Investment Rental Properties can be a very rewarding invesment if you align your goals with the appropriate asset. As an investor, you need to consider the rate of return on your investment versus the quality of the home. Every investor has different goals so we’ll go through the options as we see them here in Orlando. Here is some perspective on what you should consider and look for.
ASSET CLASSES
Low Return/Newer Home - We have found that many investors buy homes in the newer communities with the expectation that they will be low maintenance and offer the high appreciation potential. These can be found in Winter Garden, Lake Nona, and Avalon Park as an example. Homes were typically built between 2000-2007 and are very attractive and low maintenance. Many condominiums have similar investment performance however they are less expensive to purchase. The trade for the lower purchase price is lower net rent because of high HOA fees.
Here is an example of a 2,500 sq. ft. home from the Lake Nona area in South-West Orange County. This property was purchased for $175,000 and rents for $1,750/month. After expenses, the property should generate $6,700 in profit per year. The return on investment is approximately 3.8% per year. The home was originally purchased for $513,900 and has likely appreciation potential.
Middle Return/Rehabbed Home - Homes located closer to the primary employment centers are generally older, however their proximity to jobs makes them desireable rentals. These can be found in East Orange County, near the Florida Mall, and a number of other locations. Homes were typically built between 1960 -1980. These homes are typically block construction and are in hot demand for the first time home buyer and a high percentage of the work force.
Here is an example of a 1,400 sq. ft. home from Azalea Park in East Orange County. This type of property can be purchased for the $80,000 +/- and rents for $950/month. After expenses, the property should generate $7,400 in profit per year. The return on investment is approximately 9.0% per year. The home was previously purchased for $190,000 and has likely appreciation potential. A similar home on the same street recently sold for $95,000 to a first time home buyer, which indicates that home buyers are shopping this neighborhood, a critical determining factor when considering if the home has appreciation potential.
High Return/Rehabbed Home - Similar to the Middle Return in character, these homes are located in neighborhoods that have a higher percentage of rental units and often subject to more crime. These can be found in Pine Hills and a number of other locations. These homes are typically block construction.
Here is an example of a 1,100 sq. ft. home from Pine Hills in West Orange County. This type of property can be purchased for the $60,000 +/- and rents for $800/month. After expenses, the property should generate $6,000 in profit per year. The return on investment is approximately 10.0% per year. The home was previously purchased for $140,000 and has limited appreciation potential.
Conclusions – In general, there is a trade off of lower annual cash flow for higher appreciation potential. When someone promises you a home that has excessive returns, be cautious of the neighborhood or how they are calculating your returns. We calculate returns with actual Real Estate Taxes, HOA dues, and market rates for Property Management, and Insurance, and we usually reserve approximately 1% of the purchase price for Maintenance per year. Vacancies are not of material consequence in todays market if you are priced competatively and have a qualified management company do the leasing. We generally rent properties in 2-3 weeks and try to keep the tenants in place on a renewing basis. The management company we use has a default rate of less than 5% on average as they are diligent in prescreening applicants. As a rule of thumb, your expenses are going to be approximately 40% of the annual income.
If you would be interested in acquiring a rental property, please contact us at 407-740-0993 or sign up for our investment property lists.
Already Own a Rental?
Investors with existing rental properties that are underperforming should consider selling and getting some good units while the market is froth with better deals. If you would like a free consultation on your rental properties, please contact us at 407-740-0993 or let us know your contact information and we will reach out to you.
