Florida Homeowner Insurance Problems Impact Real Estate

Florida’s real estate market is about for a major shake-up. While many of my colleagues remain optimistic about Florida’s market, consultants must be more objective.

Our theory is based on the following: Property values all depend upon “Rents”. The true value of any property, whether commercial or residential, is determined by its rent. What rent will the property fetch on an open market?

Appraisers are required to use three methods when determining the value of real estate. Appraisers must use all three methods to determine the value.

We all know the Comparison method. This is what a realty professional will use to determine the listing value of your property. If my neighbor’s house sells for $250,000, then mine must be at least that.

Well, maybe!

Private home sales are driven not only by price but also emotion, the location, amenities, transport, and the proximity to malls. But, what is the real test?

What happens if the property is transferred? Can you get rent?

Rent is a key driver of value. The following are the key factors that will determine the value of your property.

What is the potential gross income of the property? Let’s say that you could rent your house for $1,500 per monthly. Add any collection or vacancy losses. Now that you’ve had a successful year, the property was rented immediately and no tenants checks bounced, your EGI (effect gross income) is $18,000. You must subtract taxes, insurance, and other operating expenses. Note that your mortgage payment is not included in this calculation. Your NOI, net operating income, is now $13,800. Let’s say you have $2,500 taxes and $1,200 insurance. There are a few miscellaneous expenses of $500.

Divide this number by the current cap. Based on the evaluation of other investments, the current capitalization rate is approximately 8%. Divide your NOI by the Cap Rate. 13800/. 08 = $172,500

Based on the Income Cap, the property’s value is $172,500 Problem: You paid $250,000. The problem is that you paid $250,000.

Value drivers

Value is driven by NOI, Net Operating Income and interest rates. Let’s start with interest. Value and interest rates are in opposite directions. Let’s use the NOI from the above to see what happens if interest rate rises to 10.5%. 13800/. 105 = $131,428. The property has not been changed, but the neighborhood has not changed except for the interest rate. We see a drop of $41,000+ in value.

The loss of NOI is another factor that can be devastating. Let’s take a look at the rental value of a house that is being rented. What is the current value of a home you have rented for $250,000? You have found someone to take a 3-year “Gross Lease” at $2,000 per Month. Assuming no collection losses, our EGI is $24,000 annually. Let’s now look at our operating expenses. OK, taxes are $3,000 (opps you lost the homestead exemption that you had while you lived there) and insurance is $1,200 + $500 for miscellaneous:

PGI $24,000

No Collection losses

EGI $24,000


Taxes: 3,000

1.500 Insurance

Misc 500

NOI $19,000/Cap rate 8%

19000/.08 = $237,500

You say that you don’t care because I was able put down 10%. It looks like I am ahead of my time because my monthly mortgage payment is $ 1,496.93. 30 Years at a 7.000% Interest Rate on a Loan Amount $ 225,000.00. You are making $86 per Month with $5000 in expenses. Your depreciation is approximately $4,900 per annum.

It’s Florida, and you get a notice from your insurance company that your insurance policy has been cancelled. Your new insurance is now $6,000 per annum and your taxes are now $3,800. Where are you?

Hypothec Mortgage 1 496.93

Insurance 500.00

Taxes: 316.00

Misc. 50.00

Outgoing $2,362.00

Red $362 per month, or $4344 per annum

You are almost even with your depreciation

However, what is your property worth?

Values are now driven by insurance

The insurance market in Florida can have a catastrophic effect on property values, whether you like it or not. There is no reason to invest in the Florida property market, except for depreciation.

I wish I could tell you that relief is near, but it’s not possible. “Citizens Property Insurance”, the largest property insurer in Florida, is currently at $2,700,000,000 (that’s 2.7 BILLION). This light is a sign that insurance rates will rise.

What should you do?

All of us are affected, but some more than others. This illustration is not fictional. It’s a real case of a property I was interested in, but it was bought by someone else.

This too will pass. We will again have a strong real estate market, but for the meantime


* Invest in vacation property. Although $300 per month is prohibitive for someone who wants to rent a property on a long-term lease, the weekly vacation rate can include increases in taxes or insurance. Vacationers will pay $80 less per week, and they won’t think too much about it.

* Stop riding the adjustable rate mortgage rate and lock in your mortgage rates.

* Buy your mortgage down if possible – create a buffer

* You may be eligible for a credit line if you have substantial equity in the property. _ Do not use it, but keep it in case of an emergency.

* Never insure personal property. Condo rentals are not eligible for this policy as the loss of RENTS, which is something you need very much, will be tied to your contents. This will help you save a few bucks.

Maximize your property deductibles. A 10% wind deductible might seem like a lot, but it will save you money. You can deduct uncovered casualty loss.

* Consider smaller forms. I don’t believe this is possible. Instead of the DP3, the best landlord policy (also known as the DP3), look at the DP2. Look at the DP1 (actual cash value adjustments) if the property is older than 1-7 years.

* Florida property is not for sale. If you want to buy property, you should go north and middle. You won’t be alone long.

Real Estate Professionals :

* Do not despair! Learn how to sell foreclosed properties

* Learn how to sell investment properties

* Keep your eyes on the north and center

* Vacation Properties on the Market

I would love to be able to give you a time frame, but Florida is Florida. It is possible that the market will turn around.