Investigating Rental Property In Markets Other Than OBX
By The Wright Lending Team of First Heritage Mortgage
Recently, I became intrigued by an intercoastal waterway property in Ft. Pierce, FL, and I thought I’d share my investment thought process and how it compares to single family real estate opportunities in the Outer Banks. This particular property is in Ft. Pierce and is being sold by a luxury auction company based in Charlotte, NC, with a minimum bid of $2 million and a potential value of up to $7.4 million. My initial thought was I could purchase this property for a fraction of its value, and it might offer great rental returns. My goal for rental returns was a 10% rent cap providing significant cash flow on the property.
For those unfamiliar, “rent cap” refers to the projected or historical rental income a property generates relative to its cost. For example, if I bought the property for $3 million and it generated $300,000 in annual rents, this is a 10% rent cap. My goal was to purchase for $2.5 million with $400,000 in annual rents, achieving a 16% rent cap.
What did I discover? From Maine to Florida, no one else operates seasonal rental property better than the North Carolina coast in my opinion. The Outer Banks also offers unparalleled property management services. I called four property management companies in Florida, and none of them had a comparable operation to the Outer Banks. Those who got back to me were nice and professional, but when I inquired about how many homes they had under management, how long, and other guest services, it was clear they did not compare. The rental market in Florida is like the Outer Banks, with peak months in March and April, but in my opinion the market is either oversupplied or the property is overbuilt for the area.
In my opinion Ft. Pierce is still being re-developed, and I believe it’s likely to take 3-5 years before there is any significant improvement to the area. This leads me to mention the age of homes in the surrounding areas. We often hear that homes on the Outer Banks are in need of repair or aged due to being built 20-25 years ago. In Florida, the coastal areas were the first to be developed, and this community has even older homes built in the 50s and 60s. Next, I investigated the estimated rental income for this property, which was at best $14,000 to $30,000 per week. In total, I estimated annual rents to be about $180,000. This is a rent cap of 7.2%, which is just too low for this purchase price.
In Corolla for ocean front property in Whalehead, we’ve seen buyers pay as much as $2 million for a homesite. They often teardown and re-build a new home with construction cost including furniture of about 1.9-2 million, making the total cost $3.9-4 million. Ocean front homes in Corolla typically have seasonal rents of $450,000 or more very consistently. This is a rent cap of about 11.5%.
Other costs and considerations: Boy, do we hear complaints about the cost of insurance on the Outer Banks. The premium for an oceanfront in Whalehead might be as much as $18,000 annually for a 4-million-dollar property. Another significant cost is taxes. The tax rate is .70 in the Outer Banks. For example, if the county values this home at cost, then taxes would be $23,400. In Florida, the property I was looking at had insurance costs very similar to the Outer banks of about $20,000 annually. However, property taxes in Florida are significantly more costly, about $45,500 per year!
The Outer Banks homes are built for capacity to hold families of 20-40 people for a summer vacation or wedding. The larger homes are more expensive to rent on a per-person basis, however, when renting with multiple families, it becomes much more reasonable. A new Whalehead oceanfront is likely to have 12 to 15 bedrooms, whereas in Florida, homes are built more for luxury. The square footage of this home in Ft. Pierce was easily comparable to a Corolla Whalehead oceanfront home of about 6,500sq ft, but the home in Ft. Pierce only had four bedrooms.
It had all the other bells and whistles you might expect from the Outer Banks: pool, hot tub, private sandy beach to the side, 100-foot pier reaching out into the intercoastal, and 2 boat lifts capable of lifting 15,000 and 25,000lbs. Being a boat fanatic myself, this made me wonder why I can’t find some saltwater fishing guys to rent this home for 50K per month, but the market is just not there in Ft Pierce.
My final thoughts: One of the property managers I spoke with was glad to hear I was from the Outer Banks. He goes to Oregon inlet every year to fish and loves it. We talked more about the Outer Banks than the rental market in Florida. This makes my conclusion clear, if you want to own seasonal rental property with what appears to be the best cash flow, and yes, affordability, then the Outer Banks is very hard to beat.
Below is our contact information, and we’re available on the weekends!
WrightLendingTeamKittyHawk@fhmtg.com or email us individually.
Alex Wright | Senior Loan Officer NMLS ID #1615455
Phone: 252.256.1050
Email: awright@fhmtg.com
Website: fhmtg.com/alex-wright
Drew Wright | Branch Manager NMLS ID #589370
Phone: 252.256.2018
Email: dwright@fhmtg.com
Website: fhmtg.com/drew-wright
Betty Brickhouse | Loan Officer Assistant
Phone: 252.202.5671
Email: bbrickhouse@fhmtg.com
