Florida Real Estate Returns

Florida real estate returns

It is all about the numbers, not the color of the kitchen or bidets in the bathroom. Real estate investing is not about what you like. It is about leverage, income and making money. The pros know it very well and over time you will realize it too. Once you understand this basic principle, and remove your emotions from the equation, you will be able to make a lot of money.

Reasonable Returns on Florida Real Estate Investment

Become a Legend

If I put together a portfolio of stocks that earned an average of 10% over the next ten years, the Wall Street Journal would be touting me as one of the best investment advisors in the business. I would become a legend and a regular on all of the financial talk shows. The irony is that just about any of you reading this article could easily make that and more with real estate. But, do not expect to be on CNBC any time soon.

Let's Get Real

Forget about the nonsense of doubling your money in two years. There was a brief period of time where the laws of the universe went wacky. But its over and the real estate market is very much in the grips of the financial physics that controls our financial world. But what does that really mean? How much can I expect to make?

I always tell investors that if someone guarantees a specific rate of return or claims to be able to see into the future, they should make sure their wallet is still in their pocket and run the other way. Nobody can tell you what the stock market, bond market or real estate market will be like in the future. It is impossible.

If you want something close to a guarantee, you can purchase a CD from your bank. Unfortunately, as if this writing, banks are offering rates of less than 2%.

If you are trying to recover from the beating your IRA or 401K got in the last few years, these returns will have you bagging groceries or greeting people at Walmart when you are 90.

Starting Assumptions

I think we need to come to a common agreement about Florida's real estate market.

1. The real estate market in Florida as in most parts of the country was over inflated and the prices on homes were totally unrealistic. It is highly unlikely that we will ever again see the insanity we witnessed in the last few years.
2. Due to the indiscretion of the lending institutions, the greed of the borrowers, banks and the dismal economy, you can now buy properties at absurdly low prices.
3. While they "good old days" are gone forever, once the inventories of homes starts to get sold off, the prices will rise. This is already happening. We are seeing homes get sold in days. In some cases there are bidding wars for homes.
4. There is an active and robust rental market. Homes and apartments in the "right" areas are renting very quickly.
5. Based on the current prices of property, you can obtain an excellent return on your investment through rental properties. This return is far in excess of anything else you can invest in. Plus, this is a relatively safe and conservative investment.

If you do not believe the above assumptions, then why are you investing in real estate?

Realistic Returns

I talk to investors that make 20% or more on their rental properties. How can they do that? They bought homes that needed a little work in marginal neighborhoods. These are not slums. I think a better description would be "working class" neighborhoods. The homes are generally selling for under $150,000.

These investors did a little "fixing up" or rehabbing and are now collecting steady rents. Some of them are Section 8 housing and the government is paying them.

Others set set their sights on more modest returns. They know that fixed income securities will only pay a few percentage points. When they see an opportunity to receive 6%-8% of steady income PLUS appreciation, they are very pleased. Generally, these properties are in ready-to-move-in condition in better areas. With appreciation, the returns can easily be closer to nine or ten percent.

I want to use a few real life examples to illustrate:

Example 1

A few weeks ago my investor friend had a duplex for sale in a blue-collar neighborhood. It needed appliances and some cosmetic work. About $6,000 would make it very rentable.

The two units would rent for a total of about $1,600 a month. If you figure in taxes and insurance you would probably net out around $1,000 a month, maybe more.

He sold it for $70,000. If you had $76,000 into it after fixing it up, you would have a return of about 14% as a rental.

As it turned out, the person he sold it to did not even close. He quickly sold it to yet another investor for $79,000. Was it a good deal for this next investor? Sure it was. He will rent it out and net around 13% on this investment. The original investor made nearly 13% in a few months.

Was this an oddball transaction? No, this is actually a very ordinary occurance.

Example 2

Maybe you do not want a house or anything that requires work or much maintenance. So, you look to a condo rental. We get into condo rentals in another article, but here are some actual numbers.

We have a completely refurbished, converted building in a very nice area where the units rent for about $1,100 a month. The taxes and maintenance would bring the net rental to about $600 a month. The units sell between $80,000 and $90,000. This is a return of between 7 and 8 percent before any tax advantages. By the way, these apartments sold for over $200,000 about three years ago.

Let us take it a bit further. If we use an extremely conservative appreciation rate, we might project that the unit would be worth $10,000 more than the purchase price in five years. Believe me, that is a very conservative number. That would change the return on this investment to over 10% a year. Again, I am being very, very conservative. I want to keep this real.

Is this a mind-numbing return? No, it is not. But this is an upscale neighborhood that has a shortage of rentals. The building is very clean and well maintained. It is what I call an extremely conservative real estate investment. Remember, this site is about Conservative Florida Real Estate Investments. Sure beats the 2% or less CD return.

Remember, you can use the money in your IRA or 401K to buy investments of this type.

What About Short Term Buying and Selling? Can I Still Do This?

At the height of the real estate madness, people were buying homes with almost nothing down and selling them before closing. Some people made a lot of money and others got caught with homes that they paid way too much for.

We take a somewhat conservative approach to flipping homes. What does this mean? Let me put it in bullet point format for you.

  • While it is possible to put a house under contract and resell it with very little cash, we do not work this way. I would be glad to point you to a special course you can take that will teach you how to accomplish this.

  • We come across properties that are very undervalued. After doing a little research we find that the homes can be quickly resold for a profit. The seller does not have the luxury of time and needs to get out immediately. You need cash or a hard money lender that would permit a fast closing.

  • Some homes require a little TLC. Mostly cosmetic work, perhaps some new appliances, etc. Afterwards, if you bought it for the right price, you can resell it for a fast profit. Even more extensive rehabbing can be done in a month or two.

  • No matter what happens, we want to be sure that any property you buy can be easily rented out at a favorable return on your investment. This leaves you holding all the cards. If you cannot resell it in the time you want to, you can rent it and sell it later on. Sometimes another investor will want a house that is already rented and producing income. Or you can do a lease option and sell it to the renter.

How much can you make? A gazillion dollars. Again, I don't trust people that tell me how much I am going to make.

Most of our investors earn between 7% and 12% on income properties. More if you include appreciation. Some make a little less and some make a lot more.

I have seen investors make $80,000 on a $150K investment after cleaning up a house, doing some rehabbing and reselling it. On the other hand, I have investors that will make $5,000 in a few days and are very happy doing so.

Bottom Line

Real estate will give you a better return with greater safety than anything else I can think of. It is the only way I know of that will allow you to repair the losses you might have taken in the stock market.