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My wife and I have two kids and are in our mid-30s. Separate from retirement accounts, we have about $50K worth of various low risk managed funds. We haven't touched them in many years - and basically watched them shrink over the last few years.
Obviously, should we retain them - they'll bouce back over time.
However, we're personally interested in investing in real estate. We've always wanted to own a second home/vacation home in Florida. Homes down there are effectively 30-50% off right now.
So we're thinking about cashing out the $50K and using it towards a Florida property. Our reasoning is that since Florida real estate has been hit nearly the worst in the country - it's got the most to gain and would likely rebound a bit quicker than real estate in other markets.
We might use the Florida house some ourselves, or rent it long-or-short term.
We're considering a 3BR, excellent condition home about 6 miles from the beach in SW Florida in a nicer, active area. We can get it for about $225K. It was $445K in 2006 at the peak.
We figure when the market turns in perhaps 4-8-10 years, the home will once again be worth perhaps $450K. At that point, maybe we sell it - maybe we keep it indefinitely. We're also thinking that the home might gain more value more quickly (perhaps as soon as the ecomony turns) vs. other areas of the country.
But the big question: is this a smart move? I know you're supposed to keep your portfolio "diversified". If we did this, we'd have our IRAs, our primary residence in GA, and this property in Florida.
Having lived in Florida for 20 years, imo, real estate is still groslly overvalued especially in the SW region of the state.
One reason is simply wages. This is a loooow wage state and without creative financing a large percentage of the population still can't afford a house even at 225K. There is also an unbelievable supply of homes as the area was over built on a proportion thats hard for most people to even imagine. Btw, have you looked into home owners insurance? That will easily set you back 5K a year.
I would make certain before you buy that you know exactly what your getting into. I think your way too optimistic about appreciation for one thing. Ask yourself as prices start rising how many homes not currently for sale will become available? I think a ton as those who are underwater and getting hammmered by outrageous insurance and utilities start bailing. I might look at what the house sold for in 1998 or so to get an idea of where the price is headed.
I'm generally an optimist myself, but Florida real estate is screwed beyond belief as far as I can tell.
Having been an active RE investor over the past 30 years I can tell you DON'T DO IT.
What is the particular allure about a FL house that is SIX MILES FROM THE BEACH. You might as well be 30 miles away. Six miles from the main attraction is of NO ADDED VALUE, anywhere. That would be like me thinking that my house has "skier appeal" just because I live in Colorado.
I personally don't care what something was worth 3 years ago, and no one can predict what it's going to be worth in the future. What is it going to cost to insure and pay the property tax on that unit? I've heard horror stories on both in FL, so check those out carefully.
What is the house going to do while you're not enjoying it? Sit empty? If your insurance company hears that they will either CANCEL your policy or triple your rate. Who is going to manage it for you? Is it going to be rented on a part-time basis? Good luck with no ocean close by. Is it going to be rented on a year-round basis? If so you will NOT get to enjoy it, rather you will likely spend your vactions doing fix-up around the place.
Most wannabe investors who lost their shirts thought that a "break even" (or within $100/month of break-even) was a great deal. IT'S NOT. Generally your expenses will eat up 40%-45% of your rent, and I don't see where you addressed ANY of those expenses in your post.
Before I moved to CO I spent 20 years coming up here skiing 2 or 3 weeks a year. I was able to pay cash for a really nice condo in any of the major ski areas and not have it in rental service (rip-off management), yet I chose to rent a condo when I came. It made much more financial sense then and now!
The description that Tradex lays out for FL real estate pretty much fits what I have seen down there -- too few people with solid incomes and whole lot of real estate that is pretty expensive to maintain. Regulators have played with the rates due to voters complaining about increases after hurricanes and insurers take it out where they can. Insects can ravage many building materials, geological issues (like sink holes) and even just wear and tear from the sun ages stuff in FL faster than in places that even a little bit more temperate. Unless a house is built real well down there it takes a beating.
The forces that shape what the housing is worth relate to the income of buyers. Unlike other areas of the broad south that have focused on building employment in diversified ares (from manufacturing to financial services) FL has too few good jobs. For folks that are retired I suppose the long term health care needs and such may eventually lead to more employment of care givers, but that is not yet happening. Too much of FL is just too far from the rest of the US and too exposed to storms to make sense for some kinds of investment. THAT is a big reason why the bubble burst so badly down there and there is simply no history of "the biggest crater having the biggest rebound"...
Being a long-distance landlord is no fun, and I fear that being "six miles from the Ocean" is pretty much as bad as being 60 miles -- if it ain't walking distance that is not a desirable feature...
If you want to invest for maximum long term return the important factors revolve around being able to "see into the future" and that is awfully hard. Real estate investing on a small scale can be fairly straightforward -- find a place LOCALLY that can be purchased FAR below the value of its neighbors due to EASY to remedy problems. Get is nice enough to rent out for more than the mortgage / taxes / upkeep or be able to improve it in such a way that you can get more in resale than it cost in fix-up. The timeline needed to see profit from such ventures is MUCH shorter and much less subject to unforeseen economic problems.
I would NOT speculate that it would take X numbers of years for properties that have "fallen off a cliff" to return to previous valuations -- for starters in X years that property is now aged X years and that is often VERY difficult to account for.
RE investments can be a nice deal but the rental situation can be a hassle. If you go that route, I would employ a management company to oversee your property. With the snowbird flight to Florida each winter and the continued issues with homeowner's insurance I know a LOT of people that rent houses or apartments for the winter vs owning one in FL now. There is a market for what you are talking about doing, the problem is getting the right people in there.
The FIRST thing I would do is contact insurance companies and see if you can even get an insurance policy for the exact house for what you plan to do. Many companies are not even writing new policies in Florida and especially for rental properties. If you can get insurance than I would talk to your accountant and make sure the numbers work out for you, taxwise. Ideally you want to create positive cash flow but still take a loss on your investment on your taxes.
We have some rental properties and have been very lucky with our renters (all long term renters) but if we had issues, we would probably NOT keep the properties.
As for being 6 miles from the beach, I don't see that as an issue. If I were to go to Florida for the winter I would be more concerned with how many golf courses are nearby. 6 miles to the beach would be plenty close for me.
If I were to go to Florida for the winter I would be more concerned with how many golf courses are nearby. 6 miles to the beach would be plenty close for me.
Me too, but then I don't need to go to FL for the golf. But if the attraction is the beach, why be 6 miles away?
Thanks everyone. Really good stuff. I greatly appreciate the detail. After reading this, we'll have to think more about it. Side note - if one sought to move to florida for sun and beach, but also a family centric area, where would you go?
My wife and I have two kids and are in our mid-30s. Separate from retirement accounts, we have about $50K worth of various low risk managed funds. We haven't touched them in many years - and basically watched them shrink over the last few years.
Obviously, should we retain them - they'll bouce back over time.
However, we're personally interested in investing in real estate. We've always wanted to own a second home/vacation home in Florida. Homes down there are effectively 30-50% off right now.
So we're thinking about cashing out the $50K and using it towards a Florida property. Our reasoning is that since Florida real estate has been hit nearly the worst in the country - it's got the most to gain and would likely rebound a bit quicker than real estate in other markets.
We might use the Florida house some ourselves, or rent it long-or-short term.
We're considering a 3BR, excellent condition home about 6 miles from the beach in SW Florida in a nicer, active area. We can get it for about $225K. It was $445K in 2006 at the peak.
We figure when the market turns in perhaps 4-8-10 years, the home will once again be worth perhaps $450K. At that point, maybe we sell it - maybe we keep it indefinitely. We're also thinking that the home might gain more value more quickly (perhaps as soon as the ecomony turns) vs. other areas of the country.
But the big question: is this a smart move? I know you're supposed to keep your portfolio "diversified". If we did this, we'd have our IRAs, our primary residence in GA, and this property in Florida.
Thanks!
Between vacancy, insurance, taxes etc you will be upside down even with 50k down. Add a mgt company into the mix and that's another 10% off the top. Add a dishonest mgt company into the mix and it can be disastrous.
I did the long distance landlord thing and DO NOT recommend it. My first mgt company was constantly claiming "repairs" were needed on things I knew I had replaced new before moving away. Every month was 150-400 in repairs for this and that, totally BS. I fired them, and then managed it myself. When it was time for that tenant to move out I had to get another mgt company who belonged to NARPM and the IREM. Supposedly high credentials as far as a mgt company was concerned, and I felt good.
They put some trailer trash in my home that decimated (nothing could be salvaged) it in less then three months. It's a very long story. I could not sell the house (no bank would give a loan for it) nor could I rent it. It was a total bomb job. I had to fly out and sell it to a cash only investor and lost a ton of money. I then turned around and sued the company, and that stayed in court over two years before they finally settled with me. My lawyer was the big winner in that one.
Unless you live close to the property and can manager it yourself I would not recommend doing this at all. ESPECIALLY since you don't know the area. You think watching that money shrink slowly was painful? Well come on down to Florida and buy yourself a house, then have some third party rent it out for you and see how that works out.
Thanks everyone. Really good stuff. I greatly appreciate the detail. After reading this, we'll have to think more about it. Side note - if one sought to move to Florida for sun and beach, but also a family-centric area, where would you go?
This is the business (finance and investment) forum. The basic principle of business (also economics) is:
revenue - expenses = income
With all due respect, you have dangerously naive notions about the residential real estate market in Florida. Do careful research on all expenses involved, including extraordinary maintenance, open up a spread sheet, plug in the numbers, and you will see that even if you buy cash, you will probably break even with a rental, unless it's a house in a prime area (e.g. high income by successful executives and professionals, with a healthy mix of high net worth retirees).
I own a SFH mortgage free, I can afford it, but I am considering downsizing to a condo anyway simply because from the point of view of economic (business/investment) analysis I simply cannot justify the outrageous carrying costs of maintaining such a luxury property in such a hostile environment, both geographically and financially.
Your best bet for an investment with $50k is to go into your own business, not a SFH in Florida.
In the meantime, go to Florida for vacations. Good family areas may be St. Augustine, Daytona Beach, St. Lucie area, Jupiter Beach on the Atlantic coast, I'll defer to others for suggestions on the Gulf coast.
If your business is successful and you can run it online (not dependent the incomes of the average Floridian), then maybe relocate to Florida early, to take advantage of its being a no income tax state, in a relatively low-cost dwelling, to avoid its high property taxes and insurance premiums.
Otherwise, when you are ready to retire, most likely consider a relatively modest, low-as-possible maintenance condo - and give your business to your children -, unless you are confident that you have enough income, with potential to rise, to cover all the costs of a luxury dwelling.
i have to agree with some of the other posts on here. i have rental property in florida and it is a HASSLE. it is very hard to get good tenants now since you have a huge pool of tenants who are former owners and have defaulted on that deal (for whatever reason) and are looking for replacement housing. as well, they are becoming demanding since there is an oversupply of housing and some refuse to pay their rent (for whatever reason).
i think the housing market has further to fall in any case, especially south florida. i don't see florida housing as being as problematic as some do for the long-term, since the population is aging and florida is a retirement state. florida taxes are not bad compared to most other states but, of course, if florida does not get the insurance costs under control a lot of people are going to be rethinking the idea of florida as a retirement state......
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