Much like California, Florida has often been the land of investor dreams – and investor heartache.
A potent mix of retirees, snowbirds, job-seekers and foreign investors has swung home prices to ridiculous highs and stomach-churning lows more than once in the past. In just a few years before 2008, home prices in some Florida markets  more than doubled – but after 2008 they fell 60 percent.
In the years that strong economic growth has returned to Florida, it’s not surprising that home prices have again climbed briskly in almost all local Florida markets. Does this mean that investors can just dive back into the warm Florida waters, certain of a good return on their efforts?
Orlando, Florida photo credit: GettyGetty
Alas, it’s not that simple. Sure, you can invest in any of the Florida markets, but how you invest will make all the difference down the road.
To help you figure out the best way to approach each of the 21 local Florida markets we cover at Local Market Monitor, we’ve assembled some economic statistics. And based on these stats we’ve divided the markets into three categories of Florida investment strategy. (We ended up with 7 markets in each category, but that’s just coincidence.)
Florida Markets 2019Local Market Monitor Inc,
Note first that job growth – the most important driver of demand for housing – in all of these markets is impressively high. The national average increase over the past year was only 1.8 percent.
In addition, with a few exceptions, the rate of growth is well above the rate of six months ago. The acceleration of growth suggests that demand for housing will stay strong for a while.
However, jobs are not the only thing that affects real estate markets in Florida. Another major factor is the constant flow of retirees into the state; they only show up in the job stats indirectly – more assistants at doctors offices, more checkout clerks at Publix. A second factor is the flow of South American money – mainly into the Miami area – which varies according to foreign political circumstances. On top of that, and most difficult to measure, is pre-retirement investing – future retirees who figure they might as well buy now and rent the place out until they move. This last phenomenon often kicks in sharply when home prices rise.
With these uncertainties in mind, let’s see if there’s a sensible way to invest in these 21 markets.
Look first at those markets where home prices are already higher than they ought to be. That’s the case in our first group. See how much home prices are higher than the ‘income’ price; for Miami it’s 39 percent. The ‘income’ price is not a precise measure, but when actual prices are more than 20 percent over the ‘income’ price, a market is in over-priced territory.
In these markets, the risk of a boom – followed by a bust – is sharply higher. Unless you’re making a long-term investment and don’t mind riding out a bust, your best strategy is to keep a short time horizon. Rehabs for quick resale and apartments (which are much less affected by a downturn) are good possibilities. In Orlando and Cape Coral, where the ratio of home prices to annual rents is still below 20, single-family rentals are also a possibility – but be sure your rent is no more than about 25 percent above the average monthly rent; that’s where the largest concentration of renters is found. In a downturn you won’t find many takers above that rent level.
Our second group contains markets that aren’t yet over-priced, but where home prices are shooting up; 15 percent in Panama City in the past year, for example. In these markets you can invest in rehabs, apartments, single-family rentals, and single-family splits into multiple units, but you’ll have to act fast – which isn’t how you want to make investment decisions. You’ll do best renting out no more than 25 percent above the average monthly rent, a good way to stay disciplined about how much you pay.
In our third group are markets where home prices are rising well (indicating good demand for housing) but not too fast. Note that in Naples, Crestview and Sebastian the home-price/rent ratio is well over 20. This means you should avoid single-family rentals unless you split them into multiple units. Other than that, all types of investments are good possibilities. With the exception of Naples – where prices are high and the economy is volatile – these are probably the best long-term bets for cautious investors.
There’s more to decision-making than these general stats, but understanding the special economic circumstances of a market can help you make a successful investment.