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.
Historically real estate has been an excellent investment vehicle to accumulate wealth. The downside to owning real estate is that 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
- Insurance
- HOA/Condo Fees
- Maintenance
- Utilities
The first item I listed, property taxes, is usually the largest of 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. Insurance costs are skyrocketing in Florida. Partly because of inflation and rising replacements costs and partly because insurers are pulling out of Florida. Did you know it is more expensive to insure a vacant property than an occupied property? HOA and especially condo fees can sometimes be even more than taxes. Condos are also subject to assessments for common area improvements. The other items together can equal or exceed what is paid in property taxes.
You may think that a vacant home doesn't need much for 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 to 5% per year. That is also assuming the property is owned free and clear, with no mortgage interest.
Simply put, opportunity cost is what you could be making on the equity in your home in another kind of investment. Treasury bills are regarded as a virtually risk free investment where current rates are in excess of 5%. There are solid stocks with good dividends that don't have any carrying cost like a vacant property. A property that does generate income should produce a 5% return or better, but it is far from risk free.
One other major hidden cost of owning real estate is repairs and obsolescence. Yes the small thing add up. You won't buy a new roof or air conditioner every year but they must be accounted for in your return on investment calculations. An air conditioner will last about 15 years, a roof about 25 years. Kitchens and bathrooms become outdated after 15 years or so. Painting should be done every 7 years. Every year that goes by gets you one year closer to a big ticket update. If you go 10 or 15 years without doing any updates your home will be lagging in value compared to others. When homeowner look at their rising equity that usually don't factor in all the capital improvements they have done.
I need to mention inflation. It isn't so much that the value of your home has doubled in the last five years. The reality is the buying power of our dollar has been cut in half and buys far less.
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 may not be netting much more than the risk free Treasuries.
Let a property sit vacant makes very little sense. If you are using a property and don't want to be a landlord, sell it and put your money elsewhere. 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 collecting dividends or paying off debt.
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Serving The Greater Fort Lauderdale area since 2006
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