If your neighbors have just flipped a condo in Phoenix or Miami, they’ll certainly talk about how much profit they made and suggest strongly that you can make a pile too.
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For example: One of your neighbors snapped up a condo for $400,000 and, after only a year, sold it for $500,000. Chances are that lucky woman or man will tell you they made a $100,000 profit — or better yet, made $100,000 on their 10 percent down payment of $40,000.
Sounds pretty good, until you figure that, unlike stocks, there are considerable carrying charges to real estate. There’s the mortgage payment each month, the real estate taxes, the monthly homeowner’s assessment, homeowner’s insurance, the utilities, repairs and upkeep, closing costs and real estate commissions.
On our example from above, a $360,000 mortgage at 6 percent is $2,160 a month. Add to that, say, $150 for private mortgage insurance because you put down less than 20 percent.
In Ft. Lauderdale, you’ll pay $3,000 per $100,000 of assessed valuation in property taxes, according to Kevin Lynch, partner in New World Builders and RealtyPro in that Broward County city.
In Miami, the property taxes will run 1.8 to 2.1 percent of the purchase price, according to Daniel Hornek, broker at Avant Realty Group in Miami and Coral Gables.
So, if your taxes are, say, 2 percent of the purchase price, that’s $8,000 a year, or $666 a month.
Then there’s the monthly condo maintenance fee, which averages 45 cents per square foot in Miami, Hornek said. So, if your $400,000 condo has 800 square feet, that amounts to $360 a month. Lynch says that at any Ft. Lauderdale high-rise, you’ll pay around $250 a month for a one-bedroom and $350 for a two-bedroom. “If there are tons of amenities, it’s more,” he said.
Now, let’s allow $100 a month for utilities, minus a phone.
Then there’s the homeowner’s insurance of, say, $600 a year, or $50 a month.
All that expense equals $41,832. Then there is the real estate commission when you sell — 6 percent of $500,000, or $30,000.
So, suddenly that $100,000 in profit becomes $28,168. That’s still a pretty good profit on $40,000, and, we didn’t count income you would receive from rentals. But up to 25 percent of your gross may be absorbed by a management firm, and if you rented it short-term, you’d have the expense of furnishing it. It’s a lot of work to make that profit.
And, we hope you will read the condo declaration and bylaws carefully, because there may be restrictions on renting the units.
Right now, 5,500 condos are being built in Miami proper, mostly in the Brickell Avenue corridor, the design district and downtown, according to Hornek. And the same is true in Chicago, except that Miami proper has about one-ninth the population of Chicago proper.
Ask yourself this: When was the last time you couldn’t find a place to stay in Miami? Now add thousands of condos to that mix — perhaps half of them intended by their owners to be rented out — and ask yourself: If I own an investment condo in Miami, how much can I get in rent, if I can rent it? Same for Phoenix or other resort markets.
Some people say that real estate is more liquid now, and can be traded like stocks. That’s a stretch: If you want to sell your condo into an influx of 5,000 new condos, can you call up your agent and do it in one day?
Like mutual funds, past performance is no sign of future performance. If the guy before you paid $300,000 for a condo and sold it to you for $600,000, that’s great news — for the seller. Do you really think you’re going to sell it to someone else in two or three years for $1.2 million?
We’re talking about actually owning the property. But, if you play the most lucrative game in South Florida, you won’t close on the condo.
According to both Lynch and Hornek, you buy preconstruction and sell before you close.
In this scenario, you put down 10 percent when you sign the contract and another 10 percent three or four months later when ground is broken, Hornek said. Per-square-foot prices for such buildings are now $550.
The units are usually “decorator-ready.” The kitchen and baths are outfitted luxuriously, but the rest of the condo has concrete floors. If you want to upgrade, you pay for that upfront.
But, once again, that’s for people who want to own the thing.
When the developer sells 90 percent or so of the units, which can happen in two weeks or even in one day, Hornek said, the developer will start a resale program and offer to sell your unit for you.
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Hornek gives the example of a contract for a $1 million condo, and the buyer has put down $200,000. The developer, before that buyer closes, will sell it for you for, perhaps, $1.4 million.
You get the difference, or $400,000 — minus the developers’ 7 percent commission. And, it’s 7 percent of $1.4 million, not of $400,000. That totals $98,000. So, you’ve made a cool $102,000 profit on your $200,000 investment — for now.
Nobody knows when it all will end, Hornek adds.
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Wayne Faulkner is editor of Real Estate. You can contact him at [email protected] or by mail at the baiduhai, 435 N. Michigan Ave., Chicago, IL 60611.