All Forum Posts by: Christopher Knibb

I am on the same area 

I don’t think this is a cycle 

For many reasons I don’t think central FL (the area I deal with) will see a big sell off at all 

We are in strange times for many reasons.  I just don’t see an end to the price increases.  

A slow down is possible but I don’t see a correction coming for a long time of ever 

Christopher, excellent questions.  You are to be commended for asking yourself the tough questions prior to making a substantial investment, because there is no one-size-fits-all answer to these questions. Your questions are of a macro nature, similar to "Is this a good time to invest in the stock market".  

In order to gauge suitability of a real estate investment, and in fact any investment, for your portfolio, it is important to fill in the blanks on these questions first.

- What is my tolerance for risk?

- What is my time horizon?

- What is my investment goal?   Income?  Appreciation?

Specific to your questions, however: A "reasonable ROI" is going to be a different number for every investor. Are you referring just to income yield? Overall yield, including projected appreciation?

A "correction" supposes that prices are overly inflated to begin with. But relative to what? If the annual income return on a vacation rental was 13 percent three years ago, but is now 8 percent, is it overpriced? Not as long as there are willing investors to accept 8 percent. What is a reasonable ROI for you?  

Making decisions based on cash-on-cash is a very dangerous game, because you leveraging 80 percent of the cost. If rents go down, you are suddenly 20 percent NEGATIVE cash on cash. I've been there, and worse. There have been years when I was paying out TWICE per month what I was taking in. Was that a "reasonable" ROI? As of today, right now, yes it was.

The future of rental rates is anyone's guess. That ultimately is a supply-and-demand issue and is impacted by new construction, traveler demand, the overall economy, etc.  Rates may rise, rates may fall.  I bought my first cabin in 2005, right before the financial crisis, for $240,000.  My annual rents the first year were around $15,000, and they rose steadily until the financial crisis.  In 2010, that cabin appraised for $120,000.  Yikes.  And I was having to rent it for $69-79 a night just to keep some $$ coming in.  It is now worth about $700,000 in my estimation, and the nightly rent is around $270 on a year-round basis.  

Moral of the story: Define what is a reasonable ROI for yourself, and make sure you factor in a 50 percent haircut on values and rents for a few years. It happens.

What if there is not a “correction”? 

Define "reasonable ROI"