Ocean Reef Absolute Auction Results

Also, Shelly originally challenged me on my gut feeling that it was possible to cash flow at these prices. I used an example to show that at the end of one year, you could cash flow the property that was mentioned earlier.

I applaud your efforts, but anyone can concoct a positive cashflow by figuring backwards through the process (start with a positive outcome and make up the numbers that would make that outcome work). Developers, investment bankers and annuity salesmen use this all the time.

That said, I was not analyzing the investment relative to any alternatives, nor did I do discounted cash flow analysis to determine whether or not it is an acceptable investment over the long term.
Little Fish

Which is exactly why people who didn't do their homework are pretty much screwed today.

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YoungFT:

Sorry, but this is an incorrect statement. Operating income includes the full amount of depreciation and later when calculating cash flow, it is fully added back. If you google it, I'm sure you will find this to be the case.

Little Fish

Thanks Little Fish. But I'm still not convinced you should be adding the full amount back. If at the end of the day, you're defining "cash flow" as money in pocket, coin in the bank, funds to re-invest - or any of the other basic terms I would use to define "cash flow" as an investor, you don't add it all back, just the amount it helps you save in taxes. You may be referring to the accounting term - which is really only meaningful to accountants. I'm referring to the term an investor would care about.

I took your suggestion, thank you by the way , and did Google it, and found this description that might help clarify:

"Depreciation does not involve any cash flow. This is clearest in the simple case of an asset acquired entirely by cash payment. Although the initial purchase is a cash flow, the subsequent allocation of part of the cost as a period expense involves only an accounting entry. Depreciation is not intended as a mechanism to provide for replacement of the asset. There are no cash flows associated with depreciation, and there is no connection with any cash accumulated for replacement of the asset...Because depreciation is an expense but has no associated cash flow, it is sometimes described as being "added back" to arrive at cash flow for the firm. This gives the impression that depreciation is somehow a source of cash flow. The "adding back," however, is simply a recognition that no cash flow occurred, and depreciation cannot supply cash."


http://www.answers.com/topic/depreciation


Interestingly, you can find the text above under "Misconceptions About Depreciation" so you're not alone.



Hope it helps the collective wisdom.

Hi,

Don't post often but this one raises a question. Don't property/wind insurance and property taxes need to count as expenses? Utilities, power, water, trash, pest control, etc? Surely these would turn the positive negative quickly. Thoughts? Thx.

Hi,

Don't post often but this one raises a question. Don't property/wind insurance and property taxes need to count as expenses? Utilities, power, water, trash, pest control, etc? Surely these would turn the positive negative quickly. Thoughts? Thx.

Generally in a condo you are going to have COA dues that will cover water, trash, pest control, and in most cases cable. However power is always metered seperately unless your in an oldy like Pinnacle Port.

http://www.vrbo.com/178971

Here's one, anyone care to cashflow this one based on the above calculations? How about a conservative estimate of rentals. For instance who wouldn't use their own condo during the summer at least one week, and snowbirds don't rent large units or in groups. So you might be lucky to get holidays and weekends in the winter. You also probably wouldn't want college students in there during spring break. 2009 has 15 weeks between Memorial Day and Labor Day. That would be $30,000 if booked the entire summer and no owner use. Everything outside those dates is gravy.

http://www.vrbo.com/178971

Here's one, anyone care to cashflow this one based on the above calculations? How about a conservative estimate of rentals. For instance who wouldn't use their own condo during the summer at least one week, and snowbirds don't rent large units or in groups. So you might be lucky to get holidays and weekends in the winter. You also probably wouldn't want college students in there during spring break. 2009 has 15 weeks between Memorial Day and Labor Day. That would be $30,000 if booked the entire summer and no owner use. Everything outside those dates is gravy.

...well, the availability calander for this condo is blank for the entire year, so I'll go out on a limb and say the present cashflow is definately negative.

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Generally in a condo you are going to have COA dues that will cover water, trash, pest control, and in most cases cable. However power is always metered seperately unless your in an oldy like Pinnacle Port.

And those power bills are going up for a SECOND time this year!

Gulf Power Gets Second Rate Increase Of The Year

For the second time this year, Gulf Power has been granted a rate increase by the Florida Public Service commission.

Gulf Power Company customers will see a nine percent increase in their billed rate beginning in January. That will increase the cost of 1,000 kilowatt hour for residential customers from $113.76 to $124.23. In September 2007, that same 1,000 kilowatt hours would have cost just $70.29.

Residential Gulf Power customers saw an increase of 11.3 percent in September. A single annual increase is usually granted in November to go into effect in January. Overall, that?s about a 21 percent increase this year.

Hi,

Don't post often but this one raises a question. Don't property/wind insurance and property taxes need to count as expenses? Utilities, power, water, trash, pest control, etc? Surely these would turn the positive negative quickly. Thoughts? Thx.

Building/structure would be covered by the HOA, but you probably also want a separate policy to cover the contents of the unit, and it's probably not a bad idea to have a little extra liability on top of what the HOA carries in case some drunken idiot wants to go balcony diving and their estate claims the railings on your unit weren't high enough to prevent the fall.

And those power bills are going up for a SECOND time this year!

Gulf Power Gets Second Rate Increase Of The Year

For the second time this year, Gulf Power has been granted a rate increase by the Florida Public Service commission.

Gulf Power Company customers will see a nine percent increase in their billed rate beginning in January. That will increase the cost of 1,000 kilowatt hour for residential customers from $113.76 to $124.23. In September 2007, that same 1,000 kilowatt hours would have cost just $70.29.

Residential Gulf Power customers saw an increase of 11.3 percent in September. A single annual increase is usually granted in November to go into effect in January. Overall, that?s about a 21 percent increase this year.

So glad not to be paying Gulf Power's highway robbery anymore.

Building/structure would be covered by the HOA, but you probably also want a separate policy to cover the contents of the unit, and it's probably not a bad idea to have a little extra liability on top of what the HOA carries in case some drunken idiot wants to go balcony diving and their estate claims the railings on your unit weren't high enough to prevent the fall.

While I do agree that a little extra liability is a good idea you probably aren't going to get sued for balcony railings as they are to code and that would make for a pretty quick dismissal.

I ran some numbers on the 4BR, Ocean Reef unit priced at $359,900 able to generate $30K annual - assuming you're using VRBO so that's your net rental income - none paid to a management company.

Key expenses are taxes, maintenance, HOA and Interest expense.

20% down, 6.5% 30 yr fixed, cost to buyer at closing of 2.5% of the loan amount, tax rate of 35%, 5 yr time horizon and 4% commission on the sale. I use a discount rate of 15%. Costs, rents and value of the unit rise at 5% per year.

With these assumptions the unit doesn't provide positive value. You'd be better off putting your money in a more secure investment.

What would it take?

Annual increase in value of 7-10% makes it attractive.

Or, getting annual rents up to 35-40,000 per year also make it attractive.

Assuming the original assumptions are correct, another way to consider the investment is how much would you be willing to pay?

Under 325K.

If you are very conservative and want to assume 0 appreciation, it only makes sense at around 210K with all other assumptions unchanged.

None of this factors in the value of owning a piece of paradise.

20% down, 6.5% 30 yr fixed

A 6.5% interest rate on an LTV 80% investment property a bit of a stretch.

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I like Amerisave's website to check on current rates www.amerisave.com

30 yr fixed rate mortgages, @ 20% down, in Walton County for Investment Purposes with a good credit score are available from mid-5's to mid-7's depending on the points you're willing to pay.

As much as people are talking / reading about the "credit crunch" - credit's available at a reasonable cost if you can document income, assets and have a decent credit score.

As much as people are talking / reading about the "credit crunch" - credit's available at a reasonable cost if you can document income, assets and have a decent credit score.

The lofty "value" of RE here, across the nation and around the world were a function of credit availability to the masses who didn't fit that criteria...folks who can wrap their mind around that will understand that prices will continue to fall.