Investing Pre Construction in Miami

---

Regardless of what you ROI goal is, we always start with due diligence of the  pre construction building. The questions we ask are:

Track records of developer and architect. 

Which projects have they concluded in the past and how are the performing

Area analysis. Is the are popular or is the project going up in a new area that needs further development.

Pricing: How is the pricing set compare to the surrounding area and its foreseeable development. Obviously that aspect has to measured by the following:

Project category: What type of project are we looking at. Is it a luxury building in a not luxurious area, or is it a regular standard project build to meet demand of either housing or vacation residences. 

In the Miami pre construction market, the conditions for short term investments are as follows:

1. The investor reserves a unit as early as possible when the prices are First Tier. This price is set to get the building of the ground and into the construction phase. The developer needs to sell typically 50% of the inventory to secure the loan and start building. Normally the developer increases the price, once 30% of the units have been reserved.

The further along the construction progresses the more the developer raises the prices.

2. The Investor sells his unit right after the building has been completed.

Construction normally takes 2-3 years to complete. In that time, there are benchmarks that the construction needs to meet to trigger more money from the investor. In a typical Miami case, the investor incrementally Pais 40% to 50% before closing and taking possions of the unit.

By the time of closing the real estate market has gone up. The investor now sells his unit for a fair market prices, which is substantially higher than when he initially bought his unit.

Example 1.

A client of mine bought a unit at Aria Reserve in Edgewater. due to good negotiations and because he came in early on the project, he succeeded in locking the price to just under $1,000 per square foot.

Prices in the same building have now, three years later, are now at $1,500 per square foot. The value of my clients unit has  increased over 50% and his investment so far han been under 50% of the purchase price. Granted he will have to pay the remaining 50% before he can sell the unit, but not for long. There is a demand in the area.

Example 2

A client bought a unit at Okan Tower which is a condo hotel. He bought a 2 bed/ 2 bath unit, which is convertible into two one bedroom units, which seem better in the hotel market.

He bought for $800 per square foot. 

Granted the construction has taken longer than anticipated, but in the mean time the World Center is being completed and attracting a blot of attention. 

Similar units like my clients are now sold out and have been for a while. Prevailing price per square foot in the area is also around $1,500 per square foot. However the product that my client bought is papular so he can a t this time sell for around $1,600 to $1,700 per square foot. 

Long term investments can be made in different ways

1. The traditional: Buy now and sell later. This is how most real estate is invested by leverage. You buy a dwelling with financing and sell it once the market presents a profit. If you do not want to pay interstate on the loan you buy it with cash and sit and wait until prices go up. Obviously, this takes longer time, however traditionally it does pay of.

2. Buy and lease out. If you want for the costs of your investments to be minimized, you rent out your dwelling. In the start the rent might just cover your costs but as time goes by and the rents increase you will start to Mae a return on your investment. However, costs will also go up, especially in Miami where insurance prices increase fast due to the risk of weather factors like storms and hurricanes. Many people chose to buy and lease out in new buildings because it take longer for things to have to be replaced, so the costs stay low while rent goes up.

The further along the construction progresses the more the developer raises the prices.

3. Buy for short term rentals

Short term rentals are very popular and more and more buildings are build for the purpose of short term rentals. Some are even sold with complete finishes and furniture packages.

Keep in mind that short term rentals have more wear and tear on the unit and there is costs for replacements, cleaning and services such as apper products, key exchanges, etc. 

Short term rentals are different from Condo Hotels in that condo hotels units are part of a hotel program. The hotel manages the unit and takes a split and a fee for managing the unit. Hotels also have black out dates, which mean that there are days in the calendar, that the hotel have reserved and that you cannot use the unit. Those are typically the big holidays in the US such as Spring break, 4. of July, Thanks Giving and New Years.

With a Short Term Rental unit you decide everything and can hire a company to manage everything from key exchange, cleaning, reservations and marketing. A Short Terme Rental manager or management company normally cost 28%-32% of the revenue.

On the left side of the example you see the price structure. All contracts start a 20% deposit.

(Sometimes the contract is not ready but to reserve a unit you are asked for a deposit. That should never be more than 10%. When the contract is signed, you put down the other 10% so you deposit 20% at contract. Until the contract I signed you can get your money back at any time). Then as construction processes, you are asked to pay additional deposits. And only when the construction has passed all inspections and you get the keys, you pay the balance which is typically  50% of the purchase price.

On the right side of the example you see the price development

At the beginning of a project, the prices are the lowest. The developer typically needs to sell 50% of the inventory to get a building loan, so he needs to sell.

Prices at the very start are slightly above market price, i.e. the price of units in immediate market where the building is going up. 

So if you lock in your price at the very start of the project, the chances are that the surrounding market price will surpass the price that you are paying for your unit. You are then building value and you will be able to see you unit at a market price that is considerably higher than you paid for it. 

Normally we look at three year cycles. I will take three years from when you buy your unit in a new project till it has earned 50% more value.