The Florida real estate market was hit especially hard by the 2008 housing market crash, and while it certainly caused its share of issues for homeowners and investors, it also led to Orlando becoming an investor’s dream market. Just a couple of years after the crash, it was quite possible to buy Orlando properties at auction for pennies on the dollar—which, in turn, gave you cheap options for flipping or renting.
But while 2010 may have led to Orlando becoming an investor’s playground, the Orlando market started to make a comeback in 2014—and it’s only gotten more expensive since. That said, while the good old days of investing in Orlando real estate for pennies on the dollar may be gone, the future of investing in this central Florida city is still bright.
Right now, Orlando—and central Florida in general—are great places to invest, and that is especially true if you need a reason to visit Florida, need a tax write-off, or have a dream of retiring in the area someday. With strong demand and low inventory—there is currently less than one month of housing supply—prices will continue to climb. In turn, this will provide equity growth that should outpace inflation.
And, with more people continuing to move to the Orlando area, rental demand will continue to grow in tandem with the market rents. All of these factors add validity to the idea that the Orlando market is prime for investment action.
How employment affects the Orlando housing market
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While Orlando may be known for its theme parks and tourist attractions, it may surprise you to learn that the Orlando economy is not entirely dependent on tourism.
It is true that tourism will likely always be the main economic driver for Orlando, but in recent years I have seen the city push to attract other industries—with a focus on technology in particular. The University of Central Florida (UCF) is also located in Orlando and is the largest state school in the nation based on 2015-2016 enrollment. I have seen a range of technology startups and Department of Defense contractors establish offices in Orlando, many of which recruit from UCF.
Still, the largest pool of renters in Orlando continues to be the service workers who are employed by large theme parks like Disney and Universal. And, the pool of renters is likely to grow, as both organizations have committed to raising their minimum wage to $15 per hour over the next few years.
This uptick in minimum pay will add some additional income to renters’ wallets, but it isn’t likely to start a new homeownership trend in the area. With home prices on the rise and interest rates creeping up, many of the area’s renters will likely be priced out of the market—and, in turn, will need to continue to rent.
Home value trends in Orlando
As noted, home values have steadily increased in the Orlando area over the last several years. The real estate market has shifted over the last few years, changing Orlando from a market with great cash flow to a market with great equity and appreciation growth.
When looking at the chart above, you’ll see that January 2017 was the starting point for the home value run-up that we have seen over the last few years. In fact, the median home sales price in Orlando has increased by 90% since January 2017—and no, that is not a typo.
And, the growth has been even more steady over the last five years, with the median home price nearly doubling. The median home price was about $163,200 in January 2017—but had grown to a median price of $309,650 by September 2021. In turn, that explosive home price growth has made it more challenging to find a “deal” in Orlando.
Rental property trends in Orlando
By looking at the chart above, you can see that the rent-to-purchase price ratio in Orlando has not been close to 1% recently—but we have started to see those numbers trend in the right direction over the last few months.
And, there are still some attractive cash flow markets that are within an hour of Orlando. Investors can still find enticing rent-to-price ratios by looking at the surrounding central Florida market. That said, these areas will likely see much slower appreciation than the metro Orlando area.
There are also areas in Orlando where there are attractive rent-price ratios. These areas generally have lower-rated schools, though, and tend to have lower appreciation rates as well. But despite these potential downsides, these Orlando areas are seeing historically low vacancy rates, as housing demand is at an all-time high.
To maximize revenue potential within these areas, it could be smart to offer these homes through Section 8. And that’s where I see a real opportunity for the right investor to acquire, clean-up, and rent homes for market rates. Offering these homes through Section 8 often leads to a good return, and if the home is clean and well maintained, there are typically no issues with finding a tenant.
This strategy will require a higher risk tolerance, however, and should involve a good property manager that is familiar with both the area and the Section 8 program. While this strategy can be lucrative, it is not for the faint of heart.
If the goal is to target areas in Orlando with better appreciation, schools, and higher market rents, investors will likely need to buy their cash flow with a larger down payment—especially if they’re wanting to see positive cash flow in year one. However, if the investor has a long-term investment mindset, there are data points that suggest that properties with negative cash flow for year one might still be a good deal, provided the property is held over the long term.
That is primarily because we are seeing rent growth in the Orlando market—and it’s happening at an astounding rate. The population growth in this metro has averaged more than 2% since 1991. And, as depicted on the chart above, the rent growth in Orlando has been strong—and I have not seen any red flags to suggest that the trend will slow down any time soon.
Short-term rental trends in Orlando
Long-term rentals are not the only option for investing in the Orlando market. Short-term rentals are a very real option here. That said, the available data for short-term rentals is less conclusive, in part because you can have identical properties with very different performances. In general, the profitability of a short-term rental property is heavily dependent on how well the business is run, making it tough to measure the results.
Over the last year, however, there has been an increase in demand for larger, 5+ bedroom short-term rentals in Orlando. Much of this increase in demand can be attributed to the pandemic and the state’s less restrictive COVID-19 measures, which have allowed Florida businesses to stay open to vacationers and tourists.
And, the increase in demand for short-term rentals is happening even in the absence of European vacationers. The Orlando airport reported that as of March of 2021, they have had a monthly tally of more than 3 million passengers, and 99% of those were domestic travelers.
It’s realistic to anticipate that there will be a stable demand for short-term rentals in the near future, as consumers flock to travel to other cities after missing out on these types of experiences during the restrictions during the pandemic. Plus, the current lack of European travelers means that there will be additional demand on the horizon. In time, these travelers will be willing and able to return to markets like Orlando on vacation, and some of this travel has already started.
Final thoughts on the Orlando real estate market
All of this information paints the picture that the central Florida market has a little something for everyone. That is true, but the Orlando market is not without risk.
The Orlando short-term rental market took a beating during the pandemic due to a temporary shutdown of Florida’s short-term rentals, which lasted for four months. That is unlikely to happen again in the short term, however.
There have been increased insurance costs in Orlando over the last few years, which is important to note. The tropical climate in Florida means hurricanes occur from time to time, which can cause property insurance rates to increase—sometimes significantly.
While there have been catastrophic hurricanes here in Florida, these weather patterns are statistically less likely to drastically impact central Florida or Orlando compared to the coastal regions. Hurricanes still translate into increased insurance costs for all Floridians, however, as insurance companies try to balance their risk exposure with profitability.
But even with the possible risks, the outlook for Orlando is strong. The rental demand is likely to continue to grow along with market rents, and while this won’t last forever, there is nothing in the immediate future that should make you think twice about investing in a property in Orlando—as long as it matches with your goals.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.