Why Miami Real Estate investmentJune 19, 2017
Miami Real Estate Investment
More and more people are turning to rental properties in Miami as a way to diversify their investments and generate steady cash flow in the future. And why not? There are serious benefits of investing in Miami real estate. First, however, it’s important to understand the key advantages of investing in properties in the first place.
Miami Real Estate Investment – Why Rental Properties?
There are several factors driving the trend in investing in rental properties and condos in Miami.
- Many people are not reaping the benefits they thought they would from Certificates of Deposit and other savings accounts.
- Despite we are not financial advisors low-interest rates have made people cautious of inflation in the future, pushing them away from the bond market. They turn to commodities like real estate which protect them from inflation.
- People are diversifying their investments.
- Low-interest rates and condo prices create interest in rental property investing.
- Miami Real Estate appreciation.
Now that you understand why so many people are turning to Miami real estate investments, you need to know whether a potential property is worth the investment.
When determining whether or not a home or condo for sale in Miami is worth investing in, keep in mind these two key formulas:
Miami Real Estate Investment – The Cap Rate
The first formula involves calculating the cap rate. If you bought the house in cash, this is the rate of return you would make.
What is the Cap Rate?
The cap rate, also known as capitalization rate, is net income divided by current market value.
Here’s an example:
- Cost of condo or home = $200,000
- You rent it out for $1,500/month
- Average monthly expenses = $500 You spend an average $500/month on expenses (taxes, repairs, maintenance, etc.)
- Net operating income = $1,000/month, or $12,000/year
- Cap rate = $12,000/$200,000 = .06 or 6 percent
Whether or not the 6 percent is worth the investment is up to you to decide. If you find a property in a Miami neighborhood with high-quality tenants, then it might be worth it. On the other hand, if the property is in a not-so-good neighborhood, then 6 percent may not be a great return on your investment.
Miami Real Estate Investment – The One Percent Rule
When evaluating a rental property in Miami, the general rule of thumb to go by is this: If the gross monthly rent equals at least one percent of the purchase price, you should look further into the property investment. If not, keep searching for better options.
Here’s an example:
If you purchase a condo for $200,000, it would need to rent for $2,000/month. If not, the one percent rule has not been met.
According to the one percent rule, the property should bring in gross revenue of 12 percent of the purchase price each year. After expenses, the net revenue should equal between 6 and 8 percent of purchase price.
In general, this is a good return on investment. However, it is important to take into consideration the neighborhood you are investing in. If the property is in a nicer neighborhood, there is likely a lower return; similarly, more questionable neighborhoods often have higher returns.
Don’t Forget This One Last Thing
Finally, no matter what percent you are gaining in ROI off of your Miami property investment means very little if the interest is not compounding. Well, what is compound interest?
How does compound interest work and what does it mean for property investment?
Compound interest is interest that is generated by your principal plus its interest.
For example, if you invest $100 in the stock market, at the end of the year it will have gained $10 in interest, to equal $110 total.
At the end of the second year, the interest has grown by another $11, for a total of $121.
In summary, the extra $1 the second year earned represents the interest that compounded on top of your interest. Each year, the interest will compound on top of the previous interest, which becomes very powerful after 10, 20, 30 years. In order to reap the same of compound interest on your Miami Real Estate investment, you should reinvest the all of the proceeds so that your returns will compound upon themselves.