Cashflow vs Speculative
Here's the deal... I'm looking at a second property which is a somewhat updated duplex in the Miami in an area that may appreciate substantially over the next 15 years. For those that are local, it's on the north side of the Miami river between the Miami Marlins stadium and the Miami International Airport. The details are as follows:
Purchase Price: $350,000
Monthly Expenses: $2,582.61 (Duplex is in a flood zone since on the river, where by my insurance is $6835.92/12 = $569.66)
Monthly Cashflow: $317.39
Total Cash Needed to Close: About a $100k
Cap Rate: 5.99%
I'm torn because although the property is in a great location, doesn't need work, has current tenants, and has plenty of speculative value, I will have a $100k parked until the property appreciates, not to mention the below than average monthly cashflow. My initial thoughts are that opposed to having a $100k sitting and not really creating monthly cashflow for me, find a different property, perhaps with less speculative value and more monthly cashflow.
What are your thoughts? Thank you in advance.
Jose
Hi Jose,
Just out of curiosity, what makes you think the area will appreciate in value? Are you referring to the Allapattah area?
Im not speaking to this specific property or market...but investing in A Class or High Demand areas isnt speculative. Cash flow is a function of the demand and risk inherent in the property and the market. The higher the pro form cash flow of the property, or the higher the cap rate, means higher the risk. Conversely the lower the cap rate is indicative of the lower risk of the asset.
If I invest in a stock with low dividend like Aflac, that is not a speculative investment compared to a high dividend stock like Verizon. The yield is a function of the markets view of the risk of the asset.
The same happens happens with real estate. If the market views the property as lower risk, the demand for that asset is higher, and pushes the purchase price higher, creating a lower cash flow asset.
I personally though would not buy a property in a flood zone though, as I could likely find something similar in price, with similar rents without the added cost of the flood insurance.
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@Rik Patel Simply because of all the new developments and purchasing of property happening in Allapattah. Several developers and realtors that I have come in contact over the last few month say it may be the "W.O.W District"... for 'West of Wynwood. Not sure if that will be the case but the money being injected is substantial. Currently, many residents and city officials are against the gentrification of the area but so were the people of Wynwood sometime ago and look were we are now.
What are your thoughts?
@Russell Brazil Thank you very much for the insight Russell.
@Jose Corbera Interesting to know! I'm an RE agent here in Doral so not to familiar with that area, but I do see the point you're making with Wynwood as that was a complete mess some years ago and now it's a hot area. In my opinion, I'm staying away from speculative investments because of the higher risk they have. I would just make sure your numbers work and negotiate hard on that property. By doing so, you have some cushion if the market does take a slightly fall.
Just my opinion though!
Thank you Rik!
*Disclaimer: I am not an experienced real estate investor*
Although I am not an experienced real estate investor, I do believe that I have a good enough understanding to refer back to Russell's post and say that he gave some good advice. More specifically, his comparison between investing in stocks and real estate as well as his notion that cash flow is a function of the demand and risk.
However, I do agree that the cash flow is a little low for a flood zone property that will likely incur other capital expenditures throughout the length of ownership. Expenses are likely higher than what you expect and various different biases lead you to see expenses as less than they are. However, if you are able to approach the investment in an unbiased way and you aren't generous with your expense metrics then I think your speculations are correct and the property will be profitable in the long run.
I prefer cashflow bc I think it is more predictable than appreciation, but if you have strong reason to believe there is appreciation, you have to consider it, because big appreciation swings do more for you than cash flow ever will.
@Jose Corbera No problem! Do you mind going over how you read these flood zone maps? and what website you went on to determine it was in a flood zone?
@pete You are right. I would prefer cashflow than appreciation but this property looked like a winner. Unfortunately, after looking into things further, there's even less cashflow than what I originally thought. Time to keep on looking as I cannot just rely on appreciation.
@Rik Patel I normally plug in the property address into https://mdc.maps.arcgis.com/apps/webappviewer/inde....
From there I use the following link to understand the flood map zone. http://www.miamidade.gov/environment/flood-maps.as... Unfortunately, the property I was interested in was in an AE zone (Moderate to High Flooding Risk).
Hope this helps.