At times I am astounded by the amount of vacant properties I see here in South Florida. I'm not referring to abandoned or other distressed properties. I am referring to under utilized investment properties and vacation homes. Some are for sale and have been on the market for months and months. Others are just a mystery why they are vacant. I don't think these property owners realize just how much this is costing them to let them sit idle.
The downside to owning real estate is it is an asset that has to be fed constantly. There are carrying cost associated with holding on to a vacant piece of property. They can not be avoided.
Those costs can include:
- Property Taxes
The first item I listed, property taxes, is usually the largest the carry costs. In this part of Florida property taxes are approximately 2% of market value, per year, for a home that isn't a primary residence. The other items together can almost equal what is paid in property taxes. If you own a condo you are paying for the same things through the association but it could be even more.
You may think that a vacant home doesn't need utilities, but in a tropical climate a vacant home without a minimum of air conditioning can run into mold problems. Many municipalities in the area charge a homeowner for water, trash and sewer, even if they aren't using the services. They call it an availability fee or something similar. Using a conservative estimate, the carry costs for a vacant home is about 4% per year. That is also assuming the property is owned free and clear, with no mortgage.
A negative 4% return on an investment is pretty bad, but it gets worse when you factor in the opportunity costs of holding onto a vacant home. Simply put, opportunity cost is what you could be making on the equity in your home in another kind of investment. The opportunity cost for each individual home owner can vary widely depending on their tolerance for risk. If they just stick it the bank, a jumbo CD will only be about 2% per year. You should see that in this example, the total negative return is now 6%. That's 4% in carrying costs and 2% in opportunity costs. It doesn't take a whole lot of investment savvy to find a safe return that does better than 2%. A property that does generate income should produce a 5% return or better. Assuming a 5% opportunity cost a vacant property now produces a negative return, or loss, of 9%
Yes, real estate does appreciate. Most of the time anyway. So the loses are offset, but probably not enough. From 1968 to 2004 home values had a 6.4% average appreciation per year. What happened after 2004 as we all know pushes that average down considerably. I'm a sure a large portion of owners of vacant properties think they are coming out ahead with the appreciation. But in fact they are probably only breaking even at best, or even losing money.
Real estate can be a very good and profitable investment most of the time, but it must be utilized to it's maximum potential. If you are holding on to a vacant property you don't use, figuring on cashing in on the appreciation, those gains have been offset with all the costs you have been slowly paying over time. If you are selling a vacant home and holding out for a better price, the difference is offset by those same costs too. It is better to take what you can get and put your money to work for you elsewhere.
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