MIAMI (ad)VICE

Since I'm now starting to look into the rental return market while I wait to hear back about my waterside REO (since it's the weekend I have to wait until at least Monday), let me give any novice investors out there a quick  PROPERTY INVESTING 101 lesson.

It's called the 1% rule.

Basically, when you're looking at single-family homes that you plan to rent out, don't touch anything in which:

THE MONTHLY RENT you can get for it IS LESS THAN 1% OF THE SALES PRICE.

For example, yesterday I looked at a few beautiful single family homes priced around 200K.  Problem is, you could only rent them out for about $1,800 a month.  Using the 1% RULE, these are bad investments (the monthly rent divided by the total price is only 0.9%, ie. 1.8 divided by 200).  Bad investment unless you're just hoping to make capital gains.  I say it's a bad investment because don't forget that you'll still have to pay property taxes (about $300), and flood and hazard insurance ($300) bringing your rental income down to $1,200 per month.  That is an annual rental income of 14.4K, which in turn is a rental return of 7.2% (but because it is a SFH you will have to do a fair amount of maintenance, and have a garden service as well, which will further cut into your profit).

CONCLUSION: Using the 1% rule in the Miami SFH market means that if you find a home where the rent is at least 1% of the total price, you'll make upwards of 7% rental return.

Here's how the Miami rental market for condos is working:

The lowest average amount a single person, or a couple, can pay for a 1-bed condo or a studio is $850. If we we were using the 1% RULE, we'd have found an condo at a cost of $85K.

Because it's a condo, you then need to factor in that you'll lose about half of your income of $850 paying for HOA and property taxes.  That leaves $425 per month, which is a total annual income of $5,100.   Since we paid 85K, that's a rental return of only 6%.

CONCLUSION: When you're looking at condos to buy-to-let, don't use the 1% rule.  Go for a  2% rule (since it looks possible to find such deals).  Here's an example of a 2% rule condo:

If the monthly rent is $850, but you only paid 42.5K, your annual rental income of $5,100 divided by $42,500 gives you a rental income of 12%.  And because it's an unfurnished condo, you have low maintenance costs.  Another good thing about condos is that the HOA fees include your insurance (to the building, not to the interior of your unit).  In addition, since it's Miami, most buildings have a pool and/or gym, which is an attraction to the renter.

I understand your thinking.  I too am not one for buying a red Ferrari and cruising the drag.

However, if you're looking for something quieter, on the northern side of Miami Beach is the last little seaside suburb, known as Surfside.  You can get a cottage there for about 300K to 350K, and you're just a couple of blocks to the beach, and you're also just a short bridge from the city (and just 5 minutes from the millionaire-hangout of Bal Harbour).

Then again, it's a long drive to Orlando!

cheers
Steve

I'm seeing and learning so much every day, and as a result my knowledge and understanding constantly evolve, so it's easy to forget what my previous concerns were.

I now do not think that the Foreclosure Fiasco was a serious problem.  It seems the media just blew it all out of proportion, and the big banks (the ones most concerned about their reputation) played along, pretending to halt foreclosures while they cleaned up their books. 

I have certainly been seeing new REOs coming onto the market while I'm here.  Unfortunately I wasn't here earlier this year, so I can't make a comparison.  However, no agents I've met have mentioned noticing a foreclosure moratorium.

One very interesting event that took place this week was as follows (sometimes I get rather verbose, and I know lots of people don't have time to go through all the postings I've made, so I'm going to CAPS LOCK AND BOLD this next comment since it's pretty important and I want it to stand out for all to see):

ON NOVEMBER 1 (6 DAYS AGO) THE MIAMI GOVERNMENT CAME OUT WITH THEIR NEW TAX ASSESSMENTS FOR EVERY SINGLE PROPERTY IN MIAMI
(Miami property taxes are calculated at roughly 2% of the estimated property value, but because properties were overvalued during the bubble, property taxes over the past few years have been too high for comfort as they've still been reflecting previous bubble-prices).

ACCORDING TO THE LATEST GOVERNMENT TAX ASSESSMENT, GENERALLY SPEAKING 2010 PROPERTY TAXES ARE ABOUT 30% CHEAPER THAN 2009 TAXES.

THIS IS VERY SIGNIFICANT FOR MIAMI PROPERTY IN THE LONG RUN.  APPARENTLY THE MIAMI GOV. HAS REALISED THAT THE HIGH PROPERTY TAXES WERE ONE OF THE MAIN IMPEDIMENTS TO LOCALS BUYING PROPERTY, SO THEY'VE REDUCED PROPERTY TAXES WHILE RAISING OTHER TAXES.

The single greatest impediment to enticing people to buy property was the fact that taxes were too high, and as a result people preferred to rent than to buy.

That is no longer the case.  A lot of renters (people I've spoken to yesterday and today while visiting condos for sale) have told me they are already looking to buy, since it's now cheaper to buy and pay your property tax + HOA fees than it is to rent.

Here I need to add some more very important info.

THERE IS SOMETHING CALLED THE HOMESTEAD EXEMPTION.  IT MEANS THAT THE FIRST 25K OF YOUR PROPERTY'S VALUE IS TAX-FREE, SO LONG AS YOU, THE OWNER, LIVE IN IT.

SO IF YOU BUY A CONDO FOR 30K, YOU'LL ONLY BE TAXED 2% OF THE EXCESS 5K, WHICH IS ONLY $100 PER YEAR, OR ABOUT $9 PER MONTH.

NOW LET'S DO THE MATHS TO FIND OUT WHY IT'S CHEAPER TO BUY THAN TO RENT.

IF YOU BUY A 1 BED 1 BATH CONDO FOR 30K, IN A NICE AREA (NEAR THE INTERCOASTAL WATERWAY) BUT WITHOUT A WATER VIEW, YOUR HOA FEE WILL BE $250 PER MONTH.

TO THIS $250 YOU ADD THE $9 FOR PROPERTY TAXES.  TOTAL = $259 PER MONTH

IF YOU GET A LOAN AT ABOUT 4% INTEREST (FOR US CITIZENS) YOUR INTEREST WILL BE $143 (30-YEAR FIXED LOAN ON 30K AT 4%)

SO YOUR TOTAL MONTHLY COST WILL BE $259 + $143 = $402

COMPARE THIS TO THE COST OF RENTING, WHICH IS $850!

THIS IS WHY I'M CONVINCED LOCALS ARE GOING TO START SNAPPING UP THESE CHEAP CONDOS SHORTLY.

Hi Chui

since finding my "dream home" (the waterfront REO SFH I put in a cash offer for $281K for) I haven't made any new offers.  I'm still nervously awaiting the outcome.

However, I've been staying busy.

I've started compiling a list of condo buildings in good areas (they're all on the east coast of the city near the intercoastal waterway) where it's possible to pick up 30K REO's (but you have to wait until they hit the market, and pounce as soon as they do).  My list only includes:

1. buildings I've visited myself and chatted to tenants/owners, and checked out the entrance hall, the elevators, the gardens, and the parking
2. HOA no higher than $300 per month
3. tenants all middle-class and professional (which generally goes without saying because the minimum monthly rental for a 1 bed 1 bath is $800)
4. have a well-equipped gym
5 have a clean pool

Why am I making this list?

My current strategy is as follows:

Buy the waterfront SFH (my dream home) and failing that, get a different SFH that's also an REO.  This home will cost over $200K, so I'll easily get financing. 

I'll then return to China.  Since I really trust my current realtor, and also because I have my "Steve's List" of condo buildings I've visited personally and on the basis of which my realtor has set up an automatic search,  every time a 30K REO comes onto the market, she'll help me to put in a cash offer, so that I can buy even in absentia.

Over the next few months to a year I'll buy up as many of these condos as time allows, using cash, and then my realtor will help me to rent them out.  She already does that for all her international clients, and I see her all day working on this while I'm driving her around to view REO condos.  Because I'll rent out the condos unfurnished (which is the norm in Miami) I won't need a property management company.

I'll then hold on to all my rental condos, and continue adding to the portfolio, until the market turns.  When it does, I'll already have a credit history (because of my mortgage on the SFH) and I'll either start flipping the condos, or just get cash-out financing on them.  I've checked with a few mortgage brokers and they're sure that financing on investment properties in the 50K range (that's what my 30K condos will be worth by then) will return as soon as prices start to rise (back in the "good ol' days of pre-crisis" you could easily get financing for 50K condos).

Hi

I've had a surprising number of people contact me (via e-mail) requesting advice and info pertaining to investing in the Miami property market for both capital gains and rental returns.

Also, a lot of people have requested more info on lenders willing to make loans to foreign investors.

As I just mentioned in a previous post, I'm working with my realtor to create something that I'm starting to think of as "Steve's List".

Although it won't be anywhere near as heroic as Schindler's, it will at least be as altruistic, and should prove to be extremely useful to anyone trying to pick up a cheap REOs in Miami.

This list will be divided into 2 sections:

1. REO condos priced 20K to 40K that have just hit the market, and will give good rental returns (10% to upwards rental return after paying HOA and Prop. Tax).  The condos these buildings are in will all have been checked by myself and my realtor, will all be in good areas, and will all have pools and gyms.

2. REO Single Family Homes that have just hit the market, that are priced between about 120K and 350K (so as to ensure that they are expensive enough to be  in good areas, but not too cheap so as to rule out financing opportunities), and that should offer about 6 to 8% rental returns, and very good capital gains opportunities.

This list will be automatically generated by setting up parameters using the MLS listing for Miami (ie. if condos, according to buildings I've already checked out, or if SFHs, according to areas I've already visited). 

My realtor will automatically receive daily updates (from the Miami MLS listings) to add to this list.  I shall make this list available to the public (free of charge).   However, I won't publicly display the list, so as to reduce the number of people making concurrent bids, and thereby working at odds with each other. 

If you're interested in access to the list, you just need to e-mail me.  Once you've located an REO that interests you, you can make contact with my realtor and make bids of your own, according to the price asked by the bank.  There would be absolutely no fee charged by my realtor since she makes her commission (3%) from the seller (ie. the bank).

In addition, my realtor belongs to a realty co. that has a subsidiary that deals with financing for purchases by foreigners, so you can ask her what her company's best interest rate is for the property you're interested in.  If you don't visit Miami you will probably need to use this kind of service.  If you are able to visit you can just do the rounds of the banks that have Foreign Lender Programs.

Not a bad deal for you guys, no matter you decide to visit Miami or not. 

Only one condition, if you make any great purchases, you need to treat me to a meal next time we're both in MIami at the same time!

I just received an e-mail from someone asking if it's possible (or how easy is it) to buy a property in Miami (particularly an REO) without flying here.

I haven't looked into this yet, but I understand the buying process, so here's what I currently THINK the answer is (but will have to check up on it)

The first offer made on your behalf by the realtor (even when you're in Miami sitting at her side) is done by signing the forms on which you make your offer, and she then e-mails the bank a scanned version.  No more signing is required until about 1 month later, on the Closing Day.  During that one month period (which is referred to as the Inspection Period) you are supposed to be having the property checked out (physically by a building company), and legally (by doing a title search to check there are no outstanding liens against the property).  Liens can include:

1. money is owed by the property since the old owner didn't pay his property tax or his HOA fees
2. lawsuits against the property since the old owner had renovations done, but didn't pay the renovation company
3. fines against the property because the person did illegal alterations that violated the building code

Banks are not supposed to sell REOs until they've personally seen to all the liens (ie. done their own title search, and paid all the fines).  However, it can happen that when the bank was doing its search, a particular liens hadn't come out yet, so this is why it's good to do your own follow-up title search.

The realty co. provides both these services for a small fee (I think about $250 each).

if you decide, about 10 days into the inspection period, that you want to go ahead with the purchase, you should immediately sign the Closing Contract (which the realtor would e-mail to you) and send the original by DHL, so that it's ready on Closing Day.  The realtor would then receive the keys on your behalf.

I just mentioned the whole process, from making an offer up to Closing Day, is about 30 days.  That seems to be the norm, but both sides (ie. the buyer and the seller) have a fair amount of leeway because the contract leaves a space to fill in what closing date you prefer.  Obviously, you can't write a ridiculous date (eg. 2 months after making an offer).  You could if you wanted to, but when the bank is reviewing all it's offers, they will see your strange request and probably not consider your offer.

HI CHUI

To find this years property tax on that condo, use this government site:

http://gisims2.miamidade.gov/MyHome/propmap.asp

Just type in the address (if you have it).  You'll see this year's assessed price (ie. assessed by the tax dept.), so to get the property tax multiply by 2%.

It's a great site, because it will also show you all the previous sales history on the property.

Today I looked at condos that I'd estimate are about 7.5 times cheaper than the equivalent in China's only city with tropical beaches: Sanya, on Hainan Island.

For example, I saw a south-facing, 80 square metre, 7th floor, 2 bedroom 2bathroom, with balcony looking down at a pool and a waterway (where you could conceivably moor your yacht alongside all the others) with an unobstructed view to downtown Miami in the distance, and the islands to your east.  The asking price was $70K.  The entrance hall looks smart, the gym a bit small but fully equipped.  The HOA fees were reasonable (about $400 per month).  The area is safe, and the street its on very beautiful.

The only thing making the comparison with China difficult, is that this building is from 1973, whereas in China all highrises are new.  However, the Miami buildings have been well-cared for (because the HOA fee is so high).

Despite the above condo looking cheap at the price, it's a bad investment as a rental return.  You could only rent out for $1,000, which probably only leaves about $400 per month profit, or $4,800 per year, which is a rental return of 6.86%