Returns From Florida Condos

The first question that comes to mind when considering any investment is what type of return the investor can expect to make. Advertisers consistently make claims of 15 %-20% cash returns on everything from vacation rentals to trailer parks.

Of course it all depends on how you calculate the returns. We recently received a proposal for tenanted condos at 10% where the return was arrived at simply by multiplying the rent by 12 and dividing by the price. No condo fees. No taxes. No vacancy. No repairs. No management or leasing costs of any kind.

Another online ad boasted 15% -20% but had no particulars at all

If comparing properties try separating the cash flow from any potential for appreciation. You can then compare both on an even footing.

Standardizing Cash Flow

There are standard “rules of thumb” that can be used when comparing different properties. One is static cash flow during a typical month including all known variables:

While this will not take into account vacancy and debt loss and extraordinary expenditures it is useful for comparative purposes between properties of similar class or different classes of properties for that matter.

Potential for Appreciation

Perhaps the best indication of the future comes from both present and past.

Present value

The definitive source for pricing information is MLS data and municipal tax records. When comparing comparable sales, it is important to note not only the prices but also how the properties were sold and by whom.  Distressed sales for example will generally be at lower prices and bulk asset sales for even less still. These atypical sales often skew automated valuations and similar online tools.

In the case of distressed sales there is an immediate increase in value realized as a result of the discount from similar market sales. This initial “kick start” will not be repeated on an annual basis however but will be factored into the overall gain during the hold period.

Conversely many structured investments sell at a premium as compared to local market MLS sales. In these circumstances the property must be held for a sufficient time to “recapture” the premium.

Past value - 50% off

Isn’t it amazing that you can buy a nice property for 50% of what it cost only 3-4 years ago ?

It is more amazing that you can actually buy one for 30% of former value depending on how you buy it.

Prices that properties used to sell for in a more balanced market seem useful for comparative purposes.

Barring any extraordinary factors, it is reasonable to assume that a property that previously peaked at $200,000 will maintain approximately double the value of one that peaked at $ 100,000 given similar characteristics.

If there is an extraordinary variance compared to similar properties there is generally an extraordinary circumstance to be avoided or taken advantage of. Determining which is which is the secret to catching the best deals.