The following is an excerpt from an email I recently wrote to a client asking me about the reality of the rental market in Miami.  My client is looking to purchase a unit near the beach for use as an income-producing rental property.

In Miami and the surrounding areas, it has always been more expensive to buy than to rent.  During the bubble, this relationship was driven way out of line as people built in unreasonable expectations for price appreciation.  As prices have fallen drastically, we've seen investors looking to purchase cheap condos in desirable areas which will have good potential for price appreciation over the next 5 years or so.

A good example of this what is happening in downtown Miami, as investors are completing bulk sales for around $200/sq ft.  These investors have no intention of reselling the units right away, but will put them on the market for rent in the meantime.  After you subtract the yearly taxes and maintenance, these units produce approximately a 5% yearly return on the cash invested.  It isn't much, but the 5% will cover insurance and maintenance costs.  The real profit will come from resales of the units.  That is the reality of today's rental market.

I strongly believe that for condos priced at or near $100,000 in desirable areas, we have hit bottom here in Miami.   The unit in Treasures on the Bay listed for $89,900 last sold in 2007 for $285,000 -- prices aren't going much lower.  There are 2 reasons why the rental economics aren't as great as one would like.

1. Maintenance Costs:  Due to the high amount of foreclosures in buildings like Treasures on the Bay, condo associations have been forced to increase maintenance fees to make up for the shortfall caused by the non-paying units in foreclosure. As the foreclosure pipeline begins to shrink, the maintenance fees will return to more normal levels.
2. Purchase/Rental Economics:  Investors and developers are currently turning condos for sale into condos for rent causing an increase in supply of rental units.  Low prices are attracting investors to use their own capital to purchase units and rent them out,  thus rental prices have headed lower.  It's a good time to be a renter!

Tags: cash, condo, condos for rent, investors, maintenance fees, price appreciation, rental property