Hojin's SW Orlando Real Estate Scoop

Real Estate News for Dr. Phillips, Windermere, Gotha, Celebration, Winter Garden, Ocoee, Clermont, Metrowest

Hojin's SW Orlando Real Estate Scoop header image 2

Things to Consider Before Buying a Residential Rental Property in Today’s Market

November 18th, 2008 · 1 Comment

I’m getting a lot of calls these days from bottom feeders looking to cash in on the declining market and I think it’s a great strategy provided they have a long enough time horizon. Many of them plan on renting the properties out until the market starts to improve, and usually shocked at the negative cash flow residential properties generate. I mean you’re not even coming close to breaking even. The surprising part is that many of them are still taking the plunge.

Didn’t Warren Buffet say the number one rule in investing is not to lose money? I realize you get to deduct the negative cash flow and depreciation but come on.

I wish I had a crystal ball, but I don’t think the market’s gonna recover in the second quarter of 2009 as all the so called experts are predicting. They say that every year and every year they’re wrong.

I remember everyone predicting a severe downturn in the Orlando real estate market after we experienced 3 hurricanes in one season back in 2004. I gotta tell ya, it ended up being the best market ever..  in history.

My advice is to tune all the noise out and look at real estate investment as a long term vehicle. The disadvantage of real estate investment is that it’s not liquid. It was during the boom years, but now we’re seeing the real side of it.

Many of the brokers in my continuing education class last week kept on saying that it’s a great time to buy because the market will recover in 2 years or less. I started thinking these guys were off their rockers. No one gave a single valid reason why the market will recover, nor did they give any insight into why it’s 2 years versus some other arbitrary number floating around in their head. The public is depending on them for real estate advice and I really hope they’re not feeding them this garbage.

Obviously, I don’t believe the market will recover in the next 2 years because there’s still too much inventory.. 2 years worth. Many of them are in foreclosure and we need to get them sold and off the market. Prices will continue to slide until then and probably take at least 2 years. The price to rent ratio(P/R) needs to come down significantly. The P/R stood at 11.6 in the year 2000 for Orlando, but currently stands at 22.2 which is a bit lower then its 26.7 peak. The 15 year average for Orlando is 15.5 which tells us that the real estate market here will stabilize somewhere between a P/R of 15.5 and 11.6.

Investors need to have at least a 5 year time horizon and preferably 10. While the market’s down right now and a lot of people are losing money, people who bought 8 years ago are all still coming out ahead in this depressed market.

Say you can’t wait that long, you’ll probably rent the place out. You can manage it yourself or hire a property manager. The trick is to decide which route is the best for you.

If I were investing in properties, I’d prefer to do it myself if possible. That means I’d have to buy something close by versus far away. I’d also have to come up with rules and forms for the tenants. Keep in mind that Florida laws are pro tenant, meaning they get the benefit of the doubt in most cases. My suggestion is to use an attorney to draft the lease for you versus the standard form provided by the Florida Supreme Court. The attorney prepared leases just allow a lot more flexibility to tailor to your particular property and situation.

I’d also want forms to be signed by both parties for just about any situation and the attorneys at local firm Heist, Weisse, and Davis have prepared forms that can be downloaded for free at evict.com. The forms are so good, I’ve downloaded them already and available below.

Knowing my luck, I’d also want some cash reserves for missed rents from vacancy or tenants just not paying and for routine and unexpected repairs.

Now there are advantages of hiring a pro to handle your rental property. They offer a proven system and convenience. The only downside is the fee which typically costs the first month’s rent and about 16% each month.

There’s already a negative cash flow and hiring a property is not gonna improve the numbers which brings me to another point. Virtually none of the investors that buy residential real estate seem to be concerned with cash flow or capitalization rate. Investors have been utilizing these tools for years in commercial real estate and I just don’t understand why investors in residential properties don’t pay attention to it. Many of the foreclosures on the market in Orlando were owned by investors and perhaps we’d have far less if they just did a little homework before jumping in.

So please, if you’re gonna try to cash in on the attractive prices offered on residential real estate in today’s market, then do your homework and have a long enough time horizon. Investing in real estate is not just about location, it’s also about cash flow and having a good plan.

download: Residential Property Management Forms

Tags: Real Estate Tips

1 response so far ↓

  • 1 Dawn Pratt // Nov 19, 2008 at 12:56 pm

    Here, Here! Great explanation and obviously, I am in total agreement. None of us agents have crystal balls (if you do, please let me know tonight’s lotto numbers) and can say without conviction, the market will change 2nd quarter 2009. What we can look at is the amount of inventory, as you stated above, and see that in many areas of Orlando, there are well over 2 yrs worth of inventory. If I’m not mistaken, there is one price point in Osceola with 4 yrs of inventory available! Investors take heed.