An Investment Strategy for Orlando

on Monday, 6 June 2011. Posted in ,
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What we looked to buy

OrlandoWe developed a strategy before we left Texas, prior to arrival, to look at Condos only but the exact strategy evolved after we arrived.  In Summary wha we were looking for was recently built (2000 or later) property, preferably a condo in a healthy HOA and local community, centrally located without a reputation for crime that would be attractive to long term tenants and also to an owner purchaser as an exit in 3-5 years time when the economy has fully recovered and excess stock has been sold down.

What we looked for…

Relatively New Properties

From our time in Dallas we discovered that older and smaller properties aren’t that sort after by home buyers. Owner occupiers preferred large new or near new properties. We were therefore targeting properties built 2006-2008 during the height of the boom, which, given the large price falls (up to 75% in some parts) from that time, the options were also quite plentiful.

Attractive to Long Term Tennant – less management headache

In Orlando, like all tourist towns, a large portion of the properties are targeted towards short term rental for holiday makers. We avoided the short term rental market since we believe the rental returns are lower in our estimation unless the owner actively spends time marketing and supporting the property manager. The lower returns are due to higher marketing, management and cleaning fees as well as the potential for no rental income during periods of disuse. We also didn’t want to spend the time to be an active owner.

Attractive to Owner Occupier – Easier Exit Later

This is a key point we think.  Investing in specialist short term rental properties or just specialist rental properties in general can be a tricky market to make attractive capital gains. The reason is that specialist rental properties, of which we saw several at the beginning, might be cheap, but they will always be priced on a multiple of net rent putting a ceiling on attractive price rises. We saw some older $35,000 and 40,000 1 bedroom apartments that had fantastic net yield of 10%, but who is going to buy this later? Only another investor – perhaps one close to retirement who wants a stable income and doesn’t live far away, and for that purpose that’s fine – but that’s not for us. We decided that apart from size – 3 bedrooms and above, and at least 2,500 square feet for houses and 1,500 square feet for condos we also needed a lock-up garage.

A Healthy HOA (Home Owners Association)

Home owners associations are in some ways similar to a Body Corporate in Australia being responsible for the outside appearance of condominium developments, common areas maintenance. They tend to be much higher for condos, than for houses due to the higher level of costs and maintenance services they provide. Not all Home Owners Associations are financially healthy however, since many property owners have fallen into arrears about payments and once this reaches a critical mass, then maintenance declines and then stops, pushing property values down more becoming a vicious cycle once a critical mass has been reached.

Normally, fees can be put up but under present conditions that only reduces prices, increases arrears and there is a limit to the rises that can be effect. The HOA can legally take possession of the house and sell it to recoup their money. They can’t do this right now either. HOA’s don’t like to do this since a foreclosed house becomes’ the HOA’s responsibility, along with any debt. Why take an asset with negative equity? That’s crazy. So the HOA’s sit tight and hope like crazy the owner isn’t making payments to the bank and they foreclose. Once they do, then the banks make the HOA payments and everything is OK. If not, then you are on a spiral to a ghost town or slum. Fortunately there wasn’t that many in this condition that we saw, but it does pay to be aware since they do exist.

Decent Net Rental Yield

A good level of net rental yield shows me that it is good time to buy a property for capital gain not just rental gain. Firstly, prices are cheap. Secondly that the economy and demand for accommodation in that area is still strong, which means that exits later should be easier once the financial and mortgage market returns to normal. Finding a net rental yield (after taxes, all fees and costs) of 5%+ is not at all common in residential accommodation and impossible in many countries, but not the US. The gross rental return of higher than 10% means that renters should be able to afford a house 2-4 times the value of the house they are renting under normal conditions with a 30 year mortgage. This is a key number and I look at it as being roughly comparable to price-to-earnings ratio or dividend yield when investing in shares.

Noticeably under replacement cost

As mentioned before we are looking for something distressed, at a 60-75% discount from what it would have sold for new just 3-4 years ago and at least 30-40% less than construction costs of producing that property given current conditions with minimal land costs. I look at this metric as roughly comparable to price-to-book value of a property when you invest in shares.

Centrally or well located

This doesn’t necessary mean in the CBD (Central Business District) or “Downtown

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