Why take the risk? Florida.
I just moved 460k into an account with 4.75 % interest. It will provide over $2k a month of income, risk free until I decide what to do with the cash. For the past year, I had been looking to invest in multi families somewhere around Tampa area. After factoring in the insurance nonsense, skyrocketing taxes and double digit increases in utilities and I'd be lucky to cash flow a couple of hundred a door. That's IF nothing needs maintenance or repair. So, my question to you more seasoned investors is.. when you can park your cash in a CD or high yield savings at 5.5%, why bother taking the risk, especially in Florida? Any ideas that I'm not considering?
Most Popular Reply
Firstly, kudos on that fantastic interest rate – it's like having a super-charged bank account! Now, comparing that to Tampa real estate:
- Consistent vs. Potential Growth: Your bank account offers steady growth, while real estate can potentially appreciate, giving you a nice bump in value.
- Safety vs. Leverage: While your bank account is pretty much risk-free, real estate allows you to leverage, which can magnify your returns.
- Steady Returns vs. Tax Benefits: The interest is a guaranteed income, but real estate provides tax deductions that can be quite advantageous.
- Hands-off vs. Control: Your bank account needs no managing, while real estate gives you more direct control, letting you influence outcomes.
- Intangibility vs. Tangibility: Money in the bank is digital, whereas real estate is a physical asset you can see and touch.
- Stable Income vs. Passive Income: Interest is consistent, but properties, even with their ups and downs, can offer a long-term passive income stream.
- Jorge Vazquez
Everyone has different risk tolerance and investment objectives. So any one person's answer to the question will be shaded by their own appetite for risk.
I agree that Florida right now is difficult, largely because of the insurance issue. That particular problem only seems to be getting worse, unfortunately, with more and more insurers leaving the state over time.
You may be missing the opportunity that can be found off-market from distressed sellers. They're difficult to find, but distressed owners are out there. However, again, if they're not in line with your personal risk tolerance than that's okay - your risk tolerance is your choice and your business alone.
Hi @John Peter, We're based in Tampa too. You have to do what you're comfortable with. We do a lot of ultra-short-term lending, we're flipping, and we had some ground-up construction deals we've been working on for some time. That being said, we've been doing it for a very long time...lending for more than 30 years and real estate investing for over 15 years. We've got it down, so I think it really depends on your comfort level. If you have it down, then there's no reason to stop doing what you're doing. If you don't feel comfortable, then you're doing the right thing. Perhaps we can grab coffee soon. It would be nice to meet you.
Private lending or investing in a debt fund. Those are other options
- Chris Seveney
I agree, anything turnkey on the market probably won't even make close 4.75% cash flow right now. However, if there is some cash flow and appreciation, it may be bigger than that 4.75% but there's more risk to it. Ideally, you can loan the money to folks for short term flips (or do your own) or personal loans (but there's risk to those as well). Frankly, I'd be ok with putting some money into an account like you have done and doing some higher risk/yield loans on the side
Hi @John Peter,
Florida might not be the best place to invest but there are other locations that can be better.
With CD most likely interest rate of 4.75%+ will only last for a few more months/years then it might go down.
If you buy a property with leverage (i.e. If you get a property that is worth more than $460K and get a mortgage) in an area that prices go up in the long run 6%+/year in 30 years you can even make 9% per year or more.
When you are lending money and you have a tenant that pays the mortgage and other expenses you can reach much higher return than a CD but of course more risk and work than a CD.
I can share with the calculator if you would like.
One word: leverage
Florida is up 2.7% YOY, which is below the 5.5% but lets run numbers at 95% LTV Owner Occupied (OO) and 80% LTV (non OO). 2.7% at 95% LTV equals 54% return from appreciation. That far exceeds 5.5%. 2.7% at 80% LTV is 13.5% return from appreciation which is significantly higher than 5.5%.
I recognize the pat 2.7% appreciation is not guaranteed and could be lower. However, 2.7% is far lower than historical average and it can also be much higher. In addition, there is equity pay down, potential cash flow (possibly not in year one in this environment but for a long hold it will cash flow), and tax advantages.
https://www.redfin.com/state/Florida/housing-market
I do not believe RE is the best investment for everyone at all times. However, I believe at most times it is one of the better investment options available. A big reason is leverage.
Good luck
#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
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#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
Exactly. I and others smarter than I found a chair last year before the music stopped.
I didn't know savings rates would jump so high, so yeah, gonna take a lot for me to give up risk-free, effort-free returns equal to labor camps with maybe the same yield.
I think you're in the right place.
I will not touch FL as everything is way overpriced. I see a correction. I will continue to buy in the Cleveland and Mississippi markets with 15% or better net caps
All the best
Firstly, kudos on that fantastic interest rate – it's like having a super-charged bank account! Now, comparing that to Tampa real estate:
- Consistent vs. Potential Growth: Your bank account offers steady growth, while real estate can potentially appreciate, giving you a nice bump in value.
- Safety vs. Leverage: While your bank account is pretty much risk-free, real estate allows you to leverage, which can magnify your returns.
- Steady Returns vs. Tax Benefits: The interest is a guaranteed income, but real estate provides tax deductions that can be quite advantageous.
- Hands-off vs. Control: Your bank account needs no managing, while real estate gives you more direct control, letting you influence outcomes.
- Intangibility vs. Tangibility: Money in the bank is digital, whereas real estate is a physical asset you can see and touch.
- Stable Income vs. Passive Income: Interest is consistent, but properties, even with their ups and downs, can offer a long-term passive income stream.
- Jorge Vazquez
Hello John Peter in Tampa. Did you understand all the data numbers that lead to projected percentages involving what you may get from buying property in Florida? Unless you Buy and Sell Notes, Hard Money Lend, plan on making Single Family Homes your 24/7 JOB or Investing in Commercial RE your choice with what you have is the absolute best for now. I am buying One Month T-bills through my Schwab Broker online to practice with the Order proceedure and this month I got 5.2%. You can buy 1, 3, 6 month bills which the Fed needs desperately to Sell and it's "Full Faith and Credit" of our Government. You decide what increment you may need to take out some Cash and hold the rest for a little longer as the Fed Rate is bound to go UP still and may stay that way for YEARS because the Politicians are all just Tax and Spend guys. You can get up to 6.5% with A or AA Corporate Bonds and with a little more RISK there are A Bonds out there for 8% if you can hold longer. Remember, Einstein said, "the most powerful Force in the Universe in Compound Interest." That gets you into thinking to just Buy "Dividend producing Stocks" to hold forever, like Warren Buffett.You can auto-reinvest if you set up a DRIPS program with your Broker. My girlfriend has had DRIPS with Milwaukee Electric for 40 years along with other Blue Chip companies. You can do a Search for only, "Stocks that have made Yearly Dividends for the past 20, 25 or 30 years." Depends on you RISK tolerance. If you have the $460K in your Roth IRA you can think to do another Search to Invest in Covered Call ETF's that produce up to 12% Monthly. Because of the screwy Tax Treatment, I would only use them like a Reverse Mortgage in my Tax-free Roth IRA and of course, Compound the overflow money you don't use each Month. With $460K you could be a Vulture Investor, looking to buy properties at the Estate Sales in Tampa etc. There are Attorney's that probably specialize in that for private clients. Our old friend in Lake Magdalen died a few months ago and all he had was one nephew out of State. His 3/2 with two car garage home was gone in a week and he owned four other houses around town that were gone in a month...all Cash Offers if you have the connections. You need to learn to use Zillow to look at Land values in a particular area and the New Construction cost to make a real "gestimate" of what you can offer. Any property with a Fixer-upper house that you can buy for Land value is a safe bet if you want to avoid all the Numbers and just learn, 'The Art of the Deal." You sound like you have a JOB and the question is if you have ever bought a property? If not, your best bet is to learn the IRS rule for First Time Home Buyers and stop renting. You can live in the Homesteaded Home for 2 out of 5 years and Sell Tax-free for up to $250,000. If you study with Dave Ramsey, he says that buying your Home at 30 year Mortgage rates of 8.6% is OK as you can wait for a few years and Refi at a lower rate later on. I would not count on it, but, you have to run your numbers and see what you can agree to do. You need to watch Grant Cardone's youtube video, "The Worst Investment You'll Ever Make." That gives you the Big Picture of what you have to support with buying a Single Family Home.
Be careful where its parked because it may not be protected.
I personally HATE holding on to cash.
Is it less painful now that we can earn nearly 5% in a HYSA? Sure, but I still hate it.
There is no asset appreciation on cash. In fact, it's the opposite. That 4.75% is great until you factor in inflation (currently 4.1%) and the tax you'll pay on that earned interest.
Essentially, you're breaking even at best. Which isn't a bad place to be but it's not good either.
I'd be hesitant on overpriced markets but I'm still investing in Detroit where I can do 10%+ CoC returns plus appreciation. I can't get that parking money in the bank.
#2 Market Trends & Data Contributor
Our nationwide appreciation forecast is only 2-3% yoy until 2026 as high rate stays longer. It's not bad idea to put the money in CD while those 6% risk free lasts.
Hey John, Dan & Travis have all brought up great points.
I would also like to note there are multiple news headlines stating Florida has the highest Rent to income rations in the nation. Prices keep going up here and income has not risen to match. That being said there's always some kind of deal.
As a licensed R.E. agent in Florida, I personally prefer stablized but high cashflow properties in amazing locations, I have located out of state deals and I have 10% currently, I'm working to secure the other 10%. I am working on doing an acquisition of a 2.1m 30 unit multifamily building, it's appraised for 2.4m, is hundreds of feet away from the state's governor mansion and has an in place cap rate of 13%-14% with room to grow. It should net after financing and all expenses more than 110k. It's roughly CoC 30% +/- as there are a few STR units with an ADR of 180-200+.
Different people want different things :)
#2 Market Trends & Data Contributor
Even some conservative low LTV debt note is recently lowering the distribution to 8.5-8.9% range. While CD increases to 6% this week.
It's almost that everything that needs actual hard work is being punished by the government.
Have you considered an open-ended real estate fund that offers predictable and stable income with a diversified portfolio of investments? This allows you to compound your investment distributions by reinvesting and allows you to redeem if you find something better.
#4 House Hacking Contributor
- Realtor
- Reno, NV
No shame in a nearly effortless 5% return.
However, we're seeing some of the best deals we've seen in Reno, NV in years because so many buyers are out of the market. But, it certainly takes work.
No two investors are the exact same. Sounds like you're doing what works best for you which is what everyone should do at the end of the day in my opinion.
Best of luck to you!!
- Jake Andronico
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It appears that you are ignoring all of the benefits of owning real estate and only focusing on cash-flow. Are you forgetting that there is appreciation, sweat equity, tax benefits, leverage? You cannot get any of these with your CD. If the only benefit that you think that real estate provides is cash-flow then you need to spend a LOT more time reading through the forums, buying books, and listing to podcasts.
- Adam Bartomeo
- [email protected]
- 239-339-3969
John,
Lots of things to consider, for sure! As a fellow Floridian, I understand what you are saying. Here are my thoughts. Many of these have been pointed out in earlier posts.
The decision to invest in real estate versus a more conservative interest-bearing account like a CD is multifaceted. Here are some factors to consider:
Appreciation: Real estate, especially in growing markets like the Tampa area, has the potential for significant appreciation over time. Even if your monthly cash flow is modest, the value of the property itself can increase, leading to a potentially substantial return when you sell.
Leverage: With real estate, you can use leverage to control a large asset with a small amount of your own money. For example, if you put down 20% on a property, you control 100% of the asset and any appreciation it sees.
Tax Benefits: Real estate offers several tax advantages. Mortgage interest, property taxes, and certain expenses are deductible. Furthermore, there are tax strategies like the 1031 Exchange, which lets investors defer capital gains taxes by reinvesting proceeds from a sale into a new property.
Control: With real estate, you have direct control over your investment. You can make improvements, choose tenants, and decide on rental rates. This control can allow you to increase the value of your investment and improve cash flow.
Diversification: Real estate can be a way to diversify your investment portfolio. Having a mix of stocks, bonds, and real estate can protect your wealth from the volatility of any one asset class.
Inflation Hedge: Real estate is often seen as a hedge against inflation. As the cost of living rises, so too can rent and property values, helping preserve the purchasing power of your money.
Cash Flow: Even a modest cash flow, when combined with appreciation, tax benefits, and principal paydown, can result in a decent overall return.
Tangible Asset: Unlike stocks or bonds, real estate is a tangible asset. Some investors appreciate having a physical property they can see and touch.
All the best,
KC
Hello @John Peter,
I view investing in CD and real estate as being very different. An example will show what I mean.
Suppose you buy a $460,000 CD (or HYSA or T-bill) and a $460,000 rental property. What will be the five-year gain if the CD pays 5% and a rental property appreciates at 5%? (Our YTD appreciation is >9%, so 5% is conservative.)
CD gain:
Assuming a 35% marginal tax rate:
- Year 1: $460,000 x 5% x (1 - 35%) + $460,000 ≈ $474,950
- Year 2: $474,950 x 5% x (1 - 35%) + $474,950 ≈ $490,386
- Year 3: $490,386 x 5% x (1 - 35%) + $490,386 ≈ $506,324
- Year 4: $506,324 x 5% x (1 - 35%) + $506,324 ≈ $522,780
- Year 5: $522,780 x 5% x (1 - 35%) + $522,780 ≈ $539,770
Total gain: $539,770 - $460,000 ≈ $79,770
Rental property gain:
- Year 1: $460,000 x (1 + 5%) ≈ $483,000
- Year 2: $483,000 x (1 + 5%) ≈ $507,150
- Year 3: $507,150 x (1 + 5%) ≈ $532,508
- Year 4: $532,508 x (1 + 5%) ≈ $559,133
- Year 5: $559,133 x (1 + 5%) ≈ $587,090
Total gain: $587,090 - $460,000 ≈ $127,090
However, this represents only capital (equity) gain. You'll also receive cash flow from the property. Let's assume the cash flow from the property is 5% after all recurring expenses—a common (starting) figure among our client’s properties. To be conservative, I’ll assume there's no rent growth. However, appreciation and rent growth are driven by population growth. If there is appreciation, you will have rent growth.
- Year 1: $460,000 x 5% ≈ $23,000
- Year 2: $460,000 x 5% ≈ $23,000
- Year 3: $460,000 x 5% ≈ $23,000
- Year 4: $460,000 x 5% ≈ $23,000
- Year 5: $460,000 x 5% ≈ $23,000
Total cash flow in 5 years: $23,000 x 5 ≈ $115,000
The tax savings will probably shield the cash flow from taxes. Therefore, it will essentially be tax-free. So, the five-year gain from the property, including equity gain and cash flow: $127,090 + $115,000 ≈ $242,090
So, I do not see investing in a CD comparable to an investment property.
- Eric Fernwood
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- 702-358-8884
#2 Market Trends & Data Contributor
There are few inaccuracies here, I am sorry to destroy the party :
- next few years appreciation would be 2-3% only per-Freddie Mac/Zillow/etc
- it's almost impossible to beat 6% CD as average large public company earning yield is only 5.5%
- When calculate the gain, make sure to substract 6-7% for real estate commision.
Hello @Carlos Ptriawan,
A few comments:
“next few years appreciation would be 2-3% only per-Freddie Mac/Zillow/etc”
2-3% is a reasonable expectation for a national average. However, you do not buy a nationally average property; you buy a property in a specific location. In growing cities like Las Vegas, land shortage combined with rapid population growth and continuing large capital inflow mean that the appreciation rate will be much higher than the national average. 5% is a conservative estimate. YTD appreciation for the property segment we’ve targeted for over 16 years is >9%.
“it's almost impossible to beat 6% CD as average large public company earning yield is only 5.5%”
I did not compare CDs to public companies. I compared CDs to investment real estate in a city where prices continue to rise rapidly.
“When calculate the gain, make sure to substract 6-7% for real estate commision.”
Real estate is a long-term investment; there is no reason to sell. I will live off the cash flow from my properties as long as I live. When I die, they will go to family members. Why would you sell a performing asset that only does better over the years?
But let’s just say you decide to sell it in 5 years. Using the above example and subtracting 7% realtor commissions, your equity gain will be:
$587,090 x (1-7%) - $460,000 ≈ $85,994.
Your total gain, including cash flow, will be: $85,994 + $115,000 ≈ $200,994
This is still way better than a CD.
So, I do not agree with your comments.
- Eric Fernwood
- [email protected]
- 702-358-8884