|
Getting your Trinity Audio player ready...
|
Investing in real estate aimed at short-term rentals in Miami is considered one of the best real estate investments in the world. In this article we will show with practical examples how to calculate the return on investment (ROI) for a property aimed at short-term rentals (Ex.: Airbnb).
If you are thinking of investing in Miami, be sure to read to the end. You can also download for free the Excel spreadsheet we prepared with all the calculations and examples of this article.
The ROI calculation changes and brings different results for a cash and financed purchase. In this way, we will work in two scenarios:
1 – 2 (two) bedroom apartment with cash payment;
2 – Apartment with 2 (two) bedrooms financed.
Understanding the formula! What is ROI?
ROI, or Return on Investment, is an indicator that evaluates the performance of an investment in relation to the amount invested.
In the case of rental properties, the ROI evaluates the net profit generated by the rent in relation to the amount invested.
The invested amount can be the value of the property, in the case of a cash purchase, or the amount of the entry, in the case of a financed purchase.
ROI = Net Rent Profit / Invested Amount
Let’s look at a practical example and some scenarios:
Example 1: 2-bedroom property, furnished, with cash payment
Premises and data for the calculation:
Characteristics and value of the property
For this example we will consider a property in Downtown Miami, with the following characteristics:
- 2 bedrooms;
- 1,000 Sqft;
- Furnished and ready to rent;
- Property value: US$ 950 thousand **
* * Don’t be scared by the price! This price is based on new launches in the best locations in Miami for a 2-bedroom apartment and already furnished in an efficient way for a good rental exit. There are more affordable options in other regions of Miami and also in buildings already ready and delivered.
Home Owners Association (HOA) – condominium fee
Home Owners Association (HOA). We can use as a market parameter the value of $ 1 (one dollar) per square foot (sqft).
For the property considered in this example, the HOA rate will therefore be $1,000 per month ($ 1 X 1,000 SQFT), or $12,000 per year.
Daily rate
For this example we will consider the average annual daily value of $485.
IMPORTANT: When analyzing the daily value it is essential to take into account the annual average, since the year has strong seasonality (low, medium and high season) and the daily values change according to the seasons.
Occupancy Rate
We will consider an occupancy rate of 85%.
Here it is also important to consider the annual average, for the same reason mentioned in the previous topic: seasonality. In this article we explain in detail about the occupancy rate in Florida.
Property Management Fee
Hiring a Property Manager (Administrator) is essential in any real estate investment, especially in the case of properties aimed at short-term rentals. Although you can manage the rent on your own, it will be very difficult to do it efficiently and safely, without having all the experience of an administrator. Management becomes even more difficult, not to say impossible, if you are at a distance.
The Administrator not only takes care of your property and manages the rent, but also publicises and attracts customers. The owner doesn’t even have contact with the tenants. The owner is only responsible for designating a bank account to receive the amounts, whose collection is also made by the Property Manager. Understand in this article how the total management of the property works
I only mentioned some of the services provided by the administrators, which are not easy and require a lot of market experience.
For all these services the Property Manager charges a fee. For our example we will consider a 30% fee on the amount collected.
Property Tax
The Property Tax varies depending on the property and location. However, it is safe to consider as an estimate the value of 1.8% of the property value per year. It is important to consult your real estate broker in Miami about the different property tax rates.
For our example, considering a property worth $ 950,000, the value used for the annual property tax will be $17,100 per year.
Shall we do the calculations?
Total Annual Revenue Calculation
To calculate the total revenue, just multiply the daily value ($ 485) by the number of days in the year (365) and finally by the occupancy rate (85%). We will have a total revenue in the year of $ 150,471.25. In the month the average revenue would be $ 12,540.00.
Total Annual Expenses
- HOA = $ 12,000.00
- Property Tax (IPTU) = $17,100.00
- Administration Fee (Property Manager) = $45,141.38 (30% X US$ 150,471.25)
- Annual insurance = $ 800
- General expenses (Utilities) = $ 3,000 (electricity, gas, water, internet and others)
- Any maintenance during the year = $ 500
- Accountant / Lawyer = $ 1,000 (you will need the services of an accountant to, among other activities, make the property’s income statement).
TOTAL ANNUAL EXPENSES: $ 79,541.38
ROI (Return on Investment)
The Profit in the year will therefore be US$ 70,929.87, which is the difference between the Total Revenue in the year (US$ 150,471.25) and the total annual expenses (US$ 79,541.38).
For the ROI (Return on Investment) calculation, just divide the Annual Profit by the acquired value of the property: US$ 70,929.87 / US$ 950,000 = 7.47%
What if we reduce the average daily rate? ..or change the administration fee?
Now that we know the main lines of income and expenses, we can “play” with the numbers. Below we show two scenarios, changing the daily value and also the value of the administration fee.
It is important to always work with scenarios. The example above was calculated based on a realistic scenario. Let’s look at a more pessimistic market scenario.
Suppose a scenario where the average daily value is considerably lower than the example presented above. Let’s consider, for a new calculation, the value of US$385 of average daily rate in the year.
In this hypothesis, the Total Annual Revenue would be $ 119,446.25. The amount of total annual expenses would be reduced to $ 70,234.00.
The ROI in the year, in this new pessimistic scenario, would be 5.2%.
Note that, even with a drastic drop in the daily value, the ROI remains above 5% already including the financing installments. That is, 5.2%, in this pessimistic scenario, is the net return on all disbursements.
Pessimistic scenarios, however, open freedom for cost renegotiation.
We could also consider a renegotiation of the administration fee, to 20%. That, maintaining the daily rate of US$ 385, would still result in an ROI of 6.43%.
In this new scenario of 20% management fee, maintained the initial value of the daily rate at US$ 485, the ROI would already rise to 9.70%.
Now, how would all these calculations be if the purchase of the property was financed by a bank in Florida?
Let’s look at an example:
Example 2: 2-bedroom property, furnished with financed purchase
In this new example, we will consider the same premises and values of the previous example, but with the purchase of the property financed.
For calculation purposes we will consider a loan under the following conditions:
- Entry amount: 50% of the property value = US$ 475 thousand (50% * US$ 950 thousand)
- Payment term = 30 years
- Interest = 6% a year
In the above conditions, the monthly amount of the installment would be US$ 2,847.86. This amount already includes principal and interest.
Although this principal value, from the point of view of ROI calculation, should not be included as an expense (since the principal value is an installment investment in the property) we will include it in the calculation as “expense” so that we have, in the end, the return value only on the actual amount invested. Remember that the investment, in this example, will be only US$ 475,000 (50% of the value of the property), and not US$ 950,000 as in the first example where the payment was in cash.
Scenario 1
- Daily value: US$ 485 (Total annual income of US$ 150,471.25)
- Administration fee: 30% (US$ 45,141 per year)
- Other expenses: US$ 34,400 (IPTU, HOA, insurance, utilities, accountant, maintenance)
- Loan installments (12 x US$ 2,847.86) = US$ 34,174.32
Total Revenue: $ 150,471.25
Total Expenses: $ 113,715.32
Profit in the Year: US$ 36,756
ROI: US$ 36,756 / US$ 475,000.00 = 7.7%
Scenario 2
- Daily value: US$ 385 (Total annual income of US$ 119,446.25)
- Administration fee: 20% (US$ 23,889 per year)
- Other expenses: US$ 34,400 (IPTU, HOA, insurance, utilities, accountant, maintenance)
- Loan installments (12 x US$ 2,847.86) = US$ 34,174.32
Total Revenue: $119,446.25
Total Expenses: $ 92,463.57
Profit in the Year: US$ 26,983
ROI: US$ 26,983 / US$ 475,000.00 = 5.7%
Understand what “Real Estate Leverage” is in Miami
Real estate leverage in Miami is one of the most used strategies by global investors in Florida. It provides for the use of third-party resources at low interest to acquire a property. With the income of the property, the investor pays off the portion of the loan and makes a profit in the operation.
The profit obtained in the first property is used to give the entry in a second property and so on.
Learn more about Real Estate Leverage in this article
Important
The information provided in this article is for reference purposes only and is merely informative, not intended to provide professional advice. It does not replace obtaining professional advice. This article is only educational. All the values described in this article are based on the current market (2023), subject to change at any time. The user should know that the values vary according to the location, type of property and demand. The values used in these examples cannot and should not be interpreted as a possible investment. Consult a legal or tax professional for appropriate advice.
About AMG International Realty
AMG International Realty is a global real estate company specialized in Florida and aimed at the foreign public. If you want to know more about real estate in Miami or Orlando, contact me right now: +1 305 318 6968 (Heloisa Arazi).
