Owner-Occupancy Ratio is an important metric for Real Estate investors. A residential condo that has most units leased and therefore not owner-occupied is traditionally perceived as a negative situation. However, this rule should not be generalized, especially within the new dynamics of the real estate market. Recently, in Florida, several developments were launched in hybrid formats, encouraging renting and suggesting, in most situations, that rented units are welcome and bring advantages to the project.
In this article we will explain the market perceptions around the Owner-Occupancy Ratio, with the objective of guiding the investor interested in buying a condo apartment in Florida. A low Owner-Occupancy Ratio is not always bad. Depending on the type of investment, it is normal for it to be high, especially when the project is aimed at short-term rentals.
It is important to choose the condominium with the correct format. That’s why it’s essential to have the guidance of an experienced Florida realtor!
Earning passive dollar income with rent in Florida is one of the best investments in the world. The demand for condominiums aimed at this type of practice has increased significantly in recent years.
It is only natural, therefore, that newly launched and rental-oriented condominiums have a low Owner-Occupancy Ratio. As they are projects developed specifically for this purpose, this indicator is harmed as an investment thermometer.
Faced with this new dynamics in the Florida real estate market and the classic view around the Owner-Occupancy Ratio, we decided to clarify some important points for anyone thinking of investing in Florida.
Why does the classic view condemn a low Owner-Occupancy Ratio?
In buildings where many units are leased, the classic perception of risk is higher. Below we list the main reasons:
1 – Commitment and care for the condominium/community
As the tenant does not have a stake in the property, he tends not to commit himself to the rules of the condominium, such as not making noise and taking care of the common areas. This situation can lead to the slow degradation of the building, devaluing the condominium units as a whole.
An owner who lives in the building would supposedly be more concerned with the upkeep of the place where he lives.
Furthermore, a leased unit is viewed by the owner as a business/investment. The lower the cost of that property, the better! In this sense, the owner would not be willing to pay high maintenance expenses or investments in building improvements. The idea is to maximize profit.
It is different from an owner who lives in the condominium, and prioritizes and watches over their quality of life.
** NOTE: Today, investors already have a more evolved view of expenses and investments in improvements, as this values the property and increases the expected return on rent. This new vision is welcome in the market and contrasts with the classical understanding of the subject. We will comment later in this article.
2 – Living Experience
Another factor is the transient lifestyle of tenants, which can impact the condo in many ways. Frequent changes often result in increased noise and discomfort to the community, and can create an environment of impermanence, which would negatively impact what in Florida we call the “Living Experience”, that is, the owners do not feel like they are living in a community. stable.
An owner who lives in the condominium values the “Living Experience” more. He is not as likely to move, as he is attached to the apartment and sees the condo as a place to live with his family and not as a business or temporary housing.
3 – Greater probability of devaluation in periods of crisis
A high Owner-Occupancy Ratio can protect the condominium in times of crisis.
An owner who lives in the apartment is usually more attached to the property/home. They are usually families who have lived at the same address for a long time. In crisis situations, the apartment would not be at the top of the list of goods to be sold.
Already an investor sees the unit as an asset, with little or no sentimental attachment. To keep or sell a financial judgment would suffice. Thus, in a context of crisis, rented apartments tend to be the first to be sold.
Therefore, in a crisis situation, if a condominium has many rented units, it may face a situation where several units are put up for sale at the same time, deteriorating the average price of the units and devaluing the condominium as a whole.
4 – Less access to credit
Given this perception, banks tend to make it difficult or prevent access to certain lines of credit for the purchase of apartments in condominiums with low Owner-Occupancy Ratio.
In Florida, when a buyer applies for a mortgage, the bank sends the condominium a questionnaire with several questions. It is called the “Condo Questionnaire”.
One of them is the ratio of tenants to owners (Owner-Occupancy Ratio)!
US banks and creditor institutions require this questionnaire to be able to make a thorough analysis of the condominium’s financial health. In addition to the Owner-Occupancy Ratio, the questionnaire asks about several other significant factors related to the granting of credit, such as: Is the condominium undergoing any legal process? Does the condominium allocate part of the collection to a Reserve Fund? What is the default rate of the condominium quota?
Depending on the answers to the questionnaire, the condominium does not qualify for some US federal credit lines which, therefore, cannot be passed on to the buyer.
The US has two main lines of credit called “Fannie Mae” (1938) and “Freddie Mac” (1970) created to support the US housing sector. These are lines that guarantee lower interest rates and lower down-payments.
Two of the most important requirements for a condominium to qualify for these financing lines are: 1 – Owner-Occupancy Ratio greater than 50% and 2 – 10% of the condominium’s annual revenue must be allocated to a Reserve Fund.
The image below is a print of an example of the “Condo Questionnaire” with some possible questions:
The new dynamics
This classic perception of the Real Estate market, which values a high Owner-Occupancy Ratio, although it makes sense, does not match the new dynamics of the global real estate sector.
Buyers and investors want just the opposite, that is, condominiums with flexible rent rules. The idea is to be able to use the property on vacation and rent it out for the rest of the year. In this way, with the income from the seasonal rental, the owner is able to meet the monthly expenses and, in many cases, pay off the financing installment and make a profit on the operation.
In the last decade, business related to real estate rental, in its most varied formats (short and long term) has evolved exponentially, including in the technological field, with the arrival of online platforms, such as Airbnb, for example. Builders are investing heavily in projects formatted to intensify the practice of renting. Solutions and services related to the rental segment appear all the time.
New condominiums formatted to offer rental-oriented units are often associated with big brands. These are called “Branded Condos”. One of them is District 225 in Downtown, where the Airbnb platform has entered as a partner. Within the new concept, the apartments are already delivered furnished and integrated into online platforms. Maintenance rules are strict, both for apartments and common areas.
Another example is the new Waldorf Astoria tower in Downtown Miami, which allows for a minimum rental period of 3 months. The rule makes the development potentially attractive to investors, as it allows the owner to earn rental income during a period of the year when he is not using it.
Taking the Waldorf Astoria tower in Miami as an example, it makes no sense to look at the Owner-Occupancy Ratio in isolation. Even if the indicator is high, most of the reasons mentioned in the first topic of this article would hardly apply. It’s hard to believe that one of the most renowned brands in the luxury hotel industry will let its common areas deteriorate.
Furthermore, in a period of crisis, a solid brand like Waldorf Astoria would not be the first to see its units devalue. In the article “Branded Residences”: Top Brand Developments in Florida we explain in detail the advantages of investing in a condominium associated with a strong brand.
Major hotel chains have chosen Miami to undertake their residential projects. In addition to the Waldorf Astoria tower, Ritz Carlton Residences has towers in the area and, most recently, The Standard Hotels announced its first residential condominium in Midtown, Miami’s most pestrian-friendly area. The Standard Residences will allow the practice of vacation rentals and will offer Studios to 2 bedroom units.
As well as The Standards, District 225 and Waldorf Astoria, several other developments in Miami are being built and launched all the time in short-term rental format.
Behavior has changed
The classic view of the owner occupancy rate, while still important, does not take into account the new behavior of both the tenant and the owner.
The demand for rent grows. The new generation of millennials see the rented apartment as home.
In addition, many rental property owners maintain their properties as well or better than owner-occupied ones. As mentioned, the idea is to keep the property in good condition to get better rent values.
The issue around rent also evolved in the condominium managers themselves. Some have established rules requiring, for example, new buyers to live in the building for a year or two before renting.
CONCLUSION: How should I interpret the Owner-Occupancy Ratio?
If you are buying an apartment in a condominium that does not allow the practice of short-term rental (rentals for a short season), that is, with minimum rental periods of one or two years, then you should give more weight to the Owner- indicator. Occupancy Ratio.
In this situation, the apartment is rarely used by the owner, who sees it purely as an investment.
As already mentioned, the indicator must be evaluated together with other factors.
If the apartment is part of a new complex, within the hybrid format that currently exists in Florida, where the new buildings are practically managed as a hotel, then this indicator loses its weight a little in the evaluation.
That’s why it’s important to analyze each case and have the guidance of an experienced broker in Florida.
In the article Miami Condos That Allow Airbnb, we show the most recommended opportunities for those who want to invest, enjoy and, at the same time, earn income with rent in Florida.
About AMG International Realty
AMG International Realty is a global real estate company specializing in Florida. If you want to know more about the real estate market in Miami and Orlando, contact me right now: +1 (305) 318 6968 (Heloisa Arazi).