The Weston Rental Market & Rental Investment Case Study

The Weston Rental Market A survey was prepared of the available residential properties on the market in the greater Weston market area. Approximately (153) properties were available in mid-January representing a diverse range of prices and communities. Asking prices per rental square foot (SF) ranged from a low of $.87/SF on Racquet Club Rd. in Bonaventure to a high of $1.39/SF in Windmill Ranches and Oakbrook. While it is difficult to measure, actual rented prices could range from a low of .78 to .83 for a smaller unit to $1.25 up to $1.32 in a Weston Hills or Windmill Ranches home. When viewing the single family/condo rental inventory by community, there was a high of (14) homes for rent in Savannah to a low of zero to one in a number of other communities. Approximately (204) properties were available in mid-August ’04, reflecting quite a bit of absorption in five months for a decrease of -25% in the rental supply. Single-Family Investment Case Study When evaluating a homeowner’s investment options, it’s important to weigh the cost/benefits of selling or holding a residence for rental. With the rate of increase in Weston residential prices, some owners are betting that the carrying costs of a rental will be offset by the potential rate of appreciation over a year or longer. A recent analysis was done and went as follows: Purchase Price: $756,000 Capital Improvements: $50,000 Property Value: $806,000 Closing Costs: $12,814 Total Value: $818,814 Other Assumptions: Market Purchase and Rental consistent w/ Weston market; Operating expenses at conservative 67% of gross income including property taxes and other association and annual expenses; 90% mortgage at standard amortization and interest rates; Total Investment: $138,414 After 5 years of ownership with possible rent increases of 2% and a possible annual growth rate in value of 9% a return on investment and cash requirement analysis was completed. Comments: While there is about $12,000 in cash income after deducting operating expenses from the adjusted annual rent, the debt service creates a total negative cash outflow of an average of about ($36,200) per year. The Federal tax implications are important. Many individuals are not aware that there is an annual maximum allowance of $25,000 (regardless of number of owned rental properties) in net losses from the rental property that can be offset against ordinary income. This allowance is reduced once the person’s adjusted gross income (AGI) exceeds $100,000. After $100,000 there is a reduction in the allowance of $1.00 for every $2.00 of income over the 100,000 level. Once the individual’s AGI reaches $150,000 there is no annual allowance. The good news is that at the disposition and sale of the property, all annual rental property losses can be applied against the person’s ordinary income in the year of sale. While the Weston market’s annual average appreciation has ranged from 15% to 18% annually, our crystal ball is projecting a more modest average annual increase of 9% per year. The results could look like this after 5 years: Estimated future value: $1,358,157 less mortgage and selling costs gives a Net proceed of $631,952; Less the initial investment of $138,414, a Growth of initial investment of $493,518, and Less the five year negative cash flow of $(181,123), provides an estimated Gain of $312,394 for an Internal rate of return of 16.8%. Investment Strategy: While this is only one of many potential real estate investment scenarios, hopefully this will stimulate discussion and debate. Depending on one’s own appetite for investment and risk, real estate investments can outperform the stock market. As Steven Zucker, CPA* notes to his clients considering a rental investment, there are really two questions the investor should address: The most important factor is the actual future rate of appreciation of the property and the other question is the quality of the tenant. The ability of the owner to both invest the initial capital required as well as fund potential cash shortfalls on a year to year basis is critical. Every investor should have access to professional real estate investment analysis software and a licensed Certified Public Accountant to assist in a proper financial analysis. Know Total Costs & Other Considerations For the person considering converting their existing home or in purchasing an investment property there are a number of factors that should be considered. Know the total costs of ownership, including principal, interest, property/other taxes, and depreciation. Association costs should be factored as well as a vacancy cost allowance, real estate professional fees, and maintenance. Owners should also consult with their mortgage banker to first review the existing mortgage and any limitations a new mortgage may impose on non-owner occupied ownership. Minimum rental periods are almost always included in association by-laws. Owners and in particular second home owners would be wise to check before assuming that it is permitted to rent for less than one year. * Thanks to Steven Zucker for his tax and accounting observations. Steven Zucker, CPA, (954) 389-9920 ** The median is the middle of a distribution: half the scores are above the median and half are below the median. Howard Willis is a realtor affiliated with EWM Realtors and Golf and Home Real Estate marketing. He and his partner Allegra are principals in Allegra & Howard Willis Real Estate Group. Howard has a law degree and specializes in providing real estate sales and services to premium homes, condominiums and commercial real estate owners and buyers. Call with your questions and comments to (954)949-0444 or to howard@thewillisgroup.com. Learn more about Allegra and Howard at www.thewillisgroup.com