Home Buying in Key Biscayne>Question Details

JCG, Home Buyer in Key Biscayne, FL

Is price/rent ratio threshold of 20 valid in Key Biscayne ?

Asked by JCG, Key Biscayne, FL Sun Jul 25, 2010

I see many houses way above that number.
For instance, you see houses listed for 2.2M and renting for 6.5k/month, that is a 28 ratio.
Considering the maximum ratio of 20, the price should be 1.56M
Should I make an offer based on that calculation ?

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Answers

3
Ivan’s answer
No, no one really looks at that ratio for valuation purposes and there will hardly be a buyer that will be swayed by such an arguement. For residential everyone here looks at comparable sales, not the income approach.
Historically, if you get 1% (of the purchase price of a home) in rent, you would be making a positive cash flow, even with financing. More recently (past 5-8yrs) in Miami in general you could expect around 0.5% in rent because that has been the market rates for rents while the prices jumped.
Over the past 5-8 years with hurricane insurance increases and real estate tax increases, it's become much more difficult to cash flow properties (especially condos).
Today you can produce a positive cash flow, but unless you pay cash and get a really high rent it's very challenging to do in a high priced area like KB. There are other 'bread and butter' areas that are poised for growth, solid neighborhoods that you can find quality properties in foreclosure or as REO's that are quite easy to cash flow and produce interesting ROI's.
Good luck and let me know if I can help you further.
Ivan Amayo
Broker
IFA Properties
Coconut Grove, Coral Gables, Key Biscayne, Brickell, Miami Beach
0 votes Thank Flag Link Mon Jul 26, 2010
No.

Do not make an offer based on that calculation.

If you're purchasing a property to live in, forget about what it'll rent for. That really doesn't matter. What does matter is how much the home is really worth. Have your Realtor do a CMA on the property to compare it with other recently-sold properties. The other things to consider, of course, are whether you can afford the house and whether you like the house. But if you're focusing on a calculation to determine whether to make an offer--and at what price--begin with the CMA and forget all about rental income.

If you're purchasing a property to rent out--as an investment property--forget all about that ratio. That really doesn't matter. What does matter is whether the property will cash flow. And, yes, that does depend on some extent on what the property costs and what it'll rent for. But it also depends on the type of financing, how much you put down, and other factors. And then, when you consider how much to put down, you have to look at your Return on Investment. Let's say you'd have to put $900,000 down in order to break even on cash flow (using your example above). Frankly, that'd be a horrible investment. You'd have a 0% return on a $900,000 investment. Put it in a bank at 2% and at least you'd end up with $18,000 a year with a lot less risk and hassle.

So: If you're buying it to live in, begin with the CMA.

If you're buying it as an investment property, figure out what you'd have to pay to get an acceptable positive cash flow. Then look at ROI to see if those numbers make sense.

Hope that helps.
0 votes Thank Flag Link Sun Jul 25, 2010
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
Contact
Hi JCG,
List price is not always a good indication of what someone will pay to buy it. Listing price is what the owner hopes he'll get for it, minus what he could lose in negotiation. Every house is different, different upgrades and features and has to be considered on an individual basis. Evaluate what similar houses sold for and take it from there.
There is nothing stopping you from making an offer that you think is fair and then take it from there. Some houses are priced too high because sellers refuse to be realistic. Make the offer and be prepared to negotiate. Know the maximum you are willing to spend.

Good Luck!!

Genevieve Ramachandran
0 votes Thank Flag Link Sun Jul 25, 2010
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