By the Numbers: Investing in a High-end Rental Home in Naples, Florida

A client recently asked me about what return might be expected if he were to buy and rent a $2.6M home in the Aqualane Shores neighborhood with the expectation of selling it in five years. Given the adage that land appreciates and dwellings depreciate, the best investment is an older home on a good lot.

The quick answer to his question of returns is this:  With the right older home in the right location that is selling at or somewhat close to lot value but still has significant rental appeal, and with current low 5 year interest rates, the rental income in this neighborhood will just about cover the interest and expenses. With 30% down, just looking at the appreciation in lot value and keeping the low value the structure constant, if the lot appreciates at a compounded average of 6% per year, over five years the average annual ROI is about 12%. At 10% compounded appreciation, the average annual return is about 25%. (For the last few years, lots in Aqualane Shores have been appreciating in the 15%-20% range, but it would a bit over exuberant to plan on this continuing. If I go back 20 years, I find that the historic rate of lot value appreciation in Old Naples has been about 9% per year.)

With the anticipated demand of the retiring baby boomers, and looking at historical data, property values west of US 41 in Naples will always lead the way in appreciation.  Also, right now rental properties in the upper end neighborhoods are in high demand due to a severe lack of inventory. I recently spoke with a rental agent in Aqualane Shores who has just such a property and she told me she wishes she had 10 of them because the demand is so high.  And with Internet sites like VRBO, a savvy rental/property manager can minimize or eliminate the rental commissions.

Setting up a LLC and sharing the investment with a group of 4 to 5 partners makes this investment strategy more accessible for many people. A 30% down payment divided by 5 people in on a $2.6M deal comes to $156,000 each. I would also recommend adding another $10,000 each for a contingency fund, the remainder of which would be returned when the home sells.

I have this all laid out on spreadsheets. If you are interested in looking at the numbers, and finding out about good high-end rental properties in Naples, please contact me. I look forward to working with you to find the right property.

Bill Van Arsdale

239-641-6164