I am biased on this subject. I love investment real estate that puts off cashflow. Cashflow from real estate is a great way to build a solid retirement. I live in Florida and that market has been hammered since 2006. Values have come down 70% in a lot of markets while rents have only declined about 30%. If you had bought at the peak of the market in 2005 more than likely smaller properties would have had negative cashflow (i.e. you would need to put money into it every month). Those same properties today are returning unlevered (i.e. without debt) 12% to 20% returns based on cashflow. If you finance these properties today the returns are incredible, that is if you can find a bank that will loan you money on an investment property in Florida.
There are quality 3 bedroom/ 2 bath houses that sold at the peak for up to $240K that are now going for as little as $50K. There are even some going for around $25K but they tend to be in rougher neighborhoods and need extensive renovation to make them inhabitable, unless you really want to be a slumlord.
Large Properties Smaller Returns
While single family and small multiunit properties (2-4 units) have become very attractive in their yields, large apartment building returns have improved only a few percentage points. At one time during the boom the large apartment buildings were commanding a premium because large investors would buy the properties and convert them to condos. They were able to make more money flipping the properties on the condo market than taking in rents, thus they artificially drove up the price of these apartment buildings. These condo flippers were caught out in the great bust because they tended to use a lot of debt to finance their condo conversions. They were over exposed and quickly failed in the market debacle that started in 2006. Banks took back a number of these properties and put them on the market for a fraction of the price they sold for only a few years early. The new buyers are mostly professional investors that demanded a solid cashflow based return.
These sophisticated investors have concentrated mainly on the larger properties because it is easier to manage 1 property with 50 units than 50 individual single family homes. This has taken a lot of the big money out of the small property market. Normally smaller properties return less than larger properties, because there is more competition and less economies of scale. The exact opposite is happening today in a number of markets in Florida. A lot of the lower end middle class properties only have investors bidding on them and not potential homeowners. The potential homeowners have difficulty with getting financing because of the poor economic conditions that permeate the Florida market. There are also a lot of potential homeowners that are shunning real estate all together because fear from the destruction in home values that they witnessed over the last few years.
Conclusion
You can try and wait for the market to start showing signs of value stabilization, but you might miss the incredible cashflow opportunities that are happening today. Eventually the market will wake up to the value that is out there. I rather have the market woken up after I had already purchased a handful for myself.
Full Disclosure
I own only 3 investment properties today, all office space. I am planning to purchase some investment real estate (i.e. single family homes or duplexes) once I have enough down payment money in the coming months.
No comments:
Post a Comment