Investment Property 101: Long term rentals
Anna Maria Island – Bradenton: Reasonable housing is the key for high ROI and Safety
With interest rates at historic lows, we are often asked what kind of real estate suits best for investment purposes. Besides the Vacation Rental market, which we consider the ideal hybrid between investment and excitement for aspiring Floridians, long term, i.e. annual rentals, are an excellent investment into Florida’s future with an excellent ROI compared to a regular bank or stock investment.
Just to give you some background information. My name is Axel Weiss, I am German by heritage, have my MBA degree in real estate, financing and taxes, so some call me an economist by trade. My wife and I came to Florida more than 20 years ago and are working as real estate brokers ever since.
We grew up with German virtues, savored German business culture and with the diligence of a prudent businessman. We always think of the opposite side at a time. When the markets are going down, we see opportunity. When markets are going up, we love the gains but take precaution to be prepared for the worst. As a result, we could steadily grow our company, pretty good during the recent recession and excellent afterwards. When others suffered we saw an opportunity. How? Because we were prepared. This is what we want to share to give prosperity to our friends and clients.
What has this to do with housing?
History is a good teacher despite it never repeats itself.
Well, before the last recession everybody built homes bigger than before, mostly financed to the max with no income potential. Just because the market could only go up. Ok, that was the thinking. Others financed out any appreciation for a sweet life. Life like real estate must be set on a solid foundation, not on a bubble.
It’s easy to make fast money with real estate, it needs a plan to keep it
So once the bubble came to a halt, even before it consequently burst, these dreams started coming to an unfortunate end for many. We helped clients with Short Sales and that time while it was a great opportunity for others.
What is reasonable housing?
People first lost their investment homes, later they were forced to move out of their own homes which they couldn’t afford. Many suffered, were laid off and later tried to reset themselves. Those who still could afford a place to live ended up in reasonable rental housing. Reasonable rental housing?
Now this scenario sounds desperate and as I said history won’t repeat itself 1:1. Today the situation is different.
Interest rates are near record lows. Europe is discussing negative interest rates. Money is floating into Florida. So how to prepare for retirement and the future?
Let’s define reasonable housing: I see it as an apartment in a multi-family house or a single family home which provides all necessities to live for tenants. Fully functional, no luxury. Not at all run-down, nice and functional.
The key requirements are a safe area, close to potential jobs, ideally close to public transport and infrastructure and within a prospering but price wise reasonable area. Forget the bells and whistles. A pool is awesome and pure luxury. Tenants may love them, but only without substantial pay. So you won’t get any ROI for that.
We clearly prefer the most flexible sizes of housing. Therefore, the ideal scenario for any landlord is 2 earners with no dependents. Since life is not always ideal, we take that into conclusion and stay flexible. However when going to far off, the more dependents, the higher the chance of default. So at the end, the additional expense for more space does not pay off.
Result: 2 bedrooms, 1 bathroom for an apartment, 3/2 for an SFR.
It needs to be kept up functional and can be improved when the market goes up by doing small investments. Variations are okay, but the goal is to keep focused. E.g. a 5 bedroom SFR is not the target for a maximum ROI and you potentially run into problems in a down economy. A 1 bedroom might pay off during desperate times but is hard to rent when people are prospering.
Now let’s come to economic scenarios – which economists like I, do whenever possible: They show there is only one housing sector which cannot permanently lose regardless of the state of the economy. The economy is doing okay, good, excellent or burst. Doesn’t matter: Reasonable housing.
It is no question, everybody is doing better when the economy is great. However, the key to success is to have a survival plan when the economy is declining. This is the time when people are in danger of losing everything.
The 3 economic scenarios
1.) If the economy is doing really good or even better, more and more people will move to the area because of new jobs. Others move up. Example: Construction, service jobs and such. Those people are not heavily paid.
—> Reasonable housing (rents rise) due to great demand and money floating around.
2.) Economy is okay, some do well, some not so well. But people grow up, move out of their family homes. Some lose their own homes and have to rent and downsize.
—> Reasonable housing (rents are steady) and people pay their bills.
These first 2 scenarios are easy to handle with all kinds of real estate investments.
3.) Economy is burst. People lose homes and struggle. They need a place to live.
—> Reasonable housing (rents are declining to a point, evictions happen the more expensive the rent is).
However, rents for reasonable housing tends to have a bottom because demand is rising for small rental properties constantly when people lose their unaffordable homes. The math is:
Reasonable housing vs. mansion
#1: Let’s say a 2 bedroom, 1 bathroom apartment in a duplex. Monthly rent now in good times is $900. Maybe you may be forced to reduce in difficult times to $650. That’s 30% or $250. Maybe even to $500 in order to avoid any vacancy. Management fee is 10%.
Landload expenses (without mortgage, i.e. just tax and insurance): $1200 annually, i.e. $100 a month. Finally, take another $100 for budgeted repairs and you end up having still a good contribution.
These kind of apartments run at about $65000 to $80,000 cost per unit on average. Let’s take $75k.
So in good times you have a ROI of just shy of 9.8%. In bad times: 6.1% positive.
#2: Now take a nice house, we call it “the Mansion”. Not a real mansion just a nice home.
It rents for $2,500. Only very few can afford this rent expense during bad times. In consequence, it takes longer to find a tenant and you need to adjust to $1,500 or $1,200. But your expenses are much higher. If the tenant goes in default you have vacancy for 2 or 3 months.
The purchase price is $300k.
Good times: 12 x $2,500 = $30,000 income
Expenses: $2,500 tax and $2,500 insurance. Budgeting: $300 a month: $8,600 annually
Bad times: Income: 9 x 1,200 = $10,800 annually.
The ROI in good times is 6.1%, in bad times 0.3%
So with any financing in place you will run into difficulties with the mansion pretty fast but you still make money with the reasonable housing. And in good times, you even make more money that way.
Cash is king
Of course, property values go up and down with the economy, but as long as you can pay your mortgage (if you have one) you won’t have a pressure to sell in a down market. You can still collect your rents and pay off any obligations and build a fortune. Therefore, it is essential to figure numbers.
A Mortgage can be worth it
Depending on your financial situation a mortgage for any investment can be helpful. Bottom line is, when making 8% net profit, a 4% mortgage is a good deal. However mortgages come with some drawbacks. First, many sellers prefer cash, because it’s faster, simpler and easier. So some deals might not work out. In addition, the closing costs are inflated by mortgage broker fees, appraisal fees and such. Sometimes properties do not qualify for a mortgage because of small damages. If the seller does not cooperate, the deal might be dead before it begins.
Rule #1 for prosperity: Keep your primary residence free and clear whenever possible.
Rule #2 for prosperity: Take a mortgage if the math works out for an investment.
Don’t let the best deals pass you. Buy a few properties cash and take a 50 or 60% portfolio loan after investment once good rental income can be proven. The rates won’t be bad.
Then take the already earned income together with that loan to buy more properties cash if mathematically feasible.
In today’s world the banks need to be thankful if we (the people) consider taking a loan. Don’t put yourself in the position of a petitioner. Banks may want you behave like that, but times have changed.
There is one very important assumption in this scenario:
The area of your choice must have a long-term demand. Any dying area is a no go place.
Others may say, Bradenton vs. Detroit.
All statistics show this is the case for Southwest Florida with the Baby Boomers retiring over the next decade or two and more people getting sick of bad weather. Europeans are trying to get their money out as well.
Sun, sand and surf is what people are looking for. Bradenton and Anna Maria Island prices are reasonable and the ROI is pretty feasible.
By the way, this also applies for Florida vacation homes. ROI on Bradenton and Anna Maria Island vacation homes is pretty good as well and they have a good rentability. Vacation homes, at least the smaller ones, can also be rented long term when there is a necessity. Just an almost as good investment with a fun factor.
Sea to Sky Realty
The Florida Real Estate Company with the GERMAN Twist!
Axel and Bea Weiss
Bradenton, Florida 34205
(941) 866 1666