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The condo hotel model has always made me nervous – whether they are in Florida, Mexico, Brazil or wherever else. I prefer to source (and buy) properties where there is a local demand – by that I mean locals who can rent it and locals who can eventually buy it.
Both holiday homes and condo hotels are totally dependent on tourism to boost rental demand, and tourists can be very fickle (condo hotels in areas where there is no established tourist market are even more risky). I can understand that condo hotels will appeal to holiday makers – it´s basically the same as a hotel as far as they´re concerned, but where is the resale market? Nobody can say for sure as it doesn´t exist yet. Think about it - how many people have a bought second hand condo hotel rooms?
There are always 3 broad categories of people who can buy a property from you – locals, tourists and investors. Locals buy for personal use and won´t live in a hotel room. The majority of tourists will either rent somewhere nice (hotel or apt) or they will buy a holiday home. Investors will want cashflow, will look at exit markets before they buy and a real investor will be scratching his head trying to identify the type of person who will want to buy a hotel room from him in 5 years time.
In short, the rental income for condo hotels seems good, but the pool of people who will be interested in buying a second hand condo hotel room in the future will be both small and unreliable. Unless the rental rates increase dramatically, you´ll have to sell at a similar price to what you bought it for.
On the otherhand, if there is an oversupply or a drop in tourist demand, rents will fall and you´ll have to sell at a loss.
Regards
Colin
I was browsing through the housing statistics page of the Orlando Realtors Association recently (I know, my wife tells me I need to get out more too), when I noticed a very interesting PDF summary of sales activity in Orlando stretching back over the past 8 years.
I´ve put a download link at the bottom of this post, and if you look at the average sales figures for 2008, 2009 and 2010 – you can very clearly see prices declining very fast in 2008 and 2009 but holding extremely steady in 2010 (apart from a jump in Apr-June where people rushed to take advantage of an expiring tax credit).
For example, in January 2009 the average sales price was $190,243 which fell to $159,942 in December 2009. In contrast, the average sales price in January 2010 was $140,422 and the average sales price in December 2010 was $146,582. In other words, average sales prices in Orlando actually increased last year.
It is also no coincidence that Orlando inventory levels are at their lowest level in almost 5 years. They peaked at 26,330 in Sept 2007 and didn´t fall below 20,000 until May 2009. Throughout 2010 they held steady between 15,000–16,000 which hasn´t happened since early 2006.
That is an enormous recovery by any standard and these numbers will continue to gently decline throughout 2011. Spanish housing ministers would be moved to weep and blubber uncontrollably at numbers like these, but then again, they´ve probably better things to do than browse through the statistics page of the Orlando Realtors Association…
You can download the PDF containing all these housing numbers right here.
Regards
Colin
A very positive article on the Florida Tampa Bay coast was published earlier this afternoon in the USA Today. Please see main extract below.
Florida is a huge second-home destination. It seems to have something for everyone: secluded beaches and urban buzz, golf communities and marinas, high-rises and bungalows at prices from ultra-luxury to shockingly affordable. It’s also diverse. The mansions of Palm Beach are far removed from the beach towns of the Panhandle and theme parks of Orlando.
But if everything that Florida offers came together in one place, it would be on the coast of Pinellas County. This includes Clearwater and St. Petersburg, just outside Tampa. It’s known by other names, including the Tampa Bay Area.
“We call it the ‘Nature Coast,’ ” says Debra Nobile of Innisbrook Real Estate Services. “The east coast (of Florida) is all big buildings and parking lots. Here, everything is nestled among the trees. There’s more beach. It’s more laid-back.”
Anthony Jaquinto, a longtime Realtor with Re/Max Realtec Group, says the area has great appeal to part-timers.
“The second-home market is big, about half my business,” he says. “It’s because of the beaches and the country clubs and all the other amenities.
“The Tampa Bay Area has an enormous amount to offer. There’s a really terrific airport, and within 35 minutes, you can be at towns up and down the coast or in premier golf communities. We have professional football, baseball, hockey, a big downtown and lots of cultural happenings.
“It’s much more cosmopolitan than Jacksonville or the Panhandle but much more affordable than Naples or Palm Beach, and a lot more natural than the entire East Coast. There are so many choices and amenities, and it’s all very user-friendly.”
It even has major theme parks: Busch Gardens and Adventure Island.
In much of Florida, only the deepest pockets can afford waterfront. But Pinellas County — the strip of coast from St. Petersburg north to Clearwater and beyond — invites a wide range of buyers.
“There are more or less luxurious communities, gated or non-gated, condos, single-family homes and townhomes,” Jaquinto says. “The price range allows almost anyone access to the Gulf. I can show you a smaller two-bedroom condo right across the street from the water for $150,000 or penthouse apartments on Sand Key for $2 million. Whatever your purchase price, we can probably accommodate you.”
That’s more apparent since the BP oil spill in April caused jitters on Florida’s west coast, and prices for some listings dropped 5%.
Condos along the water begin around $150,000, and single-family houses, even those with boat docks, can be found in the low to mid-$300,000s. Inland property is even less. Condos in the area’s premier golf communities begin at just $100,000, Nobile says.
The combination of low prices, beaches and urban amenities attracts buyers largely from the Northeast and Midwest. Jaquinto says many properties are used just for spring break and winter holidays. Thanks in part to affordability, they are often rented out at other times.
Those who wish to take a closer look at the debt, deficit, GDP and employment situation in Europe could do far worse than browse through the BBCs terrific interactive graphical presentation.
It can be viewed on http://news.bbc.co.uk/2/hi/business/10150007.stm
Kind Regards
Colin Murphy
Director
Torcana Ltd
What type of properties do American tenants want to rent?
Is it easy to tenant a property?
How do I find out if a resort contains a lot of untenanted properties?
Calculating your net rental income / yield
Which developments are eligable for financing?
How do I know which developments are affected by foreclosures?
What is Home Ownership Association?
What are Property Taxes?
How do I know if the property is in a popular location?
What type of properties do American tenants want to rent?
Americans want to rent and buy large condos with 1 beds starting at 900 Sq FT, 2 beds 1050 Sq FT, 3 beds 1350 Sq ft, with good aspect, tall ceilings, new stainless steel appliances, new kitchen cabinetry, new carpeting and new tiling. They prefer relatively new concrete build apartments with 24 hr security in crime free areas. If your property does not display most of these attributes look closely at what is being offered. Do not look for immediate proximity to industry or job centres as Florida does not have many traffic jams and locals do not mind a 25 minute commute to work. The best rental and residential neighborhoods are not generally known or frequented by tourists.
Is it easy to tenant a property?
Do not believe an agent who tells you that a property can easily be re-tenanted should your tenant skip town. Finding tenants is hard work, and for some properties it can take a long time. It is true that some well known developments are 100% occupied with a waiting list for vacancies. However these properties cannot be purchased for less than $ 70,000.
How do I find out if a resort contains a lot of untenanted properties?
I often see a situation where unwitting buyers are left to re tenant their single property while the developer has 100 vacant properties with a rental agency in the clubhouse of the development – talk about David vs Goliath. Always ask your agent how many untenanted properties are there in the community and verify this information independently by using the lettings section of craigslist.com or ask an independent local letting agent for this information. In the US, this information is available to the general public.
Calculating your net rental income / yield
To calculate net rental yields and income effectively please make sure you take the following into account and verify it with the letting agent:
Price: Both contract price and closing costs
Rental Income: The actual monthly rental figure taking into account any incentives offered. Let’s say an agent tells you that the property is tenanted at $900 per month – sounds good. It’s not so good if the rental agent gave 3 months for free to the tenant to secure a quick letting - giving 15 months’ rent for the price of 12 = $ 720 per month .
Running costs: These costs are unavoidable in the state of Florida, please make sure you always factor them all in to your yield:
1. HOA (home ownership association) – costs of maintaining the communal facilities and reserves
2. Property Taxes: every building in the USA has to pay them
3. Condo Insurance : allow min $ 50 per month
4. Rental management: fees are generally 10% of total monthly rent.
5. IRS reporting: You are legally obliged to make an IRS (tax) return. My accountant charges $ 200 per year to do this.
Gross rental income – Running Costs
——————————— = Net Rental Yield
Purchase price + closing costs
Financing: In certain developments, getting finance for Americans is a lot easier than it is for foreign investors. Local buyers can receive an $8000 federal first time buyers grant and a 97% FHA mortgage (Federal Housing Authority) underwritten by the big two federal mortgage lenders Freddie Mac and Fannie Mae.
Fannie and Freddie have rating guidelines for lending. If your community does not have FHA mortgage approval this will usually indicate that there are some hidden issues in the development. These issues need to be discussed as they can have a dramatic affect on your resale market.
If there is no FHA Approval for your community some or all of the following criteria will not have been met:
- At least 51% of the total units in the project must be owner occupied.
- At least 90% of the total units in the project have been sold.
- No single entity owns more than 10% of the total units in the project.
- The project, including common areas, is complete with no special assessments and no legal actions pending.
- The owners association has a reserve plan and a reserve fund, separate from the operating account and adequate to prevent deferred maintenance
Foreclosures: Some developments have very high rates of foreclosures or short sales. All developments will have a few but some are devastated by them and the effect on the development can be felt in many ways: the running costs of your property could increase and the quality of the communities occupants can deteriorate. An American owner occupier will avoid buying in a very distressed development.
Home Owners Association (HOA) dues. A local buyer looking to purchase your property will look at the HOA cost. This payment is for the upkeep and maintenance of the community facilities, buildings, security and insurance. Some communities that were largely sold to investors with no money down, adjustable rate mortgages and a host of developer incentives are now in big financial difficulty.
When there are a large number of foreclosures and when owners are not paying their HOA dues, this can lead to a gradual downgrading of the services, amenities and rental potential.
In order to survive, the community will often levy a “special assessment” on the remaining owners, which could lead to HOA dues doubling from $200 pm to $ 400 overnight and destroying your rental yield in the process.
It is always prudent therefore to verify if there has been a special assessment in the past or if any are likely to be seen in the future. This question should always be put to the HOA directly, they are legally obliged to tell you the truth on this matter - ask your agent for the number of the HOA and call them.
Sometimes, when a great looking property is being sold at a low price it is because the developer needs to sell his remaining units before the resort collapses – a bit like a chief executive dumping shares in his company a few weeks before bad results are announced.
If you do spot a unit you really like, you can reserve it and make use of a Florida law giving you a 15 day right of rescission. This allows you to do your due diligence and review all the condo docs and the HOA / Condo Budget.
Property Taxes: Always verify the property taxes on the property you are buying. This can be done by finding what local county your property is located in and going to the County Property Tax Appraisers website and running a search on your exact property. It will give you all previous sales history and a lot of useful information on your property. This information is public and easily assessed.
Location: Do not look for immediate proximity to industry or job centers as in general Floridians have very little traffic jams and do not mind a 25 minute commute to work. Middle class Americans look to purchase in areas with very low crime rates near good schools, sporting facilities, universities, parks, recreation facilities, low key village/town centres.
There are many more things to consider when looking at purchasing in Florida so please feel free to contact us before you make the decision. These are just some of the questions Torcana ask and research heavily prior to bringing our clients the finished product.
Please feel free to email me directly on david.shaw@torcana.com to discuss further.
Kind Regards
David Shaw
Torcana Sales Manager
Many people (although hopefully not too many readers of these blog posts) can be forgiven for wishing journalists and commentators would simply shut up for a while about the trends in the housing and mortgage markets and concentrate on more important things like reducing unemployment and improving healthcare.
However, and whether we like it or not, the focus on the housing market needs to continue because it has direct links to many other industries and house prices directly affect consumer spending. Simply put, if people know that their house is increasing in value, they will tend to spend more money (and vice versa). In economic jargon, this is referred to as the Wealth Effect and it is very influential. The economic policy models of the Fed Reserve assume that a person whose house appreciates by $100,000 will increase his spending by the same proportion as a person who receives an extra $100,000 in stocks, shares and regular income.
Declining house prices also limit a banks willingness to lend money - not just for houses but also for cars, business start ups, holidays and general investment. Far too many people who should have known better lost sight of these forces.
Colin Murphy
Torcana.com
Next month will mark the 2nd anniversary of the credit crunch believe or not, and as Fiona Redden of the Irish Times has pointed out, this is as good a time as any to reflect on what lessons can be (re)learned. Among other things, she recommends a diverse portfolio, that we know when to cut our losses and take our profits, that we purchase a property based on predicted capital appreciation & rental income rather than add on incentives and that we always maintain a cash reserve.
Warren Buffet himself would be proud of such homespun wisdom Fiona.
Colin Murphy
Torcana.com
After a (very) long winter, spring seems to have brought a touch of sunshine to American house prices. The latest Case Shiller indices were released last week and they showed that average prices continued to fall in April 2009: the ten city index was 0.7% lower the 20 city index was 0.6% lower than the previous month. What’s interesting to me is that these are the lowest falls since June 2008. The case for those declaring the worst is over continues to gain momentum.
Despite continued pessimism in some quarters of the market, the statistics point to similar turning points in the UK; with Nationwide reporting price rises of 0.9% in June and the Bank of England announcing four months in a row of rising mortgage approvals in May.
Colin Murphy
Torcana.com
