|
|
 |
|
|
|
January 13, 2008
View from Florida (Part III, 2007)
(c)
copyright View from Silicon Valley, 2008. All rights reserved.
Our annual Florida visit is not complete
without a tour --or three-- of local real estate developments and the local "spin." For the last three or four years
we made a point to take a boat tour of the fresh water lakes in Winter Park.
A homey little local operation has built
up a sight-seeing business in and around a very old, for Florida, residential development. Part of the charm is they
don't advertise much. You had to know they were there and find the docks. Once aboard, you saw sights such as
the winter homes of the original Sinclair Oil and Walgreen's Drugs founders accompanied by other stories about New York mansions
recreated on the waterfront and a brief history of Rollins College. This is local color you don't get with Disney or
Universal Studios experiences.
Since we first tried it in 2004, this homey business has grown like crazy. This
year they were running four boatfuls of people on an hourly basis. Good for them!
Unfortunately for us, the logistics
of running four boats every hour degrades the tour itself. We had to constantly wait for the boat ahead of us to move
before we could pull up to a given "story." Even at the slow speeds used, we had to cut the wake of the leading boat.
Our boat driver had to finish each spiel in 20 or 30 seconds so as to make way for the next boat behind us.
Suddenly,
our cozy little tour felt like just another tourist attraction. Pay your money, wait in line and then hurry through to make
way for the next sucker, err..., tourist, err..., paying customer.
One consolation on this year's tour was all the
real estate signs we saw on the drive through Winter Park, followed by even more signs on lakefront properties. This
made it clear that even near the heart of Orlando, there is a very large supply of property for sale. The "problems"
we identified in Part I were not just due to the distance of those houses from the center of town.
Even more interesting
on this formerly-sleepy tour, there were several construction projects in evidence. Clearly, a large handful of existing
houses were in the process of giving way to shiny new multi-million dollar mansions.
Becoming bored with the tour around
the time of the Horace Grant story, I punched a phone number into my cell from one of the real estate signs. The chosen
sign was one of three in a cluster and it seemed to point to an empty lot. (Admittedly, the bright yellow helped too,
since I could pick it out from a longer distance than the darker-colored signs.)
On the drive out, while dodging the
parade down Winter Park's Park Street, I called the number. On the day after Christmas, it was picked up by the second
ring. I didn’t have the street address but was able to describe the property I wanted to learn about and was promptly
transferred to the listing agent. So far, so good.
Judging by the crying baby in the background, the agent was
working from home. Even so, we spoke a few minutes to triangulate on the location. He apologized for the difficulty
but, "I'm handling 200 listings." He committed to get us the details and call back.
I hung up doubting if I would
indeed hear back. After all, it had to be blindingly obvious I was a tourist on vacation. I admitted my interest
was mostly casual and I was not on the verge of buying. (Being in sales, I try to be sensitive about wasting another
salesman's time.) To my surprise, he called back in less than 15 minutes.
This call was now the agent's sales
pitch:
+I recall he said the property was ~10,000 square feet.
+It has three homes it now which are rented out.
+The
houses generate about $60,000 per year in rent.
+You could easily build any size house you want on the property.
+The
property has a two-level boat slip on it.
He went on and on about about this last item. He emphasized how difficult
it was to get boat slips approved for these lakes. This a unique feature you can't easily replicate.
I must have
asked three times, "How many boats does this double-decker boat slip held?"
This question either proved I knew
nothing about boats (since the answer was obviously "two"?) or he didn't himself know because I never did get an answer.
He
kept droning on and on about how nice it was to live in Winter Park, the central location, the prestige, what you could build
on this property and the "value" of the boat slips. At this point I'm convinced these "houses" are what you and I would
call cottages.
I switched tactics and asked how long it had been on the market? Again, no direct answer.
I
changed tactics again and tried to get him to jump to the "answer." How much is the property?
Perhaps sensing
I wasn't going to build a mansion, I heard another spiel about the value of the cash flow from the houses.
The
whole time he was talking, I was trying to do the mental math to deduce the appropriate price. $60K in rent for three
houses means $20K per house, which is ~$1,666 per month for each. Classically, this suggests, three houses "worth" ~$200K.
Add a couple hundred per month for the boat slips and you could maybe call for a ~$635K valuation. You could go more
conservative by calling the rent 1% of "value" and end up with $500K, plus dock rent.
Assuming you have a lot
of other income to sterilize, you could be more aggressive and factor in tax deductions plus depreciation and end up as high
as $925K (under California tax regime) or $775 as a Florida resident. These valuations are not cash flow positive on
a monthly basis but may show a profit after you do your taxes.
That's not really a precise way to value this property
but, hey, I was doing math while driving in traffic and talking on the phone.
Finally, the agent admitted the property
had been on the market since June, 2007. The owner's "asking price" was $1.675M.
Oh puh-leeze! In what
universe does paying $1.675M to generate $60K (OK, maybe $63K with the boat slips) count as a rational "investment?"
Some
may think this is somehow reasonable due to the unique demographics of Winter Park. Admittedly, the Winter Park's median
family income is among the highest in Florida at $73,697. However, "Part I"'s Oviedo registers at 87% of this figure
($64,119) but houses listed there for less than one-third of this $1.675M are going begging for lack of buyer interest.
Just to be clear, a $1.675M Winter Park property has an annual cost of:
$100,500
interest at 6%
$36,850 property tax at 2.3%
$8,375 insurance cost at 0.5%
$16,750 maintenance
at 1%
---------
$162,475 cash out-of-pocket, or $13,500 per month. (Negative $8,300 per month.)
If
you want to actually pay down principle, instead of just renting it from the bank into perpetuity, add another $20,000 in
annual payments (Then it becomes $15,200 per month).
That leaves you cash-flow negative to the tune of $10,000 per
month!
Conclusion:
Call me when the sales price leaves the property cash flow positive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|