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Investing In South Florida Real Estate

INTRODUCTION

Today’s investor is confronted with an unusually challenging economic framework. U.S. government debt has been downgraded and the U.S. is plagued by high unemployment, fears of a double dip recession, crippling regulation and gridlock in Washington. The Euro is in danger of collapse if not from an impending Greek default or its attendant bailout controversy, then from contation in Spain, Italy, Portugal, Ireland and possibly France. Recent reports indicate China’s economy is slowing which threatens the economies of the many countries with whom China trades. A significant Chinese slowdown would be a disaster for countries like Australia and many developing nations.

Within this context an investor must choose among difficult alternatives. U.S. fixed income or bond returns are at historic lows with U.S Treasuries of 5 yr maturities and shorter yielding less than 1%. The stock market has experienced enormous volatility with daily moves of 2% to 4% becoming normal events. Many investors are uncomfortable with exposure to volatility this great. Given the precarious status of the world economy, stock returns look suspect. Developing countries, which have performed very well, may be exposed to decline caused by the risks presented by the problems in Europe and China.

Clearly, there are many alternative investments that are offer excellent risk adjusted returns, such as high yielding stocks, MLPs and many others. Despite recent declines, precious metals and other commodities look like a good hedge and probably should be a component of a balanced portfolio, but are non-cash flowing assets. Therefore we believe south Florida real estate is a valuable component of a balanced investment portfolio.

THE OPPORTUNITY

Based upon our strategy it is reasonable to expect to be able to accumulate a portfolio of multi-family and single family rental properties in South Florida with a cap rate of 5% – 15%, dependent on the sector and property class. This portfolio may be capable of providing overall total rates of return (TROR) of 20% and higher in some cases.

The expectations of these returns are not dependent on an improvement in the Florida real estate market. They can be achieved by transforming non-performing, distressed properties into performing, reliably cash flowing assets.
These cash flowing assets can be held and/or sold to subsequent investors at lower cap rates thereby producing capital gains.

Value has been created by price declines to below 50% of replacement costs. and the ability to purchase rehabilitate and rent properties at a capitalization rates of 5% – 15%.

Capitalization Rate measures the annual cash-on-cash performance by dividing net operating income (NOI) by the combined cost of purchasing the property and rehabilitation expense.

NOI is defined as the effective income minus operating expenses.

The primary threat to realizing these returns once properties have been acquired at targeted cap rates is the ability to continue to rent them at the same or higher rents. Occupancy rates have increased in Miami-Dade, Broward and Palm Beach counties and are at 96.0%, 95.0%, and 93.8% respectively. With limited new supply under construction, and positive market fundamentals, occupancy rates are forecast to increase at least another 200 basis points over the next five years. The same trend is true for rents. In all three counties, market rents have increased, and by next year are forecast to be above the record high rents that were recorded in 2006-2007.

FLORIDA’S APPEAL

  • Climate, climate, climate
  • 1700 miles of coast line beaches for fishing and boating
  • Attractive life styles with year round outdoor activities such as golf and tennis boating and deep sea fishing
  • Low cost of living relative to the northeastern US, Europe and Asia
  • Plentiful, affordable housing

All these benefits will attract significant numbers of retiring Baby Boomers (10,000 are projected to retire every DAY for the next 19 years). In 2011, 33% of all the real estate purchased by foreign nationals in the U.S. was purchased in Florida and 60% of all the Florida real estate purchased in 2011 was purchased by foreign nationals. These are powerful demographics and support the case for strong future interest in Florida real estate.

There is no Florida State Income Tax. So someone earning $250,000 a year working in NYC and living in the tri-state area can save $35,000 a year by moving to Florida by eliminating the need to pay the NY or NJ State tax and NYC income tax – which combined are about 13%. They could purchase a $500,000 home and pay for their mortgage, property tax and homeowners insurance (PITI)) for a with the tax savings alone!

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