1100 Millecento, BrickellHouse and myBrickell on the Brink of Selling Out
August 7, 2012 by Lucas Lechuga
I realize that I run the risk of sounding like your typical salesman, but it must be said - "This market is hot!". Over the past nine months in Brickell, three pre-construction condo developments - 1100 Millecento, BrickellHouse and myBrickell - were launched. I was made aware yesterday afternoon that only 20 units remain available for sale amongst these three developments combined! That represents 2.1% of their combined 948 total units. Only two units remain at 1100 Millecento, 8 at BrickellHouse and 10 at myBrickell. The first two projects haven't even broken grounded yet. If that's not hot then I don't know what is. Before anyone starts to chime in with bubble talk, we need to keep in mind that all three pre-construction developments require a very large portion of the purchase price to be paid long before closing. In the case of 1100 Millecento the buyer will have already paid 50% of the purchase price by closing. BrickellHouse and myBrickell are virtually immune from default risk with the buyer required to pay 70% and 80% of the purchase price, respectively, by closing. Like I said - This market is hot!
View all Brickell condos
just beacuse you have to put down 50% cash does not mean it is not a bubble. Are these end users for are these buys speculators, hoping to flip as soon as they can? I said it before that miami real estate goes through bubble to bust cycles. Congradulations, we are in another bubble, I am just waiting to see how long this one last and just how it ends. Has anyone heard from Joe lateley? Now is the time for him to chime in about how there are no good paying jobs to support the increase in rental rates we are seeing. Joe were are you, how about Renter Tom, now is the time to chime in with your thoughts. Timing is everything.
Even if they aren’t end users it’s very hard to form a bubble when you’re paying cash. Typically these speculators would be putting down a modest deposit. These guys are paying 50% to 80% of the price of the unit essentially financing the construction of these units. So in effect they are being presold to a buyer with cash.
Sure that buyer may simply want to rent it out, but even if he doesn’t find a renter at the right price that isn’t going to cause any bubble to burst. For example let’s say you buy a unit hoping to rent it out at $2800 to get your expected return. Then when its all said and done you can only get a renter at $2200. Sure that is going to affect your return but it’s not like the guy who bought it cash is going to get foreclosed on when the unit is essentially already paid for.
That’s a lot different than buying the same unit with a $50k deposit only to find that once you get to closing the unit is worth $200k less and therefore you can’t even get a mortgage.
Besides which the demand is much more than what is currently in the construction pipeline. If getting construction financing wasn’t so difficult you would see double the number of projects right now. Skyline is a good example. Outside of Swire who simply has an ungodly amount of cash, the only projects moving forward are the ones with Developers like Related who have contacts with S. Americans where they can finance the construction with deposits.
The vast majority of the downtown condos are filled with working professionals. I’m mot arguing that Miami is a hot job market but were only talking about 22,000 units, when the downtown area is home to over 200,000 jobs. For example there are plenty of medical professionals that live in my building and they take the train to Culmer station and work at Jackson. There is simply more demand than there is supply. I could move out my unit today and it would be rented at a higher rate than I’m paying in less than a month.
Joe was deluding himself that pricing were going to stay flat if not fall further and that when he was ready to come back to Miami he was going to somehow be able to get a new unit for $200/SF or less. Now that it’s completely obvious that won’t be happening there’s not really much for him to say.
lol, licking their wounds i guess.
Gixx,
I respectfully disagree with your assesment.
Many of these people are foreign buyser and that fact that they paid cash for the building does not mean that the will not sell if they find better way to deploy the money. If anything as a cash buyer they have more flexibality when it comes to dumping the units. Say I buy one of these condos for 500k expecting to rent it out for 3k/mo and I am happy. Now lets assume 4 years from now financing for these builders loosen up and there are several more buildings online and 3k/month is now down to 2250 and I find that I can buy 2 condo for 400k in the next hot spot in South America. What makes you think these foreign cash investors won’t cut and run. If they are smart they would dump this unit take a 100k loss and buy the 2 units in s. america. All I am saying is that as a cash investor I have way more flexibality in selling. I will be willing to take a loss if I know i can make it up on the other end or if I get fustrated with being a landlord.
Well I guess we’ll disagree. Your assessment is the opposite of what I see when dealing with our investors. People who tend to pay in cash are not searching for high returns. If they were then why would they pay cash when they could easily just put in less money and get a higher return from leverage? Sure it would be more risky but that comes with the territory when chasing high returns.
People paying cash are simply looking for a safe place to park there money for a while, and in most cases they certainly don’t need. If a guy drops $500k cash on a condo and its worth drops a bit most likely they are just going to sit tight. Why pull out at $400k and take a guaranteed $100k lost only to go and try to make up that money somewhere else.
Especially when were only talking about a few percentage points on you’re return. It’s not like the investor thinks he going to rent a unit for $2800 and then find out he can only rent it for $500. A few hundred dollars in rent isn’t going to make much difference.
It’s a lot different than someone taking out a mortgage for 80%+ of the property. If the rental rates aren’t enough to cover the mortgage or worse yet they cant even get the mortgage then the HAVE to foreclose. I’m sure plenty of people who got foreclosed on or who lost their $50k deposit would have liked to have the capital to hold on for a couple years and not lose their money.
Going into a bubble in the next let’s say 5 years is extremely unlikely because we simply don’t have enough supply. Here is the supply of new units over the last few years:
2004: 2,272
2005: 1,951
2006: 2,215
2007: 4,500
2008: 10,111
2009: 306
2010: 530
2011: 346
I expect that financing will eventually open back up even then it’s going to be a while before we open back up to a point to where we’re even adding 2,000 units a year on a consistent basis.
Given the nature of supply/demand, the lag in construction, political system, permitting process, etc. we will undoubtedly have another bubble. So I guess you could argue that if you’re not bursting you’re always in the process of building another bubble. But that is more like a decade out which would put it at least 15 years since the last bubble burst. Under if the best optimal conditions there simply isn’t any way to build enough units. You would need Citicentre, Resort World, Miami World Center, and various other projects all being built at once. And it’s obvious that isn’t happening.
Most likely My Brickell finishes in 2013, Brickell House and 1100 Millecento in 2014 and Citicentre in 2015. That’s about 1400 units over the next few years. Anything else planned is likely to come 2016 or later.
All the other projects are spread out. Coconut grove, South Beach, Sunny Isles Beach, Aventura, etc.
you are talking about investors, as soon as they see the grass greener somewhere else that where they will move their money. A person with a mtg is usually tied to the community by friends, family or a job. foreign investors are not. You said “People paying cash are simply looking for a safe place to park there money for a while”. If prices drop they will be the first ones out beacuse they want to preserve cash, If rental rates drop, taxes or HOA rises too much or even too many bad tennants I am willing to bet they will look for other places to invest the money.
I don’t understand how you can say it is not a bubble forming right now. You have a market where most of the buyers are foreign investors paying cash for expensive condos which will not be used as a primary residence. Prices are approaching that of the peak bubble period. Projects were selling out quickly during the bubble peak too and many people had the same argument you have now that there is not enough supply to meet demand.
wow, I butchered that up. My apologies! I would like to blame my computer for the misplaced text.
MMT,
You seem to be missing the bigger picture. In the run up to the last boom prices were trading on SPECULATION. Meaning there was no proven value to the pricing it was just at $XXX per square foot because another unit sold for the same amount. So when the speculator got stuck holding the investment when it didn’t go up in price like he thought he had no one to rent it to in order to cover the holding cost so he was stuck and had to foreclose.
But now investors are buying the units CASH based on prices that can be sustained by current rental prices. Worse case scenario these guys get stuck holding a unit that isn’t generating cash flow. They’re still not losing money.
In order to be a bubble prices have to be inflated based on speculation. If a unit that cost $400k has carry cost of $2500 and renters are willing to pay $2500 for that unit then how can there be speculation? The pricing is being set based off the market.
Now if the investors started buying the same $400k unit for $600k knowing that renter will still only pay the $2500 but they’re hoping prices will go up $200k in a year then that would be a bubble forming.
Pricing is by and large being set by renters and the investors buying units to rent to them. This is why Ace and all the other fools who thought pricing would drop lower were wrong because the rental rates are market value and therefore are the floor. The only way that pricing drops is if rental prices go down, which isn’t going to happen. Worse case scenario is that rental prices STOP going up 10% and level off.
And saying that my argument is the same as the last bubble is ridiculous. The last time they were building 10,000 condos a year with NO ONE renting in them. Now were in a scenario where ALL the condos are rented and there are no place for new renters to go.
Gixx – “In order to be a bubble prices have to be inflated based on speculation. If a unit that cost $400k has carry cost of $2500 and renters are willing to pay $2500 for that unit then how can there be speculation? The pricing is being set based off the market.”
Ha, Don’t follow your logic! This IS the defination of speculation.
why spend 400k to break even every month. What investor do you know that is willing to risk 400K for a 0% return? If that is the case why not buy us tresuries, make a small return and not have to deal with tennants who might damage your property, not pay rent or sue you. The investors buying today at these prices are definately speculating on higher pricces or higher rentals. I see I can’t convince you so I will agree to disagree with you.
Speculation: the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends.
“Ha, Don’t follow your logic! This IS the defination of speculation.
why spend 400k to break even every month. What investor do you know that is willing to risk 400K for a 0% return?”
They’re assuming there is going to be some price appreciation. If you buy at $400k and your breaking even, then when rents go up 3% you’re now making 3% not 0%. Then when you go to sell you have to assume that the value of the unit is going to go up as well. Maybe 3% – 4%, maybe more. So you’re not getting a 0% return. This isn’t speculation this is just trying to value an investment. They are looking at the underlying value of the investment (RENT) and trying to profit off of that. Now thinking the price will go up 20% in a year not because rent is going up that much but because you think there will be a short term fluctuation in the market would be speculation.
“If that is the case why not buy us tresuries, make a small return and not have to deal with tennants who might damage your property, not pay rent or sue you.”
The 5 yr treasury is at .75%, as in less than 1%. These investors are assuming that if they are going to hold these investments for 5 years they are going to make more than .75%. Even if they end up with a 4% return they will be doing much better than investing in the treasury.
And most of them don’t deal with tenants. They simply hire a property manager and treat it like any other investment. It’s not like the tenants are actually calling or dealing directly with these guys.
I guess we’ll agree to disagree but if you think a investor assuming a piece of real estate will appreciate 4% and that rents will rise 4% in line with inflation is speculation then your logic is way off.
“I guess we’ll agree to disagree but if you think a investor assuming a piece of real estate will appreciate 4% and that rents will rise 4% in line with inflation is speculation then your logic is way off.”
We have had one year of price appreaciation and 5 years of decline, how do you come up with 4%? I do consider that speculation when you add in other factors like the smart Investors bought back in 2009 and 2010 when the numbers made sense. There is also a thing called price resistanc and affordability. Will the renters continue to recieve 4% wage increase, will there continue to be 4% employment gains in that demographics. Are the Hospitals in the area Jacskon and UM adding employees or reducing Headcount, you said many doctors and healthcare professionals rent those condo. Speculators will blindly factor in a 4% appreciation in price and rental rates. A smart investor will dig deeper and look at other factors that may affect his return. Who are the current buyers going to sell to if prices are to increase 4% for the next 5 years? The renters living there right now can’t afford to buy with these record low rates, are they expected to be able to afford the houses when the prices have gone up and interest rates rise as well? Maybe there will be another bunch of savy cash investors ready to pay the inflated prices. We’ve been through this alrady and it wasn’t that long ago.
Brickell condo rents rise as early buyers sell
By Marilyn Bowden
Demand is pushing up rental rates in Brickell’s residential condos, even as some of those units begin to trade.
“It’s getting harder to find a good rental at a good price,” said Alexandra Goeseke, an associate at Cervera Real Estate. “The good ones are going quickly.”
Brian Carter, a broker at Majestic Realty, said even through the summer, generally considered the offseason, rates are competitive and rising.
“I rented a townhouse for $1,850 a month two years ago,” he said. “Today, it’s renting for $2,100 — a 13% increase.”
In general, these rental units are in the condos from the most recent wave of construction, which came to market from 2003-’10, said Alan Gabay, a broker-associate with Zilbert Realty.
“The older ones had a different business model,” he said, “targeting snowbirds and full-time residents. The newer condos have smaller apartments but beautiful amenities, and were built to attract a young, urban clientele.”
But the recession forced a different dynamic. Developers, left with large inventories when presale buyers could not get financing, sold units in bulk and at deep discounts.
“Those buying were investors driven here by discounted rates,” Mr. Gabay said, many of them foreign nationals also attracted by the devalued dollar.
“South Americans and Europeans are used to paying cash,” he said, “and are happy with a lower cap rate than North Americans are used to, so these deals were very attractive to them.”
Five years down the road, he said, “pricing has come up and rental rates have come up. Most of these buyers had a five- to seven-year exit plan, and we are now seeing a lot on the resale market.”
Others, Mr. Carter said, are re-evaluating how long they want to hold their units, with the expectation of prices going higher.
“Some owners who live in their units and are no longer underwater are deciding to sell,” he said, “but there are many who are saying that if they hold on, they may get a better deal later.”
With financing restrictions gradually loosening up, Mr. Carter said, the buyer profile is changing.
“I see more and more local buyers and buyers from the Northeast stepping in,” he said.
“It’s hard to define an exact demographic,” Ms. Goeseke said. But it’s clear, she said, that financing is becoming easier, though “buildings with a good reputation at the bank get financing more easily than the ones with mortgage fraud issues.”
Having a sitting tenant is not necessarily an impediment to selling a unit, Mr. Gabay said — and can even be an advantage, since investors like having a source of income in place.
“It’s rare that tenants are being asked to move out when the unit is resold,” he said.
Renters, Mr. Carter said, are “local students, professionals and others relocating from the North for business or from abroad. I recently did a rental for a specialist from Israel coming over to work at Jackson.”
Ms. Goeseke and Mr. Carter said they’re starting to see some renters buying their units as they come on the market.
“As lending opens up over the next couple of years,” Mr. Carter said, “and as the credit of potential buyers improves, many tenants will convert into buyers. This process is just starting as people find funds to make that purchase and see prices still low but increasing.”
In most instances, though, Mr. Gabay said, “it’s not the renter in the unit who is buying now.
“It’s not that they don’t want to, but most renters are recent graduates or in their 20s and 30s, and the qualifications for getting a loan are a challenge for that demographic. But we would see a lot of them convert if banks would open up a little bit.”
So far, he said, renters are not being priced out by escalating monthly rents.
“There are always studio apartments or units on lower floors with lower rates,” Mr. Gabay said, “or they can get roommates.
“And because basic cable, Internet service, parking, gym membership and so on get thrown in to the package, they can put those expenses towards the rent.”
MMT, Usually I agree with you but you have no clue about foreigners+Miami. They are not just investors. They are emotionally tied to Miami be it South Americans, Canadians or Europeans. Why do you think all the foreign money came into Miami flats and not Las Vegas flats when there are better deals there and and still are? Simple: They don’t care about Las Vegas or Torremolinos or Sitges where you could buy a gorgeous condo in the Sun for less than Miami. That is the reason why Miami bottomed out in 2010 a full 2 years before rest of America bottomed out.
You do not want to argue with me on this one. I predicted back in 2008 that foreigners will gobble up every last Miami flat by 2012. I never ever made such bold prediction regarding Vegas or any other place.
I agree with you wholly. I am the one who constantly argued with joe that miami was/is a special place and that the rules that apply to the rest of the country does not apply here. I also suggested to those interested in buying should have done so in 2nd quarter of 2009-2010.
My problem is that now prices/rents have appreciated quite a bit to the point were they are almost back to the point where this mess started. The article gixxer posted says many of the early investors have already sold out at a hefty profit. now we have new Investors in the market hoping to sell to the greater fool. May I post this question to you and gixx. how much rent can the 20 30 year old single professional that currently occupy these apts afford, 2k, 3k or 4k per month? at what point do they say I am better off taking something a little further out and pay less. Remember just a few short months ago there weren’t enough renters to fill up these ghost condos then prices droped and they came. Now prices are up significantly, do you know how renters will react? Will they continue to shell out for the higher prices and less space? I don’t know the answers to those questions but what I do know is that when prices were high the places were empty then prices got lower and they got filled up now prices are high again what happens next? Can you make financial projections based on the rapidly changing dynamics we have seen in the past 4 years?
4% is a very conservative number. Inflation is in the 2% to 4% range range over the past year. You can’t have inflation at 3% and rents not going up because inflation is based on among other things housing cost increases. You basically taking concepts that you don’t fully understand and trying to make arguments based upon you layman’s interpretation.
How can rents be back to where this whole thing started when this whole thing wasn’t based off of rents????
In 2008 ICON was selling at $700 SF. That would mean an 800 SF one bedroom would cost around $550k. So carrying cost on that unit would have been over $4000. However at the time you could probably rent that unit for around $2000. The pricing had NOTHING to do with rental rates and was trading purely on speculation that the price would continue to go up.
Now in 2012 Icon is selling for less than $500 SF That same 800 SF one bedroom can had for $370k. So the carry cost for that unit are probably around $2500 and that same unit can now rent for about $2500.
“May I post this question to you and gixx. how much rent can the 20 30 year old single professional that currently occupy these apts afford, 2k, 3k or 4k per month?”
Right now the average rent downtown is $2,100. And not only are all (96%) of these condos filled, but you basically have to get on a waitlist for the many units. Arguing for a 4% increase in rent is pretty much a given. Were talking about an average rate of $2,184 next year and $2,271 the year after that. I don’t know where you’re getting $3k and $4k from. These peoples salary are going up by at least that much. I know I’m basically the young professional you’re talking about. I’ve been taking 7% rent increases the past couple of years. I expect that to level off and drop BACK DOWN to 4% to be more in line with inflation. I’m talking about EXTREMELY CONSERVATIVE numbers.
“at what point do they say I am better off taking something a little further out and pay less.”
And where exactly are you talking about. Head out to Coral Gables and rents are almost just as high. People aren’t going to move out of Brickell to Kendall to save a couple hundred bucks. Again were only talking about 22,000 condos. There are clearly more people that can afford to be in these downtown areas then there are available units.
“Remember just a few short months ago there weren’t enough renters to fill up these ghost condos then prices droped and they came.”
Once again you have the story wrong. A few years ago there was essentially nothing in Brickell. So why move into a neighborhood where there is nothing there but a nice unit and pay a high price to be in a ghost town, with no restaurants, nightlife, etc. So they dropped the rental rates to BELOW market prices to entice people to come since they obviously couldn’t sell the units. Better to make 75% of market rental prices than nothing. So then everyone one moved in for the cheap rates. But as the units filled up then restaurants, dry cleaners, bars, etc. popped up to support the new influx of people. Once occupancy got up to the 60% – 70% range it wasn’t just a bunch of nice buildings and had become a desirable neighborhood. So they started raising rents considerably and kicking out the people who could barely afford to be there. Then it only got even more desirable and is now 96% full. There were always enough renters to fill up these units its just that 5 years ago these downtown neighborhoods weren’t as desirable.
Average rent was $1700 in 2009 and it’s now $2,100. That’s about an average of 6% a year increase. Again I’m scaling that number back to be conservative. Then you have add in the fact that things are still drastically changing for the better.
So I’m not making projections based on the rapidly changing dynamics of the last year. I’m using assumptions that have been in place for decades. Housing appreciates at about 4% of the long haul. I’m probably too conservative for areas like Brickell which will probably appreciate a lot more than that.
Love affair is a better word to describe than emotional ties to Miami. My bad.
Well, a friend of mine just left the Luxurious 50 Biscayne and moved back to a rat infested Sobe hovel (exaggeration). The unit got sold for a nice profit and these renters had to move out. I have no idea how long this will last. But I can say one thing. It will last for a while.
Just got back from Mary Brickell Village on a weeknight. It is not even a Friday or a Saturday but there are Traffic jams, packed, jam packed bars and restaurants all around. It is as busy or even more busy than Lincoln road which has an unfair advantage of added tourists. That says a lot. Once you get used to all these conveniences such as walk to Publix, LA Fitness, Metro Mover, Metro Rail, 100 bars/restaurants you never want to leave. Somehow you will keep ponying up the cash until you reach some breaking point.
But as Gixxer pointed out, there are just 22,000 condos here and 200,000 jobs in downtown (2/3rd of them might be low paying jobs). That is still a lot of people who can afford to live and play and work here even with the increased rents.
BTW rentals range from a high of 70% in buildings like Quantum to a low of 50% in buildings like 1800 Club. So an average of only 60% of these 22K condos are available for rent. That is why the rents are going up and people used to this wonderful life are reluctant to leave. At least for another couple of years.
AJ,
I agree with you here. The people who are renting downtown are people who would otherwise be renting in places like Miami Beach. For the same money you can get a bigger unit, in a better building with more amenities, better parking, etc. In 2007 they would to have given up on living in a great neighborhood. However in 2012 that is no longer the case. And what is there now is only the tip of the iceberg. Mary Brickell village is only about 200,000 SF and that is with a publix. Citicentre is going to have 520,000 SF of retail. And that doesn’t include all the new condos that are going to have retail on the ground floor. There is talks of a Books & Books in 1100 Millecento, a Meat Market in Brickell house, and 1101 is supposed to have a couple floors of retail. Then Cabi is trying to do vertical big box retail (think 5th and Alton) at the old Capital site. If people think the area is popular now with a Publix, Restaurants and bars, think how its going to be when you add movie theaters, bowling alleys, a book store, and real shopping including a department store.
Although I slightly disagree about the breaking point. Sure at some point you’re going to have push back against rental increases, but it’s not like people people who are paying $2,000 rent are going to wake up say I’m only paying $1,000 or I’m leaving. That’s not how it works. Right now average rent is $2,100. Most likely when the lease is up the landlord will try for a $150 increase. Right now they’ll probably get it because if they don’t they can always not renew the lease. In which case they’ll be able to put a new renter in the unit in less than month. So even if they lost the $2,100 for a month, that’s only $175 a month over a 12 month lease. Bringing in a new renter at $2250 and they’ll make that money up over the life of the next lease.
Now at some point they aren’t going to be able to move another renter in the unit at the higher rate within a reasonable time frame. When that happens the rental increase will drop down closer to 3% to 4% range. The renter is still going to pay some increase because even if they could find another place that rents for the exact same price (or even slightly less) it’s still going to cost more for the renter in moving cost than simply paying a 4% increase. Especially when their wages are going up by about the same percent.
The only way you’re going to get less than 3% rental increases is if a) you have massive amounts of new building in which case the new units lower their rents during their lease up period, b) the area is on the decline and people are moving out of the area or c) you’re in a recession where wages are going down.
I’ve already laid out that because of the restrictions on financing were not going to have a large amount of building in the next 3 – 5 years. The area clearly isn’t on the decline as there are more people moving to area. And were coming out of a recession so wages are either going to be flat or growing for a long time to come. 3% rent growth on the low end and 7%+ growth on the high end.
I’m sorry gixx,
I don’t know how this discussion got so off track. I will take the bame for that. I thought you said that anyone can get a 12% return without even trying, in a recent post? Now you argue 4% retrun on 400K cash investment in Miami condo rentals is not speculation but a good investment. Ok, I’ll take your word on that, where do I sigh up? There is a saying that when you are a hammer everything looks like a nail. I’ll leave it at that.
I just came across this in this from a recent discussion
“Downtown Miami/Brickell is a nice place to live. Right now rents are in the $2.00 a sf range. So a typical 1200 sf 2/2 is about $2,400. Most people are currently renting at about 30% of income. For rents to get to 60% of income rents would have to essentially double. There is NO possible way this happens. People would immediately move out to places that are close with less rent. There are a lot of average new buildings up near 20th and biscayne on the west side of US-1 with rents 20% cheaper.
Then on top of that every developer in the world would be building rental buildings to capitalize on rising rents. Once all those units get built the supply would increase and prices would start decreasing. Miami isn’t like other European countries where their cities are already built out. Downtown/Brickell still has acres and acres of VACANT land.”
The above quote summarizes my argument perfectly but it wasn’t my quote this quote came from you (gixxer1000). I guess the only thing I am saying is that 60% is not the level which you agree%. My thinking is that maybe that number is around 40-45% and I believe many renters in the Miami area are spending more than 30% of take home on housing. I could be wrong, but this is just based on discussions I have had with others.
Because you don’t work in finance you are confusing a lot of arguments. The 12% cake walk return I was referring to was a leverage return. That is to say a return when you are using leverage (credit, debt, etc.). Leverage obviously increases you’re return because you are getting access to the same income with less money. Here we are talking about an investor getting a cash on cash or unleveraged return.
Let’s say I bought a condo for $400k CASH and I charge $2500. I’d probably have to pay about $650 for taxes and another $550 for HOA fees. Take out another $200 for property management and maintenance and that means I’d make about $1,100 a month or about $13,200 a year which I’ll grow at 4%. Now let’s say the unit appreciates at about 4% a year so I can sell it for $486k in 5 years. I’d have to take out 6% for realtor fees on the sale. So without looking at taxes to keep the demonstration simple you’d have:
Year 0: -$400k Purchase of unit
Year 1: $13,200 income
Year 2: $13,728 income grown at 4%
Year 3: $14,277 income grown at 4%
Year 4: $14,848 income grown at 4%
Year 5: $472,282 income grown at 4% + sale proceeds minus realtor fees
IRR = 6% This would be you unleveraged cash on cash return.
Now let’s look at the same scenario only this time instead of buying the unit cash lets get a mortgage for 80% of the purchase price. That means you only need $80k and now have a 4% mortgage of $1500. Add in the $650 for taxes and $550 for HOA and your carrying cost are $2,700. That would mean if you rented at $2,500 and grew rent by 4% you would lose $2,400 the first year, $1,200 the next year, make $48 the thrid, $1346 the fourth and $2696 the fifth and end up with these cash flows:
Year 0: -$80k purchase unit
Year 1: -$2,400 income
Year 2: -$1,200 income grown at 4%
Year 3: $48 income grown at 4%
Year 4: $1,346 income grown at 4%
Year 5: $170,104 income grown at 4% + sale proceeds minus mortgage balance and realtor fees.
IRR = 16% This is your leveraged return.
This isn’t speculation this is simply underwriting. Speculation would be buying the unit for $450k and thinking that I can sell in for $600k two years later NOT because I think rental rates are going up but because I think the Resort World casino will get approved and people will simply pay more.
As to your other comments about Percent of income I don’t get what you are trying to say.
AJ was saying that rents were going to go from 30% of income to 60% of income. That would mean rents would have to DOUBLE. As in go up 100%. I said there is no way in hell that would happen. Instead I’m saying that rents will stop going up at 7% and instead only go up 4%. And since most people salaries go up 3% to 4% anyway that would mean if they are paying 30% of their income now they will CONTINUE to pay only 30% of their income as their rents and income continue to go up at the same percentage.
Example: Guy has a household income of $100k. His rent is $2,500 a month or $30k a year (30% of his income). The landlord increase his rent 4% to $2,600 or 31,200 a year. He gets the same 4% raise at work so now he makes $104. Take 30% of $104k and now you have $31,200, the exact amount he’s paying for rent after the increase.
So there is no way in hell its going to 60% or even 40 – 45% for that matter. I’m sure you can find a person here or there but where talking about averages. I spend about 15% of my household income living in Brickell. I’m on the low end because I’m saving to buy. I’m sure there is probably is somebody out there making only $50k in a $1800 unit that would get you to that 40% range. But not in most buildings as they simply wont allow you to rent with that salary.
The average household income downtown is $85k. At 30% that equates to a month rent of $2,125. As I pointed out the latest market studies say that the average rent in $2,100. Pretty much spot on. These are real numbers done by market studies, not the couple of people you had discussions with.
Gixxer – “Because you don’t work in finance you are confusing a lot of arguments”
Well, I’ve only worked for 12 years on wall st. at the largest investment banks dealing with investment finance. I’d like to think I’ve retained at least some of the training they paid for. It has been a while since I left so maybe I am in need a refresher.
Right now I manage my own portfolio of Investment properties. This is why I can tell you that your numbers on paper looks good but in practice they are off. First, your 16% IRR on leverage calculation is flawed because you left off Management expense ($200/month) . Secondly I will tell you that 10% management fee is a quoted fee. That is for collecting rent, in practice it is higher. They also take a nice chunk of your first month rent for placing the tenant and they hit you with a nice markup on each service call. You assume there are no turnovers, no vacancies and no repairs required over 5 year period. In practice that rarely happens even if it does after 5 years you need to refresh the paint, fix the floors (if wood or carpet) and fix a few other items to get it ready for sale. Those costs usually far exceed security deposit. I know it doesn’t look like it but your numbers represent the best case scenario. Oh, let’s not forget the tax man will to want to raise his assessment every 2 year in a rising market especially for investment properties so your $650 for taxes is probably reflective of last assessment when the property was worth less. Do you really think they won’t raise taxes for the next 5 years now that prices are back up. What about HOA’s are they going to stay the same for 5 years? Like I said, in theory the numbers are easy to calculate but in practice you would be surprised how much higher they are. I should know, I buy a few properties each year and I got through these numbers every time i buy a property. I do the evaluation, purchase, repairs and rental management. I spend lots of time thinking about how to reduce service calls, maintenance costs and tennant turn over. I don’t work for a company, I do this for myself (with the help of a few professionals).
These and other factors are the reason why I tell you 4% return on 400K condo rental just isn’t worth it and is considered speculation. There are way too many things that can go wrong that will easily eat up that 4%. 1 bad tenant or mgt co will show you. Don’t get me wrong, speculation is not a bad word so don’t take it that way. If you speculate then that is fine as long as you are not fooling yourself thinking you are investing and as long as you know that 400K of your funds are in speculative investments. I would prefer to invest in SEVERAL solid blue chip companies that returns close to 4% div yield rather than delude myself into thinking I am investing in one Miami Condo rental.
Tell you what, after you buy your first 2 investment property and have them in service for at least 2-3 years, then we can have this discussion. Thank you for your lesson on investment finance though but I would like to think I passed that class many moons ago.
Yeah, you may want to go back and fresh up on your skills because you still keep confusing terms. Their is a difference between a 4% yield and an IRR of 4%. But just like Joe lets wait a couple of years and you’ll see how stupid you sound.
But you got me, I don’t own 1 or two condos and I do work for a company where we own over 10,000 units. We have our own property management business to manage just our units. I’ve personally underwritten the acquisition of over 2,000 of those units, over 1/2 billion.
We generate yields of about 6% unlevered, however when you look at rates that are around 4% range for 10 year debt that pushes those yields to above 10% and therefore our return to around 18% even if we add .5% to the exit cap rates.
This isn’t speculation this is underwriting. You don’t even know what speculation is. But just like Joe a couple of years from now it will be obvious to you that you’re wrong.
Most downtown areas have established themselves as legitimate neighborhoods and are achieving stable pricing based off of the market fundamentals of those areas. Downtown is still extremely cheaper than South Beach.