All Forum Posts by: Randy Buff

As a resident of the Gulf Coast of Florida (Bradenton) we just witnessed the strength of Mother Nature with the most recent passing of Hurricane Helene in the Gulf. Even though we did not get a direct hit we encountered a storm surge that reached 5 to 8 feet in some area. I do a lot of business on the nearby barrier islands of Anna Maria and Longboat Key. Yesterday I toured Anna Maria to help a couple of my clients that experienced the effects of the surge. One lost a car and all his belongings in the lower level of his house. Another lost his primary residence plus his vacation rental and will be staying with me for the next month while he sorts out his home. As a former resident of both islands, I was shocked to see the damage firsthand and to also see all the homes that where I once lived having to dig out from the sand that came with the surge.

Coming back to my own home off the islands I could not help to think how this event is going to change our local area in the near-term. Most owners of short-term rentals on the islands and the nearby areas have been dealing with the triple whammy of a slowing economy effecting rental revenue this year, higher insurances and higher property taxes. A lot of people are losing money or operating at breaking even at the moment.

This hurricane has obviously affected the available supply of available units. With reduced supply this could have a positive affect on rental revenue this upcoming winter season for short-term rental owners of homes that were not negatively impacted by the storm. Long-term this will likely raise insurance rates for all owners, compounding on top of sky-high current insurance rates. Will this cause more short-term rental owners to sell out on top of the noticeable increase we have seen this year because of the triple whammy?

I have had several of my short-term owners go to a self-insure model (i.e. they only get liability insurance on paid for properties) in recent years. I asked why they would do that. One of my owners put it to me this way. He paid less than $500,000 for the property in the early 2010’s. Today the property is worth around $1.6M. Two years ago, his insurance was approximately $17,000 a year. A year ago, it increased to a little over $28,000. This year it went over $40,000. At that point he cancelled all insurance except for liability. He could not make a profit with that high of an insurance bill annually. He figured worse comes to worse he could sell the property for land value and still recoup more than he paid for the property. I wonder how many other property owners will be doing the same when they get notice of this year’s increase?

Do you think this storm will cause prices to finally decline in the once red hot short-term rental market in Florida?

Most investors that have tried to purchase an investment property recently have been shocked by how high prices have remained given the higher interest rates and growing negative economic news. What gives?

I am currently in the market for a small apartment building (10 to 18 units). With all the headlines showing large apartment buildings selling at 30% to 40% less than a few years ago I thought the same would hold for the small apartment market. I mistakenly thought that we would see sellers bringing their asking price more in line with todays interest rates to help facilitate a sale of their property.

Unlike DSCR (Debt Service Coverage Ratio) loans for smaller multifamily (i.e. duplexes, fourplexes, etc.) that allow market rents (not actual rents) to help determine if the property covers the mortgage payment, commercial loans look at what is happening today. When you have 5 or more units these loans are classified as commercial loans. Most commercial lenders require a DCR (Debt Coverage Ratio) of 1.25 or more. This means that net rents (after operating expense or what they call Net Operating Income -NOI for short) has to cover the mortgage payment plus 25% or more. So if the mortgage payment is $10,000 a month the property needs to have an NOI of $12,500 (25% more than the mortgage payment). Banks do this because they know that with this difference a borrower probably will not get in trouble and default on the loan.

This brings us back to small apartments. With higher interest rates mortgage payments are obviously higher. That means the NOI has to be higher to have a DCR of 1.25 or better – its just basic math.

I recently bid on a 10-unit apartment building that was getting below market rents ($320 below current market rents on average). The Seller did not want to Seller finance the property. He wanted his cash now. Normally this would not be an issue. We would figure a price that was commensurate with the lower rental rates so that we could get commercial financing given the DCR requirement of 1.25 or higher. That did not happen. The Seller wanted a price that was the same as if he was already getting market rents. There were 3 different parties offering on this off-market property including myself. I offered about 33% less than the asking price as this was the maximum I could pay with 25% down and still get a commercial loan. I was told that a second investor offered a very similar amount. We both lost out to someone that was willing to give the Seller almost the price they were asking because they were doing a 1031 exchange were they had a substantial amount of cash and they liked the property location.

This similar scenario has played out for me several times over the last few years because the market was so hot. Unfortunately, the distress of the larger properties does not seem to be trickling down to the smaller apartments. I have spoken to several local banks and credit unions and none have any properties where they are in default.

I am left wondering do I stick to my guns and stay patient and wait for properties that make sense given todays rents and interest rates OR do I ignore the gap in what I am willing to pay and what the Sellers want knowing I will have to increase my down payment to 35% to 40% to get a solid property? What would you do?

 I agree commercial is still not seen much of any pullback especially in industrial.   I am noticing more empty spaces in retail and office that are staying vacant longer.   We moved our offices in March 2023 and the space we left on a major road is still vacant.   I am having challenges finding warehouse space with fenced yards.   That is in real demand here for people in the trades.   

In my opinion Florida is headed for a downturn in the local real estate market. I am a licensed FL Realtor and part owner of a FL Real Estate Brokerage. I see a lot of transactions here in my market firsthand. Most agents in my market have seen a noticeable decline in activity that really started in Q4 of 2023. This downturn was really pronounced this year with most agents transaction volume down by 40% or more.

So what is causing this current downturn in Florida? Some claim it is the new NAR rules (it isn't). Some claim it is election year (most likely not the reason – just an excuse). And some claim it is a shortage of inventory (we have the most listed homes on my market since Q4 of 2012 just after the great recession – i.e. there is no inventory shortage). What is driving the Florida market is simply it is too unaffordable for someone to buy a home here.

I am based in Bradenton, FL (Manatee County). The average household income here is $79,524. The median price of a single-family home in July 2024 (most recent information available) is $499,000. This is down slightly from the peak in August 2023 of $525,000 – a 4.95% decline. Using a 30% of gross income to represent what most consider a safe amount for a mortgage payment, the average person could only afford a monthly payment of $1,988. Given our higher insurance costs (usually 0.7% to 1.0% of purchase price as a rough guide -$291/mo on low end) and property taxes (typically between 0.5% and 0.7% of purchase price as a rough estimate -$208/mo on low end) that leaves only $1489 for Principle and Interest. At current market rates of 6.2% for 30 year fix mortgage you could only safely afford a $243,114 mortgage amount. So the average person would need to put a 51.3% down payment to afford a median priced home here ($255,886 down payment plus a mortgage of $243,114 on a $499,000 purchase price). Most buyers do not have this large of a down payment and thus this is why my market is slowing.

To make housing affordable again, one of several things needs to happen. Either people need to start earning more money (we can debate this since it looks like we are already in a recession here), interest rates need to decline (looks like the Fed is about to start doing this) or prices need to decline which has already started to happen.

My vote is on lower interest rates and price declines until the market finds its balance and you see transactions start to increase. My speculative guess is that you see a further decline of 15% to 20% off the peak (August 2023 – here) and interest rate declining to 4.5% in the next 18 months to bring the market to a more affordable level. If the median home value declines 20% and interest rates decline to 4.5% for a mortgage, it would bring the down payment to 21.4% of the new purchase price ($85,593 down payment on a $399,200 purchase price) for the average person here to afford the average home. While still a challenge saving up the down payment it is closer to the realm of possibilities versus where we are at today.

There are several large colleges that offer a Masters of Real Estate Science.   My son went to one of the top programs at University of Florida at the Warrington College of Business.   It was a smaller program (less than 40 students).   It helped land him a 6 figure job out of college working for a large family office that builds 200 to 500 unit apartment complexes in the SE US.   The exposure he got from this program is way more than he got from his experience working with me as an investor and Realtor.    At 24 he sees deals and works with financing that would take a lifetime to see if they started at the bottom and worked their way up.   It is definitely a big jump start to a promising career. 

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $225,000
Cash invested: $65,000

Nice 3/2 X 2 duplex that needed a new roof. Placed in self-directed Roth

What made you interested in investing in this type of deal?

I was able to use a self-directed IRA to purchase the property

How did you find this deal and how did you negotiate it?

Deal was with a past client that wanted to sell without going on the market.

How did you finance this deal?

Seller Financing

How did you add value to the deal?

Updated one unit and added a new roof.

What was the outcome?

Great Long-term hold for the IRA

Lessons learned? Challenges?

Working with self-directed IRA's on purchasing investment properties

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $300,000
Cash invested: $75,000

Large duplex with 1,725 sq ft per side. 3/2 X 2 that is actually being used as a 5/2 X 2.

What made you interested in investing in this type of deal?

How large and well maintained the duplex was.

How did you find this deal and how did you negotiate it?

This was another off-market deal with an investor we represent that wanted to liquidate part of her portfolio.

How did you finance this deal?

We used a non-QM (Qualifying Mortgage i.e. not Fannie, Freddie, and FHA) that was a DSCR (Debt Coverage Service Ratio) loan with one of our lender partners

How did you add value to the deal?

repositioned the units with rents closer to market rents.

What was the outcome?

A strong cashflowing asset we plan on owning for several years.

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $550,000
Cash invested: $145,000
Sale price: $550,000

We 1031 exchanged a single family rental into a 4 plex with seller financing.

What made you interested in investing in this type of deal?

Increasing monthly Cashflow from a single family home (approximately $450 per month) to $2,100 per month after adjusting rent closer to market rent.

How did you find this deal and how did you negotiate it?

This was an off-market deal with one of our investors was looking to diversify their holdings and wanted to sell.

How did you finance this deal?

Seller financing

How did you add value to the deal?

Added a new roof and adjusted rents closer to market.

What was the outcome?

More cashflow from a great asset we want to hold long-term

Lessons learned? Challenges?

Handling repairs using 1031 exchange finds

I am a commercial RE Agent and I am representing a condo developer that wants to build a high rise in the Southeast US.    I have introduced my developer to another large developer that is wanting to do a mixed use high rise that is looking for a joint venture with a condo developer.  We have had several meetings and it looks like a joint venture is in the works.  The project is in the $100's of millions.  Normally we get a percentage of what we sell but in this situation I am just helping the partners get together not selling anything.  One thing to note is that if it wasn't for me these two would never have gotten together.  I have discussed with my developer (condo one) about him paying me for my services.  He is thinking of a flat fee.  His potential upside is about $30M to $40M (possibly more based on final sale prices of the condos).   My Broker suggested a flat fee like $50K upfront and a free condo ($450K construction cost - move valuable when completed).   I am not sure of the structure I should ask for and thought this might be a good discussion for the forums.     What say you BP, what would you ask for and when should it be paid????