Real estate in South Florida is expanding at a pretty impressive rate now that the Great Recession is far behind us. Existing homeowners are moving up and buying newer, nicer, and larger homes, while other buyers are coming from all over the world to enjoy the area’s miles of sunny beaches and temperate year-round weather. There’s no doubt that South Florida is a great place to own property right now.
But there’s a third type of buyer who is also enjoying the steady growth in the region: the real estate investor.
Why South Florida
When it comes to investing in real estate – especially for newer and inexperienced investors – few other markets offer the opportunity that you’ll find in South Florida.
Not only is the tri-county area the 8th most populated metropolitan region in the country, but it’s also among the most quickly growing: both Palm Beach County and Miami-Dade have experienced 7.8% growth over the past five years, while Broward County has seen its number of residents increase by 8.5% over the same time frame.
It’s also a major destination for part-time residents: 20% of Palm Beach County properties are classified as second homes.
Between the booming economy, continued population growth, and its solid reputation as an international travel destination, the South Florida housing market provides some of the biggest opportunities out there for serious investors who are ready to take action.
Leverage is one of the most commonly used phrases when it comes to talking about real estate investing. Simply put, leverage is the ability to use other people’s money (OPM) to increase the returns that your investment generates.
For example, if you invest $50,000 in the stock market and experience a 10% increase in value over the first twelve months, you’d walk away with a profit of $5,000 – not bad for a year’s time. But what if you invested that same $50,000 in real estate? You could use your capital as a 20% down payment and leverage OPM to finance the other 80% of a $250,000 house. In this scenario, a 10% growth in value would equate to $25,000 in profits – essentially a 50% return on your investment.
While real-world investing obviously isn’t always this straight-forward, there’s no denying the huge potential upside that’s available through real estate.
Flips vs. Rentals
Although there are a myriad of different ways in which individuals can invest in real estate, we’re going to focus on the two most popular among new investors: property flipping and long-term rental ownership.
Ideal for investors looking for short-term gains, flipping involves finding an undervalued property – one which is typically in good condition structurally but may need some basic repairs and cosmetic upgrades – and adding value with the plan of selling it for a higher price within a few months. This is a great way to build wealth quickly in a rapidly growing market like we’re experiencing now, although it isn’t without risks: unexpected expenses and longer-than-anticipated holding times can be serious issues for unprepared, novice investors.
The second investment type, purchasing property with the intention of keeping it as a rental, is equally as attractive to many investors and a much more stable option for long-term financial gains. With this type of investing, your renters are essentially paying down your mortgage for you. While you may not be generating large amounts of extra money at first, you’ll find your investment’s cash flow steadily growing over time as the mortgage decreases and rental rates increase. That said, even the long-term investors should be prepared to weather periods of vacancy and unanticipated repairs that are bound to arise from time to time.
Finding Your First Investment
You don’t have to be an experienced investor or financial expert to get started with real estate, but that doesn’t mean you should dive in headfirst without the proper knowledge and assistance. Although real estate offers a wide range of benefits not found in other types of opportunities, it is still a complex investment vehicle with no shortage of variables that can get in the way of the returns that you’re after.
If you’re new to real estate investing, the first thing you should do is sit down with a Realtor who is familiar with the local market. South Florida is a big area, and while we’re experiencing significant growth all across the region, it’s important to work with a professional who is intimately familiar with the specific communities that you’re considering.
More important, working with a professional may help you to avoid the number one mistake of many new investors: overpaying for the investment.
Remember, there are no guaranteed investments. Before you purchase investment property of any kind, especially if you’re just starting out, make sure you talk to your realtor, lender, attorney, and accountant or financial adviser.
If you’re thinking about selling or buying a home, please give us a call.