Why the Smart Money Rents in Miami
May 24, 2008 11:45 a.m.
MIAMI - Maybe the smart way to play the real-estate crash is to come down here and rent.
You can live in an amazing, brand-new condo, high above Biscayne Bay, for about $2,000 a month. And there are plenty of desperate owners who need the income. The cash doesn't come close to covering all their costs. For this money, you can get a two-bedroom home on the 20th floor with a wraparound balcony and stunning views of the bay. And I mean the kind of views that make your jaw drop. This is millionaire stuff. You'll have at least one private pool in the building, along with saunas and fitness centers and all sorts of other conveniences. Of course, you have a 24-hour concierge and valet parking. Many have private cinemas, bars, restaurants, spas and the like. They're like cruise liners on dry land.
And there are lots of ex "condo flippers" who are happy to rent you their new place for a song.
They're all waiting for the market to recover. None wants to sell in a depressed market.
But that has created a new, predictable situation. "Rents are falling," says Miami broker Leslie Cooper. "You and your brother and everyone else is trying to rent your new condo out. So no wonder. But the rents won't even cover your costs." I looked a number of fabulous condos in new developments on Brickell Avenue in downtown Miami. Their prices had been slashed drastically from peak levels. Some are now in forced sales.
You can get a two-bedroom condo in some places for $400,000 or less. And that's considered a great deal. But let's do the math. Once you own the condo, you'll have to pay the monthly fees. In these new developments, those are steep. In some two bedrooms I saw they're about $1,100, or $13,200 a year.
Providing all these amenities costs money, after all. And property taxes here work out at about 2.25% of the home's value. On a $400,000 condo that's going to be another $9,000 or so.
All in, the owner of this condo is probably going to have to fork out about $22,200 a year in running costs. Likely rental income: $2,000 a month, or $24,000 a year. So your net profit is all of $1,800. And that doesn't include any extra costs for further maintenance or special assessments. If you manage to squeeze the rent up to $2,200, you only net a couple of thousand a year more. All this is before counting the other big issue - the actual cost of the money needed to buy the place. If you have to borrow 80% of the purchase price at 6%, that's going to cost you another $19,000 and change. Even if you have the $400,000 in cash to buy the condo, renting it out doesn't make economic sense. By spending that money on a condo, you're passing up maybe $20,000 a year - at a conservative estimate - of investment income instead. Buying is a bet that condo prices will rebound dramatically. In other words, the cost of renting these fabulous places is, right now, well below the true economic cost of building and maintaining them. That's true elsewhere, too. Real-estate brokers in Fort Lauderdale described clients who were hemorrhaging cash each month because their rents weren't covering the costs. One broker had been in a similar situation personally. He had owned a condo one block from the beach. His expenses ran to $3,300 a month, but he could only rent it out for $1,750. He finally gave up the fight and sold out. He lost money, but at least he stopped the bleeding.
R.O.I. By BRETT ARENDS
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