Residential Property Investment Due Diligence in Florida

Navigator conducted market analysis, property due diligence and financial assessment of residential rental investments in Florida following the 2008 global financial crisis. The assignment focused on suburban multifamily properties in the Tampa, Orlando and Miami markets, including developments ranging from approximately 100 to 500 residential units.

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Our work assessed whether the severe decline in property values had created sustainable investment opportunities when considered against rental income, occupancy, operating costs, mortgage finance, taxation and the prospects for market recovery.

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Market Context

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Florida’s residential property market experienced a severe correction following the 2008 financial crisis. By 2010, residential property values had fallen by approximately 50% from their 2006 peak, based on the Case Shiller Index.

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International investment was beginning to return, supported by lower asset values and favourable exchange rate movements for several investor groups. According to the US National Association of Realtors, international purchases of US property increased from approximately $62 billion in the previous annual period to $82 billion between April 2010 and March 2011.

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Despite this renewed activity, much of the foreign investment entering Florida remained concentrated in urban high rise developments. Navigator examined the less prominent suburban rental market, where asset values remained depressed and opportunities for operational improvement were substantial.

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What We Did

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Navigator combined property level due diligence with analysis of the wider economic, financial and regulatory environment. Our work included:

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• Analysis of suburban residential rental properties in Tampa, Orlando and Miami

• Financial assessment of selected properties containing approximately 100 to 500 units

• Review of property tax records, tenant schedules and rental income

• Analysis of occupancy rates, operating costs and management practices

• Assessment of commercial mortgage availability, financing terms and repayment periods

• Review of ownership structures and tax optimisation strategies

• Analysis of local property agents and the quality of investment information provided

• Economic and property market analysis covering supply, demand, foreclosures and investment activity

• Review of government regulation and public investment affecting the residential market

• Identification of opportunities for operational improvement and portfolio efficiencies

 

Property and Rental Market Analysis

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The assignment focused on suburban multifamily developments that had experienced significant declines in both valuation and occupancy. At the time of the study:

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• Occupancy in some properties had fallen from approximately 90% to between 70% and 75%
   

• Monthly rents for a one bedroom apartment with one bathroom typically ranged from $550 to $650
   

• Property valuations remained substantially below their pre crisis levels
   

• Foreign investment had begun to support recovery in selected urban markets, but had not yet fully reached the suburban rental segment
   

Navigator assessed whether the combination of reduced acquisition values, established rental demand and potential market recovery could support attractive long term investment returns.

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Financial and Operational Due Diligence

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We analysed property income, operating expenditure, taxation, occupancy and management performance to determine the underlying financial position of selected assets.

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The review identified the potential for substantial operating returns in appropriately priced and managed properties. It also demonstrated that headline acquisition prices needed to be considered alongside:

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• Tenant quality and payment performance

• Current and achievable occupancy

• Rental levels and collection rates

• Deferred maintenance and capital expenditure

• Property taxes and insurance

• Management costs

• Mortgage terms and debt servicing

• Local market conditions

• Exit value and timing

 

Property Management and Technology

 

Many of the properties reviewed were managed independently. This created opportunities to reduce costs and improve operating performance through portfolio management, shared services and greater use of technology. Potential improvements included:

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• Centralised property and facilities management

• Consolidated purchasing and supplier contracts

• Standardised financial and operational reporting

• Customer relationship management systems

• Digital monitoring of occupancy, income and operating costs

• Improved tenant communication and service management

• Portfolio level performance benchmarking

 

These measures offered the potential to improve occupancy, control costs and create economies of scale across multiple properties.

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Financing and Taxation

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Mortgage finance remained available during the period under review. Financing structures commonly included repayment periods of 25 to 30 years, with interest rates generally ranging from 5.5% to 6.5%.
 

Navigator assessed the effect of debt terms, ownership structures and taxation on property cash flow and investor returns. This enabled potential investments to be considered on the basis of their total financial structure rather than acquisition price alone.
 

Outcomes and Results

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The assignment provided investors with an independent evidence base for evaluating residential rental property in a distressed and rapidly changing market.

Navigator’s analysis:

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• Distinguished sustainable rental investments from assets whose low prices reflected deeper operational or market problems
   

• Identified the principal financial, commercial and management risks affecting selected properties
   

• Assessed the relationship between acquisition value, occupancy, rental income and operating costs
   

• Evaluated opportunities for cost reduction and operational improvement
   

• Clarified the effect of financing and taxation on investor returns
   

• Established a structured basis for comparing individual properties and potential portfolios
   

The work demonstrated that post crisis property investment required detailed analysis of asset quality, operating performance and local market conditions. Reduced valuations alone did not establish a viable investment case.
 

Areas of Expertise

Residential Property; Multifamily Housing; Property Investment Due Diligence; Distressed Assets; Post Crisis Investment; Florida Real Estate; Rental Property Analysis; Property Financial Modelling; Commercial Mortgage Analysis; Property Taxation; Occupancy Analysis; Property Management; CRM; Portfolio Optimisation; Investment Risk Analysis​

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Confidentiality Notice

The project reference presented here is an actual example of Navigator Consulting's experience. Stock photography and conceptual images are used for illustrative purposes only and do not depict the actual project, client, owner or location. Certain technical, financial and commercial information has been modified, generalised or omitted in order to preserve client confidentiality and commercially sensitive information.