some basic due diligence and number crunching on it. On first glance it looked like a solid Orlando property - a gated community with swimming pool, fitness center, children´s playground etc. Units ranged in price from $38,000 - $45,000 and net yields were 7-10%. Many of Orlando´s main hotspots were within a 15 minute drive.
What´s not to like?
Plenty as it turned out. The HOA reserves were hopelessly inadequate to maintain the facilities and the building structures. Almost 50 of these units were in foreclosure or short sale with asking prices way below what was being offered to me. Average household income was one of the lowest in the city and the crime rate was very high. Most of the leases of the tenanted units had expired or were about to expire. Driving around and through this neighborhood was like something out of The Wire, a gritty TV show based in Baltimore.
Perhaps you´re not too bothered about the condition of the property as long as it´s generating a 10% net yield? I mean, it´s not like you´ll be asking your mother to spend the summer there minding the kids right?
However, you might want to consider the following: the rents will decrease because there are too many vacancies, your HOA will increase because too many people aren´t paying their monthly dues. Your repair bill is going to be high because the properties are nearly 30 years old and these tenants are much more likely to break stuff than those renting in a wealthy neighborhood like Dr. Phillips /Bay Hill. You will also have vacancy periods every single year due to tenants regularly leaving and/or refusing to pay their bills on time.
In other words, that +10% net yield can turn into -10% quicker than you can believe. After all, we´re only talking about +/- $4,000 per year on a $40,000 property.
As for capital appreciation? Forget it. You would do well to sell a property in this community for the same price you bought it for in 5 years time. That doesn´t include the stress it will have caused or the hole it will burn in your wallet every year with those negative cash flows.
Because Torcana would like to continue doing business with you in 3, 5 and 7 years time, we refuse point blank to move down the food chain. This model just doesn´t suit buyers who aren´t local experts and most of our clients live a long way from Florida.
If we don´t have an Orlando property available in a decent middle class neighborhood for $70,000, we will promote something in a high class neighborhood for $140,000 instead. It´s a higher purchase price, but it´ll be a big property in a prime neighborhood - i.e. you get what you pay for. It will also be a hassle free purchase that will provide a reliable income and sell at a handsome profit in years to come.
For full details on the real estate offered by Torcana Ltd please visit www.torcana.com