Real Estate in Florida
Big investment firms are buying Florida single-family foreclosures in bulk, expecting to profit twice: First by renting out the homes and then by reselling them in a few years.
As of late 2012, five years after the real estate crash bottomed out, there were still more than 300,000 foreclosed homes in Florida and another 250,000 or so bank-owned properties, called REOs.
In recent months, however, those homes have been coming off the market more quickly. In October, overall sales of single-family homes were up 25%, while inventory was down 30%.
The sales surge doesn’t reflect a rebound in the traditional market for single-family homes — the people purchasing the homes aren’t individual Smiths and Wilsons and Garcias.
Instead, sales records across Florida reflect at least 4,000 purchases by a cadre of private equity funds, hedge funds and REITs with names like American Homes 4 Rent, Blackstone Group, Two Harbors Investment and Pacifica.
Since last summer, for example, American Homes 4 Rent, based in Malibu, Calif., has purchased more than 640 homes in eight Florida counties. The firm has spent $20 million on approximately 200 homes in the Jacksonville area, $9 million on 60 homes in the Tampa region and approximately $20 million on more than 200 homes in the Orlando region.
The sales represent the first major incursion into the rental market for single-family homes by big investment firms in Florida’s history.
“There’s between $8 billion to $10 billion worth, and what was once considered a mom-and-pop asset class is becoming an institutionalized asset class,” says Danny Kattan, managing director of Property Investment Advisors, a real estate investment company that specializes in buying, remodeling and renting single-family homes in south Florida.
The investment groups all share the same strategy: Pay cash for clusters of foreclosed, bank-owned or otherwise discounted homes, generate healthy cash flow by renting them, then exit in a few years when demand from traditional buyers increases and the homes can be sold at a healthy profit.
The dynamics of the market are simple: Prices of single-family homes are low. Rental rates for single-family homes are high. Cap rates on rentals — the net rental income from the home divided by its sales price — are far outperforming most other asset classes.
Real estate experts say investors can expect, on average, 6% to 8% returns on single-family rentals in Florida. Some markets provide better opportunities than others, however. According to Core Logic, a real estate industry analysis firm, Florida boasts some of the highest cap rates in the nation, with rentals in Fort Lauderdale providing a 12% return and West Palm Beach averaging around 12.4%.
Vulcan Investment Partners, a Miami investment group founded by a group of Mexican businessmen, predicts it will hit a 14% cap rate on the homes it’s acquiring in Miami-Dade and Broward counties.
That’s a game-changer for investors, says Lewis Goodkin, a Miami-based real estate analyst who has been advising investor groups on Florida’s single-family market. The “condo vulture” investors who snapped up hundreds of condo units at distressed prices a few years ago didn’t expect to make money by renting them out, he explains. Their strategy was simply to sell the units at a profit “down the road” when prices rebounded.