The Wall Street Journal’s “Florida Bust Spawns Vulture Culture” talks about a series of amateur real estate investors ready to pounce on Miami’s weak condo market. I call them amateurs because none of them speaks about the negative cash flow that they will incur until their units appreciate to their targets. None of the investors cited live in the Miami area and they don’t appear to be knowledgeable on the Miami neighborhoods, the rental market, or the additional costs exaggerated to the South Florida market.
The realtors have done an
outstanding job of focusing investors on the square foot cost, anchored
to the peak. The article cites a buyer bragging that he paid $290 per
square foot compared to an asking price of $400 in September. If he was
focused on the previous trough rather than the peak, he would realize
the prices were under $200 prior to the boom for high quality
buildings. Improper anchoring leads to most investment mistakes.
latest crop of buildings in Miami and Miami Beach do not lend
themselves to investments. The Miami area job market does not support
rents high enough to even cover operating costs, without even
considering the cost of capital. The newer buildings contain a high
level of costly amenities. Insurance costs are very high (due to
hurricanes) and might not even be available for non-owner-occupied
units. Banks don’t pay maintenance on foreclosed units, so other owners
will receive special assessment to cover the difference.
buildings have their own set of problems. While they might have more
stable associations, older buildings require costly updates, repairs
and maintenance. Pre-hurricane Andrew buildings were built to a lower
standard. Windows usually need replacement after 25 to 30 years. The
caustic salt air causes concrete decay and the rebar rusts under the
surface after about 20 years. Elevators usually need a major rebuild
after 30 years.
Counting on appreciation is a fools’ game. The
net present value of any gain would never be greater than the net
present value of the expense (including the cost of capital). Owning a
condo for pleasure is an entirely different story. The pleasure owner
would be happy to increase costs for a better maintained building with
better amenities. This is the opposite of investors.