Investing in real estate is a tried and true method of building wealth, and buying a rental property can be an excellent way to create equity and cash flow. More fortunes have been created through real estate investment than any other method of wealth building.
But before you jump into the hot rental market in South Florida, here are some vital details to keep in mind.
2017 will likely be a renter’s market in South Florida.
If you look at Miami specifically, according to the Miami Herald, “developers are expected to complete nearly 6,350 condo and rental apartment units” in this year alone. Prices have already begun to drop in 2017, and the trend will likely continue as renters find more options available downtown.
50% of income goes toward rent in South Florida
Despite that small drop in prices, South Florida still has some of the highest rents in the country. In fact, nearly 50 percent of residents’ income goes toward housing. And many of the new developments are in the luxury sector. With most of the price drops happening at the higher end of the spectrum, there are still many, many viable rental properties available for investors.
Also, everyone has to live someplace. Right now, the majority of new families are not able to afford the downpayment for their own home. This is a current fact of life everywhere in the country. So these families have no choice except to rent.
Someone is going be their landlord and collect that rent.
Be realistic in your expense estimates. Then add 5%.
Back of the napkin calculations and unbridled optimism can lead you astray in the rental market. Investors new to rental properties can get excited when comparing their prospective mortgage payment with the potential rent.
But these figures often don’t reflect the real world, especially when it comes to expenses. Always plan for regular maintenance and upkeep costs. Many experts suggest planning for around 1 percent of the property’s value per year for maintenance. Be sure to include your HOA or condo fees, insurance, and taxes in your calculations as well.
You should also budget at least 5% for unexpected expenses. If you are renting a single family home, a new roof or HVAC unit can quickly eat into your profits. As with any home purchase, make sure you have a thorough inspection performed by a qualified inspector. That way, you will have a good idea of what might need repair or replacement in the coming years.
Choose tenants carefully. Always check background.
Ideally, you want dependable, long term tenants. Using comprehensive credit and background checks for everyone, regardless of your first impression, is the best way to find them.
After all, one of the quickest ways to lose money with a rental is to have tenant problems. These could come in the form of tenants paying late, causing damage to your property, refusing to leave, or failing to notify you about necessary maintenance.
These are notable exceptions, but they can happen. If you choose your tenants carefully and put proper management systems in place, you may be able to avoid any tenant stories that are newsworthy.
Vacancies are real. Plan for them.
Even if your tenants are angels, they may still end up costing you money if they don’t stick around for long. Every day your property stays vacant cuts into your profit.
However, there is an ever-growing rental demand in the South Florida rental market, so you should not expect to have long periods of vacancy, at least for the foreseeable future.
On a financial note, having tenants for just one month out of the year, though, means an 8 percent reduction in your rental income, so you will want to include that in your figures. A trusted real estate agent can help you understand the vacancy percentage for the area in which you’re looking to purchase.
Consider a property management company.
For many investors, a property management company offers a solution to the potential headaches of becoming a landlord. A quality management company will help you find tenants, draw up paperwork, and take care of evicting tenants, if necessary.
You will pay for that service, of course. Most companies charge a fee each time they rent your property and a percentage of the monthly rent. If you see your rental property as a more hands-off investment, or if you own more properties than you can handle on your own, a management company is a great option.
Talk to your realtor.
Whether you’re looking to purchase your first investment property or your fifteenth, an experienced real estate agent is a terrific source of information and expertise. They should be able to guide you in choosing your location, calculating your potential income and expenses, and even referring you to a reputable property management company.
Hopefully this list of considerations doesn’t scare you away from the rental market. With proper planning and expectations, the rental market is a terrific opportunity for investment. Just go in with your eyes wide open and your calculator on high alert.