Cashflow vs Speculative

[Jose Corbera]

Here's the deal... I'm looking at a second property which is a somewhat updated duplex in the Miami in an area that may appreciate substantially over the next 15 years. For those that are local, it's on the north side of the Miami river between the Miami Marlins stadium and the Miami International Airport. The details are as follows:

Purchase Price: $350,000

Monthly Expenses: $2,582.61 (Duplex is in a flood zone since on the river, where by my insurance is $6835.92/12 = $569.66)

Monthly Cashflow: $317.39

Total Cash Needed to Close: About a $100k

Cap Rate: 5.99%

I'm torn because although the property is in a great location, doesn't need work, has current tenants, and has plenty of speculative value, I will have a $100k parked until the property appreciates, not to mention the below than average monthly cashflow. My initial thoughts are that opposed to having a $100k sitting and not really creating monthly cashflow for me, find a different property, perhaps with less speculative value and more monthly cashflow.

What are your thoughts? Thank you in advance.

Jose

[Russell Brazil]

Im not speaking to this specific property or market...but investing in A Class or High Demand areas isnt speculative.  Cash flow is a function of the demand and risk inherent in the property and the market.  The higher the pro form cash flow of the property, or the higher the cap rate, means higher the risk. Conversely the lower the cap rate is indicative of the lower risk of the asset.

If I invest in a stock with low dividend like Aflac, that is not a speculative investment compared to a high dividend stock like Verizon.  The yield is a function of the markets view of the risk of the asset. 

The same happens happens with real estate. If the market views the property as lower risk, the demand for that asset is higher, and pushes the purchase price higher, creating a lower cash flow asset.

I personally though would not buy a property in a flood zone though, as I could likely find something similar in price, with similar rents without the added cost of the flood insurance.