When planning our annual family holiday, my long-suffering wife has to balance her needs for good weather/shopping with my interest in going to somewhere with a yielding property market. This has resulted in a lot of Scottish holidays in the early years of our marriage, followed up by Germany and eastern Europe for the last few years. I have to say, my wife has compromised heavily on holiday weather on occasion. I am not sure how I got away with so many Leipzig 'holidays' in the last few February half-terms, having family fun in minus-20 conditions. I am still unclear why my wife stays with me, she is 10 years in now, I am sure she has her reasons. So it was a pleasant diversion for the family (in particular my wife) this year to go to balmy Florida for Easter for holiday, from where this rambling “postcard” comes.

For the past 20 years Florida has been a part of the world that is very familiar to us to be fair, my brother and sister have lived there since the 1990s and so have my mum and dad on and off (until my dad fell out of a tree, another story). And so, we have visited many times to visit family, and seen the journey my family and friends have had in property over this time and have some perspective on the market. Why I am tapping this away from a cramped economy return seat on Virgin Atlantic is to jot some ideas down, hopefully for some interest to investors looking at the market or just looking how property markets develop in general. I have watched with keen interest the market develop from a relative affordable base in the mid 1990s, through rapid growth each time I revisited until 2006. And this is my 3rd trip back during this financial crises. But the real raison d'etre for looking more deeply into this market was provided by a cockney fellow I overheard on the telephone , apparently to his wife. It was day 2 of the recent London Property Exhibition, and it seems he had made an acquisition:

“You sittin' down luv? Well me and Dave popped into some property thing after going to the body builder show” [The London Excel was hosting 2 exhibitions thus weekend, for what you thought was a mutually exclusive audience]

“Well, guess what I bought today? You're never going to guess”

The poor wife on the other end of the phone was given ample time and chances to guess, although we will never know how close she was to winning the “Mr and Mrs title” for accuracy.. But the next line from the husband leads us to believe she was not bang on:

“no luv, better than that...We just bought a f*****g 7 bed villa with a pool in Florida. How much was it Dave? [Dave puts up his five fingers] Yeah, fifty grand.”

Now, being a seasoned attendee of exhibitions for the last 10 years, I had heard conversations such as these. But in these more straightened times, it was a conversation that stuck in my mind. I wanted to know if the brand new investor [and perhaps Dave, if he had also gone “shopping”] had got as good value for their investment as their wives were led to believe.

Well, there has been a lot of noise concerning the USA and Florida market of late. Not surprising perhaps, with the effects of the financial crisis playing through in one of the epicentres of the mess. Although much of the developed world has felt the full effects of the crisis, property markets have reacted in different ways perhaps mainly due to foreclosure rules, current financing conditions and the imbalance between supply and demand. And of course the levels of prices that were reached in the peak time of any market, relative to earnings being as good a measure as any. Whilst many European markets have been hit, the fall back so far in prices has been in many cases moderate thus far. In UK for example, the restriction on building keeps the supply down even though it is a safe bet that prices will fall back some more in the short to medium term in most parts. Unless inflation comes to help out. Spain, due to the foreclose restrictions widely in place, has yet to see the large drops that the high-unemployment and ravaged economy demand. More to come perhaps in the next years. Only Ireland has felt perhaps some of the pressures that have been felt in the USA over the last 4 years. So, back to Florida and oh is is a sorry story. Building permits were granted as freely as mortgages in the period 2000-2006, and they did not hold back. Development after development of villas and condos sprawled in increasingly remote locations and the results can be seen on the streets in the city which I will focus on, Orlando. Orlando is a fascinating city to focus on as its population numbers [metro or greater Orlando] 2.1 million and is boosted each year by huge tourist numbers of around. The population in this region has increased by 500,000 in the last 10 years. Add to this the world-beating convention centre and high tech employers like Locheed-Martin, then this city has more to boast about beyond the Disney Theme parks it is so famed for around the world. But with the local economy being hit by lower tourist budgets and the like, unemployment is the high for the US in this city at 10.8%, against an average of 8.8% in the country, although it is starting to fall. Vacant properties number the highest in the USA at around 15% [although this includes second homes]. So, it does not sound too pretty right now. But it never does in a yield market, does it? Let's look at some different types of properties in the city, to see where could be safe for an international client to play right now.

Firstly, lets take the holiday villa and condo market, which dominates the marketing of Florida property to international clients. This was perhaps the most over-built sector and one that has felt the full force of the correction, the properties largely being 'discretionary' that is to say places that folks do not need to live and hunker down in whilst the crisis blows over. They can just lay empty, especially if the owner has decided not to pay the mortgage for the property which is now perhaps worth 25% of what they paid a few years ago. Like all investment for overseas clients right now in the city, new purchases are backed entirely by cash and deals are driven hard typically through the short sale or foreclosure process. As a quick background, a short sale is where the owner is yet to default on their mortgage, and in negotiation with the bank as to a price it can be released for. Foreclosures are properties on the bank's books, and the bank decide how and when to offload the properties themselves.

Popular areas for villas and condos include the areas to the south of Orlando itself, areas like Kissimmee, Davenport and Lake Buena Vista. Celebration is another quite unique community, built by Disney and with all that comes with that including trees that drop leaves automatically during the “fall” and manufactured snow each night in December. Nice. A drive around these areas shows a real mixed picture, some communities have been devastated over the last few years, others show signs of more resilience. For example, the more remote communities in places like Davenport seem largely uninhabited, save a few brave Brits on their cheap holidays. Whole streets, perhaps with 100 villas on, have only 2 or 3 cars parked outside. And communal maintenance, not being paid for by owners under financial distress is going to the wall.

Where is everyone? The deserted streets of Davenport

It is most likely our investors from the London show bought in a community like this. Nice properties, but difficult to see any viability in the investment, with no chance for rental return from either short or longer-term tenants, and a growing problem with community maintenance [grass cutting and the like] when owner do not pay into the community fund. If something seems too cheap, it probably is, goes the old saying.

Other areas nearer to the main resorts of Disney or Universal, or ones that support longer term tenants show more signs of viability and are in a better state. But in this whole sector it is really difficult to pull out any real investments, that is to say something that is going to put regular money in your pocket over and above what you could achieve in a bank account. Taking a look at a typical 3 bed villa with a pool in a better division in Kissimmee, lets break down the investment:

Purchase Price Now - $115,000 [in 2006 - $245,000 ]

Average Rental Price Per Week - $700

Rental / Managing Agent Fees Per Rented Week- $140

Home Owner's Association Per Year - $6,600

Tax Per year - $1,850

Maintenance Per year [fully furnished] - $5,000 [estimate]

So, to break even, the unit would need to be rented for 24 weeks in the year. Perhaps possible in the very best located units, and ones that enjoy the best marketing. But there are a lot of units out there chasing holiday-makers. Perhaps it makes sense if you have intended personal use for 4-6 months of the year, but that is not yield investing and so we will not take this any further. In short, whilst investors have all lost their shirt in this type of market, even before the crash, there are still plenty of ways investors can lose money here. And it is this market that is most heavily promoted to international clients.

The condo market which is zoned for longer term [1 year plus] residents shows more viability, but should be carefully chosen. Condos start at around $10000 for a 1-bed, trading sometimes on E-Bay I notice, but should be avoided for the reason of tenant demand and viability. It is better to look for a better-located unit in a community which is well-maintained and is viable. For example, a well-located one-bed unit in the Sand Lake region, near the Theme Parks but also regular employment and good schools, breaks down as follows:

Purchase Price - $38,000 [Price Paid in 2006 - $135,000]

Rental Per Month - $700

Rental Agent Fees Per Month - $70

Home Owner's Association Per Month - $190

Property Tax Per Month- $40

Estimated Annual Maintenance [unfurnished] - $600

Net Yield - 11.05%

It really pays not to look at the prices which were paid back in the peak of 2006, but how the investment will perform for you today. Well-performing investments today are the ones most likely to attract finance when it returns, and you have an income whilst you wait. It makes little sense in nearly every case to look back to older capital values, apart from for vanity and to say “look how clever I have been”. Well, maybe you have, maybe you haven't. I include these old prices as a point of reference on where the market has been.

The really interesting plays at the moment fall in the in-demand area of downtown [or central] Orlando.

These are the streets I have been bravely walking in the 90 degree heat these past 2 weeks, looking what is going on whilst taking the kids to the playground and local coffee shops. We stayed here in one of the area's very well-appointed hotels, and I have to say I really enjoyed the laid-back [dare I say European] feel to this part of the city. The area has been highly developed over the past 20 years, formerly a less-desirable part of town to live, and now attracts young professionals and families, valuing the proximity to work and the superb recreational facilities the downtown area offers. There are great facilities here for professional singles and families alike, concerts and sports games, great bars and clubs and galleries. In the leafy Thornton Park district there are weekly farmer's market, boutique shops and bistros. Just 800m from the very centre of Downtown, [although my brother being American swears it is 3-4 miles]. It really is quite unique, and a story which can only continue to improve over the coming years as the location establishes. And, like in any yield market, it is these areas of unique value that you seek. These downtown areas have been hit by the same lack of confidence and lending as anywhere else in the city. But well-paid folks want to live there, and rents are strong whilst you wait for the confidence and bank lending to return. Which it will here first in this city.

The bulk of the market is represented by condominium buildings, having been erected in the last 10 years and built to the standards usually seen in 5 star hotels. The tenants live well here, perhaps too well. It is typical to be offered a 60-100 sqm 1 bed or 100 – 150 sqm apartment with lake views, balcony, concierge, underground parking, swimming pool, communal bar area, gynasia, conference facilities. The list goes on and on. The only water features I have seen before in yield property have been through the ceiling and very much unintentional. So this is a little different.

A typical condominium building in Orlando

But before hitting the figures, let's give a bit more explanation to the rental concept, which differs to many markets around the world. So the tenants pay a monthly rent, as usual, to the landlord and they stay for a minimum of 1 year and 3-5 years is common. So far, so good. What is different is the cost structure, all those 5-star hotel facilities in the apartment buildings need to be paid for. And these are paid for by the landlord in effect. This is the Home Owner Association, the fund which pays for the facilities and upkeep of any property in the city, but can be astronomical in these developments in comparison to the rent. And then there is the monthly property tax to be covered. So, lets do the sums on a higher end 2 bedroom sqm condo:

Purchase Price - $269,000 [short sale]

Monthly Rent - $2100

Home Owners Association Per Month - $620

Tax Per Month - $450

Yield - 4.6 %

As an alternative, here is a property in the hands of a bank and being released at a better price:

49,000 [bank sale, just released and will sell quickly]

Monthly Rent - $1750

Home Owners Association Per Month - $460

Tax Per Month - $170

Yield - 9%

So, whilst these units are simply stunning, it is only the most distressed properties being delivered under foreclosure that will provide a high yield. This occurs when a glut of units are released by the bank in any one development in a short space of time. But put simply, I have never seen property with this yield which is presented to this standard and is frankly remarkable.

Of course, finding these great deals is not a walk in the park. Having invested in the market myself, it can be a long process and one which you really need help on the ground with in order to succeed. And many times, those great deals get outbid at the last minute and you are back to square one. Perhaps a more reliable in this segment of the market are units still in the downtown areas, but not presented to the 5-star standards of the recent builds. These units still often boast swimming pools, gynasiums and the like, but are done to a lower-key standard and the home owners association fees can be half of the newer units. But due to the location, a steady demand for tenants can be found at the right rental level. 

These are the figures of a unit we bought ourselves in December 2010 and ones worth looking for:

Purchase Price - $38,000

Monthly Rent - $700

Letting Agent Fees - $70

Monthly Home Owners Association - $147.50

Monthly Tax - $50

Net Yield - 13.7%

Right now, there are 3-4 such units sitting on the open market, and others underneath the market and waiting to be released over the coming months. One such example, still in the downtown area but in the more lower-rise and fashionable Thornton Park is this 2 bed / 2 bath townhouse:

Purchase Price - $75,000

Monthly Rent - $1100

Letting Agent Fees - $110

Monthly Home Owners Association - $150

Monthly Tax - $110

Net Yield – 11.6%

Perhaps the pick of the yield crop on the market today, and a very in-demand tenant location that should enjoy finance possibilities in the near future, enabling equity withdrawal post purchase.

A typical family house in Thornton Park

I had the good fortune of being taking around many of these investments by a nice chap called Jason, a local property agent / expert and a dead-ringer for Steve Merchant [co-writer of the Office, for the fans of Ricky Gervais]. Jason has a great insight into the market and has sold property before the boom, during it and now in the aftermath. He has seen it all as agent, and also as owner in the area himself. Rather than throw the towel in as an agent when the times have got tougher, Jason to his credit has kept going, perhaps earning a crust from rentals, until the market recovers. Many agents have gone to the wall, so fair play to him. I spent a happy afternoon with Jason and his colleague [and wife!] Marion looking around all the interesting units in downtown. For fun, and it was fun, they took us upstairs to the penthouse apartment in one of the top-spec developments which overlooks the very popular Lake Eola. This unit, Jason promised, offers the best vista in any property in Orlando. He was not wrong. We arrived on the lift, the penthouse enjoys a lift to its own level. It was massive, and the views were quite something.

Spread over 320 sqm, it boasts 4 bed and 4 baths in its current configuration. Okay, the unit was left in a bit of a state by the old owner who had paid $1.8 million 4 years ago, who can blame the old owner who has lost over $1 million for not hoovering up on the way out, but you could feel you were in one of the very best spaces to live in the city. And Jason let on that it was soon to be marketed by the bank [it is under foreclosure] for $600,000. That is unbelievable for this type of property. Okay the monthly rent will probably “only” be $4000-4500, and we have all the fees to pay, but still a real return and in a unit that will feel Orlando's uptick first and move heavily when it arrives.

Postcard sign-off

I would sum up my little tour around Orlando by saying that there are indeed some good deals for the cash investors out there. I have been searching the world for yield property for the last 20 years, usually seeking net returns of double-digits and I have never seen property that meets this requirement that frankly looks so spectacular. As usual, homework needs to be done as to which exact area / type of property fits your investment expectations. Most crucially, diligence must be placed on calculating actual monthly returns after the sometimes astronomical monthly fees etc, and also to ensure that you are buying in an area which enjoys high tenant demand. And of course, as a cash investment in another currency, the investment's success could largely be down to timing of currency rates on disposal of the asset.

Perhaps one final point for investors in the US from around the world is that trips to Florida [or indeed anywhere else] to view your investment on a regular basis are tax deductible as allowable expenses. So, that family holiday just became that much cheaper......

Ok, back to the day job in Germany. Good yields, finance in place. Looking forward to it, but will miss the swimming pools.