Following a horrific third quarter, many investors are now focusing on income producing investments and the Miami housing market is at bargain levels. It is time to consider buying an investment property in Miami?
Miami attracts a wide variety of investors and the majority over the past few years have been an international bunch with cash that have been taking advantage of a weak dollar. Some investors aim for properties that produce rents at 1% or less of the purchase price. For example, $1,500 a month in rent for a $150,000 condo or home, or an annual gross return of 12 percent. Today, some of our investors are actually realizing as much as 2.5% yield of the purchase price per month.
However, this rental yield actually provides an average return of 4 to 6 percent of the purchase price as investors have to account for expenses and real estate taxes. Considering that the Dow Jones Industrial Average just finished the third quarter down 12 percent and that the S&P suffered an even bigger decline, this return is clearly above what equity investments yield.
Purchasing an investment property in Miami requires expert help and a tremendous amount of due diligence. You have to remember that owning an investment condo can be expensive, management intensive and challenging.
Here are some common miscalculations Miami property investors make:
Underestimating repairs and rehab costs – Many investors underestimate the extent and nature of the repairs required to offer an acceptable product to renters. Mold, inefficient air conditioning units, wood rot, insulation, and shoddy window treatments are common issues. Often what appears in good shape on the surface may be a nightmare lurking beneath.
Assuming you will rent out the property immediately – Renters tend to show up at the last minute and they want the property to be turn-key and “move-in” ready. If you place an unfinished or dirty condo on the market, they will simply move to the next best available.
Ignoring key expenses – It is not simply a matter of knowing the potential rent, monthly maintenance fee and estimated annual real estate taxes. Investors have to also factor in closing costs of 1.5 to 3 percent, the expenses to fix up and maintain the property, property management, plus any holding costs while vacant.
Exit strategy – Having a clear and defined exit strategy is key to owning investment property. When and how do you plan to exit the property? When you exit what is the assumed sales price less your selling expenses? How will you market and sell the property? Will financing be available to potential buyers?
Opportunity costs – In real estate, time is one of your biggest challenges. Properties age and can rapidly deteriorate if not adequately maintained in Miami’s tropical climate. You also lose money when your home is vacant, and managing and marketing an investment property is very time consuming. Hiring a competent and reputable local property manager is a key ingredient.
Owning an investment property is the same as owning a home – This is a common misconception that investors make. Tenants will not put up with maintenance issues like you will in your own property. Many communities also have certain ordinances in place that may restrict your ability to freely rent your property.
Condominiums pitfalls – While the investment condo may have an ocean view, did you consider that the monthly condo fees of an oceanfront condo can be extremely high? Although the monthly condo fees may appear manageable, does the condo association have reserves and are there any upcoming or current special assessments? Has the building cleared and satisfied the 40-year re-certification?