Short term and luxury vacation rentals as an investment strategy
Cap rates on multifamily homes in Fort Lauderdale have compressed down to yields that barely beat the US Treasury Bond after all expenses are taken out. The market for rentals of single family homes in Fort Lauderdale is now saturated due to institutional buying. Investors continue to fear large scale investments in condominiums (though I don't agree with that fear). There is still a lot of money sitting on the sidelines, and people are looking to put those funds to work. I've had a handful of requests from people looking to purchase homes and operate them as short term and vacation rentals. Today I'd like to give some thoughts on that strategy.
Let's begin with some background on short term and luxury vacation rentals specific to Fort Lauderdale. There have been a number of court cases, and appeals, over the last few years in relation to this type of rental. Everything culminated in May of 2012 when a Broward Circuit Court judge ruled that the City of Fort Lauderdale could not restrict homeowners from renting out their property to vacationers. The judges ruling was based on a bill that was passed by the state legislature in 2011 which took away cities rights to restrict short term vacation rentals. The ruling opened up the market of short term vacation rentals, but it also opened the flood gates for abuse. In some places the result has been 25 people cramming into a 3 bedroom house to party for the weekend. Needless to say the neighbors of these homes are less than amused. Last week the Florida Realtors sent out a notification that the state legislature intents to take up the issue of restricting vacation rentals in the 2014 session. If passed each city would then have to adopt their own ordinances regarding short term and luxury vacation rentals.
Given the risks is this a plausible real estate investment strategy? Let's talk about the rewards. If you research on Airbnb or HomeAway you'll be astonished at the nightly rental rates some places in Fort Lauderdale can bring in. I'll select one of the 241 results in Fort Lauderdale that I found on HomeAway and dig into the income. If you were going to look at this strategy you would need to find a property that would satisfy the discerning vacationer. This would mean, 3 bedrooms or more, waterfront, a pool, a great location. I'll select a property on Las Olas Isles that is advertised for $3,000 a week, or $10,000 for the month. One week is the minimum stay. The home is 3 bedrooms and 3 bathrooms and fits all the criteria I outlined before. I think that is a fair baseline to use for income figures on a home of this type. I selected one on the lower end of the price scale to be conservative.
I can find a couple of homes for sale that are comparable listed in the $1.3 million range. As always, I want to be conservative. So let's say after you purchase the property, make necessary repairs and upgrades, then furnish it, you'll be at $1.5 million.
On the expense side I'm going to pencil in some rough numbers, if you decide this is a strategy for you and we identify a property these numbers would be tightened up. Taxes of $30,000 yearly, assuming a $1.5 million purchase price. Insurance costs, Las Olas Isles is generally considered to be in a flood zone, of $10,000. Management fees would run roughly 10% of the gross revenue. Electric, water, and utilities I would pencil in $700 monthly. Maintenance for the pool and lawn would run another $300 monthly. There is an 11% tax rate for short term stays, and cleaning fees, both would be paid by the renter, not the owner.
Let's tie this together. If you rented for 35 weeks out of the year at a price to $3,000 a week you would gross $105,000 for the year. If you stick to the expenses I outlined you would come out with $62,500 in expenses. In this scenario you would net out $42,500. From a cap rate perspective that would put you at a very thin 3%.
The pending legislation is what, in my opinion, poses the most risk to investors. In theory, and if passed, the vacation rental industry would be all but wiped out overnight. Thankfully, Fort Lauderdale does have a lot of love for tourists as they really drive a large portion of our economic engine. Locally I can't see ordinances being so tight that no vacation renting is allowed, but I would imagine minimum stay restrictions would be adopted. Whether that's 3 days, 7 days, or more, would have to be worked out. The income and expense numbers I put into this post are up for debate. In the end I think this really works for the same person that a condo hotel works for. The owner that wants to spend a few weeks a year in Fort Lauderdale, and wants to offset the cost of owning a vacation home here. As always I'd be glad to talk in more detail about this with anyone interested.
I work as a Realtor in Southeast Fort Lauderdale. If you’re interested in buying or selling a home, condominium, or townhouse (townhome) in: Rio Vista, Victoria Park, Downtown Fort Lauderdale, Fort Lauderdale Beach, Sailboat Bend, Tarpon River, Croissant Park, Collee Hammock, or Las Olas Isles, please feel free to contact me at (786)443-7203 or through my email firstname.lastname@example.org. I am a Realtor that works on Saturdays to accommodate those with busy schedules.
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Written By Casey Prindle