Happy 8th Anniversary

Beach restoration south Cocoa beach 2005

I just realized that this month marks the 8 year anniversary of this little real estate blog. In the 8 years I've been commenting on our market I've written 389 posts and angered scores of listing agents, developers and other market participants. Those same not universally loved comments have also initiated contact from hedge funds, banks, troubled developers and various members of the media. Not one of them realized the oracle was wearing flip flops until the first meeting. Hey. Whatcha gonna do? My shining moment of the last eight years, however, has to be the time I was accused straight-faced by a local lender as being the reason via this blog for the market crash. I may not have crashed the market but I will take credit for torpedoing more than one deal. All this because I write honestly about what I see happening in the Cocoa Beach real estate market. Expect more of the same, hopefully for at least another eight.

What's changed since then? When I began writing in March 2005 the market was poised for a meltdown but it wasn't apparent yet. We had never heard of short sales and there were zero foreclosures for sale in the two cities. There were 200 new condos either under construction or about to break ground just in the 3/4 mile stretch from Patrick Air Force Base to 18th Street South. It was to be a disaster for all of them except the one building that was never built, Cocoa Cabanas. They are still threatening to build, by the way. Magnolia Bay was set to break ground the following month and the announced 77 units were offered pre-construction starting at $549,900. Many of the pre-construction buyers eventually walked away from their 10% deposits but they lost less than those who went ahead and closed with an instant six figure loss. The fourth building was never built. It was a story to be repeated at all the other new buildings in the once-sleepy southern stretch of Cocoa Beach. Another boondoggle soon to be announced was the Enclave between 3rd and 4th Street South with an original plan of 24 zero lot line single family homes starting at a million dollars. Only 12 were built and several of those eventually sold for less than a half million. For the record, it was true then and as is still true today, no non-waterfront home has sold in Cocoa Beach for even close to a million dollars. For anyone to think they could sell, not one, but 24 for more than a million bucks seems incomprehensible. Those were heady, optimistic and greedy times.

At the same time in March 2005 pre-construction buyers were flipping contracts at Portside Villas for 5 to 7 times their investment. Similar, although not quite as lucrative, activity was happening at Solana on the River, Mystic Vistas, Majestic Bay and Puerto del Rio among others. The coming months were to see tens of millions in evaporated money for those unfortunate enough to be among the buyers of the flipped contracts or those who closed on those contracts rather than flip for a profit. Prices of individual units in some complexes eventually sold for a quarter of the number they were bringing in 2005, e.g., Perlas del Mar and Sea Spray Townhomes.

In early March 2005 the national average 30 year fixed rate mortgage was 5.77% and climbing and scrutiny of the borrower and the property was practically non-existent. Rates topped 6% by month's end. Inventory was still relatively low with around 400 condo units listed for sale in the Cocoa Beach and Cape Canaveral MLS and less than 45 single family homes. The condo inventory was top heavy with over 110 units asking over a half million. This  warning sign was ignored by almost all market participants. Inventory was about to blow up with total number of condos for sale almost tripling in a year's time as prices tumbled.

 Things have changed. MLS condo inventory is at 317 total units for sale this morning. Magnolia Bay and most of the other once-troubled complexes are on solid footing with most or all units sold. (There are a couple of exceptions in south Cocoa Beach.) The national average for a 30 year fixed rate mortgage  is 3.52%. Scrutiny of borrowers and the collateral property is now as invasive and thorough as a prostate exam. The Space Shuttle is no longer flying and Kelly Slater has been world champion five more times since that first blog post. The downtown sidewalks that were concrete in 2005 are now pavers and rowdy beach-goers are more likely to be accosted by a fired up old dude on a power trip in a Beach Ranger shirt than a cop. The locals on the deck at the Beach Shack have not noticed any change at all. Through it all, Cocoa Beach is still my pick as the best little beach town in Florida.


"I always wanted to be somebody, but now I realize I should have been more specific." ___Lily Tomlin

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Thank you, Internal Revenue Service

I decided to write this post yesterday after answering a reader's questions about the costs of ownership of a vacation condo. Back in June this year I wrote a post entitled "Positive cash flow. Does it exist?" In that post I explored a hypothetical case detailing expenses, income and other factors related to an investment condo and how they affected the chances of achieving positive cash flow. One factor I did not discuss was the contribution that favorable tax laws make to the overall picture of investment condo ownership. I will use another hypothetical weekly rental condo and explore the effect to overall return that tax deductions will make for an owner. (Disclaimer: I am not an accountant (not even close) and do not claim accuracy nor am I offering tax advice here. This is just a hypothetical case using my understanding of current tax laws. Please consult your accountant and/or tax lawyer before making decisions based on my writings.)

We'll use a $280,000 weekly rental condo in this scenario. We'll assume a 30% down payment (Fannie Mae requirements for 2nd home condos) on a 30 year mortgage at 5.5%. Our fixed monthly costs will be (estimates but close to reality);

mortgage______$1112
property taxes__ 374
condo fees_____ 350
utilities________ 130
insurance_______ 70
TOTAL________$2036

Let's project a conservative average of $800 per week for our unit and a conservative 50% occupancy for the year. Management for weekly rental units runs from a low of 10% to a high of 40% in our area. Keeping our example conservative, I'll use the above-average 35% charged by the very efficient team at Cape Winds in Cape Canaveral for our example. That means that our 26 weeks at $800 will net the owner $13,520 after the 35% management fee, a shortfall of $10,912 to our annual expenses. Not looking so good at this point. Those two weeks a year of personal use are going to cost over $5000 each. Ouch! Not so fast. Let's look at the tax benefits. According to IRS publication 527 the following expenses are deductible.

1. Advertising.

2. Cleaning and maintenance.

3. Commissions.

4. Depreciation.

5. Insurance.

6. Interest.

7. Legal fees.

8. Local transportation expenses.

9. Points.

10. Rental payments.

11. Repairs.

12. Tax return preparation fees.

13. Taxes.

14. Travel expenses.

15. Utilities.

[Edited: Thanks to Anonymous CPA for pointing out the math errors] All of our example monthly expenses of $2036 are included in the IRS allowed deductions except the mortgage payment. The interest part of that (average for the year of $892/month) is, however, included. That comes to a total of $21,792 of deductible expenses for owners with active participation. The IRS also allows for depreciation of investment property over a 27.5 year period. That means that for each year of ownership of our $280,000 condo, we will be able to deduct $10,181.82 as depreciation. In this example our investment condo will generate $31,973 of legal tax deductions ( expenses plus depreciation). After offsetting the deductions with the income of $13,520, we are left with $18,453 of net deductions saving the owner $4613 to $5166 in taxes assuming our condo owner is in the 25 to 28% tax bracket. [As pointed out by Anonymous CPA, the limit for deductions is $25,000 per year which would max out the savings for a 28% taxpayer at $7000.] Remember that this is using a conservative 50% occupancy unit with high management costs. In this example our unit does not achieve positive cash flow. I have used management charges at the high end of the scale (35%) and modest 50% occupancy as I prefer to project conservatively so that my surprises are good ones. Good management is available for considerably less than 35% and occupancies of more than 26 weeks a year are common.

But wait, there are other benefits and deductions. A well-informed and law-abiding owner can generate additional deductions including but not limited to some acquisition costs in the year of purchase and travel expenses to manage, conserve or maintain the property. In addition, with higher occupancy and/or lower management expense the numbers can look significantly better. Conclusion; a rental condo at today's prices can come close to paying for itself and, with good management, generate cash flow. Let's also not forget that an owner is allowed to use an investment property for the greater of "14 days or 10% of the total days it is rented to others at a fair rental price". [Edit: I didn't mention possible appreciation or mortgage principle paydown over time nor depreciation recapture taxes upon the sale. The combination of all three could be either a net positive or negative. No way to accurately project without a crystal ball.]

These same rules apply to units rented for longer than weekly periods. The overall numbers are generally less for units that rent for monthly or longer periods but the tax benefits still apply and will make the costs of ownership considerably less than at first glance. As always, do your homework and talk to your trusted expert before making a purchase. Non-American citizens, I have no idea how your tax laws treat your ownership of American investment property.

I hope this was helpful and not too confusing. I also hope my errors are minor. I expect to hear from readers more informed than I. Please contribute your thoughts, observations and experiences to the comments below. And to everyone reading this, I hope you have a happy, safe, rewarding holiday season filled with love and joy.

"Unless we make Christmas an occasion to share our blessings, all the snow in Alaska won't make it 'white'." __________Bing Crosby

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