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Market Spotlight on the Cape Coral, Florida
It’s my pleasure to welcome Rob to the show. He is one of our strategic partners in Southwest Florida. He has worked in the real estate industry for over ten years. He’s renovated houses and commercial properties and for the last three and a half years, he has been building new construction properties in Southwest Florida. These are cities that include Cape Coral, Lehigh Acres, Fort Myers, and Punta Gorda. I’m quite familiar with this market because I was an investor in this market years ago, but things cycle and repeat. Now, we’re back into this market because the opportunities are plentiful. With that, Rob, welcome to the show.
Thank you very much, Marco. It’s a pleasure to be on with you and it’s fantastic to be able to talk about the Cape Coral area. We absolutely love this area and we think it’s a fantastic place for your investors to consider for a new construction development and investment in general.
We’re excited about it. I know that we’ve been working with you here since the beginning of the year and putting together some programs for our clients and real estate investors to be invested in this market. Why don’t we start off by talking about the market and then we’ll get into the different types of properties and opportunities that are there. Cape Coral is a fascinating city. It’s beautiful, it’s large. It’s got a lot of water canals. Why don’t you give us a verbal virtual tour of that city?
To me, what’s unique about Cape Coral is it’s a master plan city. It’s pre-plotted and pre-planned with a lot of thought and design put in ahead of time before they broke ground at all. It only started in 1957 so we’ve got a really new city. We’ve got over 400 miles of canals. Back in 1957, they used to have viewing trips and they would fly planes over the city before it was all dredged out and everything. They would drop down sacks of flour to show people who are looking to invest and purchase a lot, it was a lot that they are actually purchasing. There was a lot of momentum and a lot of energy that came early on in it.
It’s still at this point right now, 50% of the city is not yet developed. We have a lot of opportunity for growth and it’s an exciting place. People are coming down here for three main reasons. It’s the three S’s and it’s sunshine, it’s the scenery, and it’s security. It’s just a fantastic place to live. It’s actually an up and coming place for Millennials. As you look throughout the city here, they’ve designed it so that within a ten-minute walk from any place in the city, you can be at a park. It’s loaded with lots of parks, 400 miles of canals, and over 50% of those canals go out to the Gulf of Mexico.
The American dream here for us is to live on a canal, have your pool out there, and you’ve got a boat dock outback, and a boat-lift. You press the button, your boat goes down into the water and you’re off into the Gulf of Mexico. It makes for a fantastic standard of living for people. I think an opportunity to see the values over time grew strong because when you look at price values, South of us in Naples and North of us in Tampa, there is a massive difference between the markets that we saw. I think we’ve got a great opportunity for appreciation.
I’ve come to know Cape Coral as basically a cyclical city. We’ve seen a lot of appreciation back in ‘03 through ‘06 and then there was that housing correction and property values pulled back, but now we’re starting to see an upcycle again. It probably started around 2012, 2013 there. Cape Coral is a very interesting city. You’ve got more canals than Venice, Italy. In fact, you’ve got more canals than any city in the world. It really is beautiful. It’s expansive. There’s a lot of new buildings and new shopping and retail and housing and all kinds of stuff. It’s a sign that there’s a lot of growth and people are moving there. Let’s talk about the market and the economy there. What’s driving the growth in Cape Coral? Why are people moving there? What’s going on? Why should I look at Cape Coral?
Right now, when you look at Cape Coral, if you go and start pulling some Google searches on it, you’ll see that it hits the top ten for about everything. It’s in the top ten places to invest. It’s in the top ten places to own a boat in the country. It’s in the top ten places to retire. It’s in the top ten fastest growing populations. It’s in the top ten in terms of fastest-growing job growth. It’s got extremely low unemployment. It’s the third most affordable city in Florida to live in. It’s in the top 25 safest cities in the United States. In Florida, it’s number two for cities over 150,000.
You’ve got top ten everywhere you go. I think investors are looking for a place to go, when you start seeing that many boxes check top ten, top ten, top ten, it’s got to catch your attention. It’s certainly catching the attention of the number of people that are moving here. US News & World Report has ranked Lee County as second on its list of places to nationwide that people are moving to in 2018. There’s a big influx of people coming. They are recognizing the opportunities here. It’s got all the amenities, the restaurants, the water that people are looking for in their lifestyle, and the economy is moving along well here.
A big one for me is that last year, Forbes ranked it number two out of ten as the hottest real estate markets to watch. The primary reason for that was about the affordability of housing and the biggest thing for me is job growth. When you have jobs, it fixes everything else. You drive people into the market from other markets so you have population growth which drives housing demand, which drives the need for new housing, new construction, refurbished homes, and rentals. We, as real estate investors, that’s the stuff we look for because we need that tenant pool to fill the houses that we provide as a product and service to our customer being the tenant. That job growth is so critical and Forbes is putting it as number two on that top ten list as far as markets to watch, really says a lot.
There are a lot of accolades, actually. It was ranked number three as the most affordable city to live in Florida by Livability.com. That goes back two years but still, it’s a very interesting metro area. I don’t know if you have anything to add to that but do you have any comments about the job environment? What kind of industry is down there? A lot of people think about Florida as a place where people go to retire. You think of seniors and seniors are not in the workforce. They’re not necessarily employed, they’re not part of the work pool. What kind of industry is going on and what is driving these jobs?
There definitely is a huge retirement community here and a big healthcare industry that’s tied to that. When you’re looking at a lot of the jobs that would be coming from the retirement community, it’s in the healthcare industry here. That’s definitely huge. The school systems are a big job provider. There are numbers of IT and health-related companies. Right across the hall from us, we’ve got a decent-sized company that’s come in and they’re IT-based and providing some healthcare solutions to people. There’s a lot of marketing and IT companies coming in as well. I think still the major industry are retirees and the healthcare systems and so forth that come through that. Tourism is huge here as well because you’ve got a great place for people to come on a vacation.
Fort Myers is the largest city next to Cape Coral. Is that correct?
Yes.
That would be the airport for someone flying in and out of Cape Coral.
We’re right next to it. The airport is a 30-minute drive from Cape Coral.
I remember the city is extremely large geographically. It was divided into four quadrants. You have Northwest, Northeast, Southwest, Southeast. The Southeast being mostly on the water is probably the most built out and populated. Is that correct?
Southeast is going to be your most populated and that’s the place they started developing initially. Southwest was the second quadrant that’s being developed. The Southeast is going to have a lot of Gulf access. Your Southwest is going to have a lot of Gulf access and your Northwest has a lot of Gulf access as well.
As I remember, the inventory that you’re providing us for our investor clients is in the Northwest. Tell us why. I want to say it’s the best balance between available inventory and price points.
As I looked at the different areas, the price point that we’re able to purchase land for in the Northwest for people wanting to hold rental properties just made the most sense for numbers. One of the things that we’re looking at doing as well is we’re trying to leverage good pricing in terms of our land. We’re also trying to make a play in terms of leveraging the best cashflow with one of our lenders. We have a lender that we’re working with right now. They give you a 4.5% interest rate if you have a ten-year arm and 4.75% if you have a seven-year arm. The area is in the Northwest that we’re looking at, those right there, the water and sewer are going to be installed in about ten years out in the areas that we’re buying.
The play that we’re advising investors to come in on is to buy in these areas right now. Plan to hold it for seven years at the best interest rates at that 4.5% or 4.75% depending on which arm you want so you’re going to have maximum cashflow. Meanwhile, you’re watching the appreciation grow up and you’re going to sell right before those utilities come in. Take your money back and move it into a 1031 exchange and purchase another property. There’s a number of different zones that keep rolling out here in Cape Coral. You could do that play several times before we’ve finished all the utilities.
All the properties that investors are purchasing, these rentals, are they all on well and septic right now? The plan is ten years from now or sometime between now and ten years from now, they will be converted into a city-run water sewer.
Yes, that’s what it is.
Some people are probably thinking, “What happens when that happens?” I think I know the answer because this actually happened to me with one of my properties in Southeast Cape Coral ten years ago. It was well and septic then I got a bill from the city saying we’re going to be rolling out a city water, city sewer, and this is your cost. That was my bill but they amortized it over twenty years so it would be included as part of the property taxes. I would be paying for it for over twenty years at that time. I don’t know if they still do it that way. How does that work?
You just described it perfectly. That’s exactly the way it works. That has not changed at all. For me, that’s the play there. I think you get the most bang for your buck by doing it that way. There are other areas as well that you can go, but if the price of land goes up a bit on you, it’s going to hurt your cap rates.
How does that impact an investor’s cashflow? Granted we’re talking potentially ten years down the road, at which point your cost basis is going to be lower than what the property value is. Your loan would have been amortized, maybe you’ve had to refi, probably not. I would assume that rents would be higher ten years from now than now. When you have this twenty-year amortized city bill for these improvements, do you have an idea of how much that’s going to impact the expenses in terms of property taxes? Because that affects the bottom line, right?
You bet it does. It’s going to be about $2,000 to $2,400 a year extra, at least some of the lots that I’m looking at right now. You’re probably looking at close to $200 a month extra. That’s why it makes a lot of sense to utilize those loans with the lower interest rates and sell out after seven years because you’re going to end up that 4.5% interest rate. Right now, what interest rates are you typically finding with your investors, 5.5% for most people? When you take it down all the way down to 4.5% and hold that for seven years, you’re going to put a lot more money in your pocket every single month. I honestly think the best thing is to move on because you’re going to hurt your cashflow too much if you don’t sell before that period with the assessment.
We have to assume probably quite safely that in ten years, your rent is going to be at least $200 more a month. If that’s true, and I would suspect it would be, that is enough or more than enough to cover whatever the assessment will be for those improvements.
That’s a good point, Marco. When you look at the rents here in Cape Coral, they’re continuing to rise and continuing to rise. People are just renting a whole lot more and the Millennial generation, as we look right now moving forward over the next year, we don’t know how quick the Fed is going to start raising rates. One of the concerns right now is this is the time to get in and buy? Because as rates go up, it keeps hurting you. There’s definitely an urgency there for investors if they’re on the fence and thinking about investing. I would definitely say do it now prior to too many rate increases.
I know you know that RentRange did a study not long ago. It was probably a couple of years ago in Cape Coral, Fort Meyers and that whole area, the rents had outpaced all the top Metros in the country in terms of single family homes. We’re talking about a market that has had fast rental growth and continues to have strong rental growth. Now, you’re building single family homes, duplexes, and fourplexes. This is all new construction product which I love. I have a bit of a bias for new construction. The same could be said for inventory in mature stable markets, neighborhoods that have been completely refurbished because those are essentially like new anyway. You’re building new construction and they’re single families, duplexes, and fourplexes. Describe the price range of these products just so our audience has an idea of what is available. Then let’s also talk about what those same properties rent for so we have an idea of the ratio of that rent to the purchase price.
We’re looking at $182,000 for our three-bedroom, two-bathroom house. We also have one at $174,000 for a three-bed, two-bath. We’ve also got $129,000 for a two bedroom, two bath. That was an interesting one for me because of the retiree community, you’re providing a reasonably priced but new construction property for them, not here in Cape Coral. Although they are talking about creating the new zoning for cottages here, it’s not yet approved. For those properties, the two-bedroom, two-bath, would be up in Port Charlotte or Punta Gorda area or in Lehigh as well.
That same range of property type, what would those rent for? In my mind, I’m just trying to get an idea of the ratio of that rent to price point.
We’re at $1,100, $1,150 for our two-bedroom that we will be renting out. The three-bedroom, two-bath are going to be typically around $1,500 a month for those. I do have one model that we’re building right now that’s also a three-bed, two-bath. We’re using it whenever we go on the water. One of the things we’re doing now that is interesting is we’re purchasing properties on the water, but we’re not putting in a traditional seawall that’s typically $15,000. What we’re doing is we’re grading it down to the water and putting a sod package over it. It’s costing us around $3,000 for that element instead of 15,000 and they’re going to be renting out for the same amount.
When you’ve got a property on the water, you’re at $1,750 for that. Those are going for $192,000. You got a nice cap right on there and there’s high demand for something that’s on the water. We’re using kind of a beach look with plank flooring. We should have some pictures coming out on those that I can send over to you as well. Those would probably be another week or so but really beautiful property. This first one that we’ve done, it’s on a canal. It got a great price on the land and you just come down to the canal and you’re right out to a lake where they have the best fishing tournaments and so forth. There’s a lot of fresh water lakes inside of Cape Coral as well. We’re trying to leverage some of those little sweet spots there so that we can achieve higher rental returns for our investors by thinking a little bit different because most people always put in that seawall. You have to put a seawall in place when it’s salt water. If it’s fresh water, you’ve got three options. One of those is the one that we’re utilizing. I don’t see any other developers in the city using this option.
One thing I want to make sure is we don’t skip over the neighborhoods. How would you describe the neighborhoods? Maybe not necessarily in terms of grading them, because my impression of what I’m seeing is they’re probably B-plus and A-minus type neighborhoods. Correct me if I’m off on that, but that’s basically what I’m seeing. How would you describe these neighborhoods quantitatively or qualitatively?
We really don’t have a bad area in Cape Coral at all. I would say everything is going to be either B-plus or A-minus. It’s a little bit older in the Southeast quadrant because that’s where they started building first. You can find a good number of 1960s homes. Even some of the ones on the water over there, they’re starting to get bought out, knocked down. They’re putting some nice, larger properties on some of those there. The Southwest is probably the most populous but also new. Maybe you would probably categorize the Southwest area as the highest end area right now. There’s a beautiful marina in the area here, the houses are fantastic. A lot of beautiful tower-roofed houses that looked pretty luxurious here. Although, I think the Northwest has the largest potential for capital appreciation and here’s why. They’ve got a project that they’ve approved called the Seven Islands. All the way over right just off the Gulf, you’ve got these Seven Islands that are owned by the city of Cape Coral.
They’ve been approved for a luxury marina, luxury hotels, high-end restaurants, and boutiques. Literally, you can be living over there in the Northwest, drive your boat into the marina, have lunch over there, go to some of the different retail places or just go right out to the Gulf. The nice thing about that Northwest is there’s no lock. You go right out. When you’re going out from the Southwest, you get stuck in line trying to get through the lock and then you go out to the Gulf. If you’re a fisherman, the best fishing in the whole area is right outside that exit into the Gulf of the Northwest. It’s really a world class fishing. The Field & Stream magazine has named that area there as number eleven in the country of best places to go fishing.
Is this going to be a private park or a public park?
The Seven Islands are going to be public buildings. They’re recruiting developers to come in and develop it all right now. They brought everybody in to vote on four different concepts that they had developed. It looks gorgeous, it looks high-end. It’s those kinds of developments of infrastructure that make the values shoot up. When you look at the price for lands down in the Southwest and Gulf access land or in the Southeast for these, like the Gulf access properties, they are multiples of what you’re going to pay right now for some of the same properties up in the Northwest. I think that’s a good play for investors up there. One of the reasons as well why we chose to build for investors up there, what we’ve done is most of the properties that we purchased, we purchased within a mile to two around Coral Oaks golf course, which gives the appraised value of the other properties that we’re building a nice lift.
Let’s wind things down with the property management side. Everything we sell obviously in every market is tied to management. We try to make sure that our tenants are in place when it makes sense. That’s usually most of the time but there’s also management in place that’s managing the property and taking care of the tenant, and the rents, and the payments, and anything that comes up. Tell us the management side of your business. Obviously, there’s going to be management included in all these properties but give us a quick rundown of what you’re doing on the management side.
On the management side, Cape Coral is a great place in terms of getting your property rented out quickly. Every property that we put out in the market for rent is typically rented out less than a month. It’s pretty quick in terms of that. We don’t put anything extra on in terms of any maintenance and repairs that we do. We’re not going to be gouging investors that way. We’re trying to hold our own properties as well. We’re focused to make sure that our investors are going to get the most for their cashflow and managed as tight as we possibly can and find the best rent interest for them that we can. We’ve got a good process in terms of doing all the background checks and checking credit scores and making sure there’s been no bankruptcies or no evictions or anything like that. We’re putting high-quality tenants in place for the properties. In general as well, in Cape Coral, you have a good group of people that are living here. That goes back to it being one of the safest cities in the US and the people that are living here are the kind of people you want renting your property.
That’s a good point. I think we forgot to mention that before. Essentially this is truly a turnkey, new construction, rental investment opportunity. It’s not just single-family home. You have duplexes and fourplexes. We need to mention that the single families and duplexes can be turned around fairly quickly, but the fourplexes have a longer build cycle because of the permitting. I don’t know if you want to comment on that but it’s important for investors to understand or people reading this that may have an interest that fourplexes are a longer build cycle.
That’s a good point to bring out. It takes us ten days when we go to secure a permit down before it’s released for us to start building. New single-family homes, it’s ten days. It’s very fast. Duplexes, it’s the same thing, within ten days of submitting a permit, I get it. It’s almost like clockwork, it’s released for us. We’ve got a build cycle of about four months or so. We’ve got a little bit of some of the survey and engineering front, depending on where we are building. We can have it built in four months, plan for six months because of some of the engineering and so forth that we have. Within a six month cycle, we have the property from start to finish done.
With the multifamily, it’s fantastic. It’s great for cashflow, but you have to be ready to wait for eight to twelve months in terms of getting your planning permissions approved. It’s a longer cycle. I wish it were better. I’m doing everything I can to try and squeeze people to hire more inside of the planning department because they desperately need more multifamily, but there’s a time lag there that’s a little bit of a bummer that way. You got a fourplex at that point and your properties are all grouped in together. It’s a new construction. We are building a sixplex right now and tenplex as well and it’s great for the investors. You and I have talked about that fourplex model, which is really good for the Fannie and Freddie loans. You can get up to ten of those and ten if you’re married, for your spouse as well. We’re holding 24-plexes, which is unbelievable with the best lowest rates you’re going to find.
I don’t know if this has changed, but the single-family inventory doesn’t have a standing inventory with that. These are all new. You pick a lot and start building. You don’t have a construction in the pipeline, meaning that there are properties that are being built already for purchase in the next few weeks or few months. You don’t have standing inventory.
What we do is there is so much land out here, it makes a lot more sense for us to keep a favorite list of lots. The way to move forward is once an investor says, “Cape Coral is the place for me, I believe in it, I want to go there.” At that point there, it’s about choosing the area you want to buy land in. We could get you a piece of land very quickly. It wouldn’t take us more than three or four days to a week to secure that if you know what you want and we can work together on it. From there it’s about selecting a model. Which model do you want to build? We sit down and we talk through some of the pros and cons and benefits and what we think we can rent each of the models out with somebody. At that point there, it’s about signing a contract to get started. We have construction-to-perm lenders that we work with. We want to work with you to get a quick approval on that and start moving that whole process forward. From the time that you decide that you’re ready to go, it’s probably going to be four weeks before you get the approval for your loan. Meanwhile, you can be selecting which model that you want or which lot that you’re interested to build on and so forth like that.
I think it’s probably worth mentioning and it’s touching upon what we started with in terms of the market and economy. The Cape Coral Housing Development did a study and they pointed out that there is a tremendous demand for housing, particularly multifamily housing in the city of Cape Coral. Their projection was the city needs about 1,500 units per year by the year 2019, which is right around the corner. To me, that’s saying that demand is outpacing supply. We’re constantly behind the eight ball, not just nationwide, but certainly in Southwest Florida to provide that housing stock. Any comment about that?
They’re actually looking to change some of the zonings right now to help encourage more multifamily developments. They’ve got some zoning requirements in terms of the size of land that you need to amass in order to do multifamily projects. It’s twenty acres and they’re lowering it down to three acres on some of these projects to encourage more of those mid-range projects that are multifamily. I’ve read some articles here that they’ve got some incentives in terms of reductions in your impact fees and so forth like that for permitting, for people who are going to be providing multifamily at a more of an economical base as well. It’s a big problem not having enough multifamily in the city for sure.
It’s a good opportunity for us as real estate investors. Rob, thank you for spending time with us here. If anybody is reading this and they’re saying, “This is interesting, I’d like to learn more about Southwest Florida,” what I suggest is just contact your investment counselor here. If you don’t have an investment counselor, give us a call or fill out the form on our website. We provide a free strategy session so we can get you started or at least answer all your questions and put you on the right track and point you in the right direction. Regardless of whether you work with our team are not, we just want to educate you on the different markets around the country. That’s why we do these market spotlights. Now, it’s about Cape Coral, Florida which is a great market. It has been even ten or more years ago when I first started investing there.
Get in touch with your investment counselor. Let’s get some more information into your hands and we’ll introduce you to our teams down there, which obviously includes Rob that we just talked to here. If you have any questions about real estate investing, put them down in the notes below or better yet, go to PassiveRealEstateInvesting.com. Click the link at the top where it says Ask Marco. Shoot me an email and I will certainly cover that directly with you or I’ll cover it on the show. Remember to subscribe. We have a weekly episode and now we’re starting to do this in video format. Expect to see more videos on our YouTube channel. Rob, thanks once again for spending time here with us.
It’s a pleasure, Marco, always to talk to you and I love to talk about Cape Coral.
To everybody else, thanks and we’ll see you on the next episode.
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