Grand Strand Real Estate News - February 2024

February 2024

Volume 2024 Issue 2

Dear Gene Carter Team,

Summary

I usually refrain from prognosticating. However, occasionally the signs are so compelling that I feel that I have to pass my thoughts on to my readers. It’s not always good news. For instance, last February I predicted we would see much higher insurance rates for condos which would result in much higher HOA fees. 

I’m sure this newsletter will not be seen as welcome news by most owners. But when I see a situation this glaring, I feel like I have an obligation to report it. It’s up to you to decide how to use this information. I’m now seeing unmistakable warning signs for oceanfront and resort condos. I’m going to skip my usual monthly market update and the Best Buys this month but they will be back next month.

Investment Condos, Net Incomes, and ROIs

Listings are coming in way faster than they are selling, creating a basic supply and demand imbalance. This is why inventory has been increasing for 11 straight months. There were 325 oceanfront condo listings this past March, and as of today, there are 871. There have been 620 new oceanfront condo listings this year but only 248 closed sales. By the way, we are seeing similar numbers for condos off the beach.

The majority of this activity is occurring in the condotel type properties which are primarily bought by investors looking for vacation rental income. Investors generally decide how much they’re willing to pay for a property of this type by reverse-calculating the value based on two numbers – the net income to the owner after expenses and the return on investment (ROI) they hope to achieve. 

If a property nets the owner $10,000 and the buyer wants to obtain a 5% return, the calculation would be $10,000/.05 = $200,000. If the net income for the same property goes up to $20,000, for an investor wanting a 5% ROI, the property’s value has now increased to $400,000 ($20,000/.05= $400.000).

5% ROI has generally been a good benchmark for investors for this type of property in our area. Over the years, whenever I’ve seen ROIs increase to significantly above 5%, investors start snapping them up, the sales pace increases, inventory drops, future listings ask for and get higher prices, and this cycle continues until the ROIs are back around 5% again. Unfortunately, this also works in reverse.

This cycle is why prices increased by about 60% in just six months back in early 2022. The 2021 incomes were far higher than in any previous year - 30% to 40% more in some cases. For most properties, a 30% increase in rental income results in an increase in net income of about 50%. Since no other costs changed much, using our model above, an increase of 50% resulted in the value of a property going up by about 50%. It wasn’t hype or overenthusiasm driving the prices up. The increases in values were real.

What Has Changed?

So what’s happening now to cause listings to come in fast and furious and buyers to be hesitant? In a nutshell, the net incomes have dropped. By a lot. In many resorts, rental incomes have declined 10% to 25% from the 2021 levels. In addition to the drop in rental incomes, HOA fees have skyrocketed, with increases of as much as 50% due to the much higher insurance costs. The combination of lower incomes and higher HOA fees has severely diminished the ROIs.

I examined the projected net incomes after expenses for 2024 compared to 2021 for 1BR condos in 5 different oceanfront buildings. Details on my methodology are in the main newsletter. The results: Down 48%, Down 48%, Down 40%, Down 60%, Down 22%. 

So What Does This Mean for Owners Going Forward? 

Most owners are not making as much money as they did a few years ago - their ROIs are lower. If you are an owner, you may want to examine how much is actually going into your pocket after higher HOA fees and insurance assessments (if your building has had any of these).

Prices in many resorts have already been impacted, and they will be affected more unless there is an unexpected correction. In the short term, while the prices don’t match up with ROIs, this means there will be a slowdown in sales, which is already reflected in the increasing inventory. The cycle we saw in early 2022 is reversing.

My benchmark 5% ROI may not be good enough going forward. Interest rates were historically low in 2022. Now there are CDs paying 5% and there’s a lot less risk in a CD than in an oceanfront condo.

Property taxes will probably increase this year because of a scheduled tax reassessment, which the county conducts every five years. I didn’t factor this potential tax increase into the numbers noted above. 

Any Good News?

Your property is still worth way more than it was in 2021! So far, most of the huge gains from 2022 are still in place. Please contact me if you want to discuss your particular situation. 

The prices of larger condos are holding up better than the smaller ones, and we are not seeing as much inventory growth. Whereas smaller condos are purchased almost exclusively by investors and numbers are the only things that matter, larger condo purchases tend to involve more emotion so the prices don’t need to correlate to the ROIs as closely. Quite often the buyers intend to use them personally, and they want their families to like them.

There are still people buying investor condos. Most are doing 1031 tax-deferred exchanges (because even low ROIs are better than paying capital gains taxes). Some of the other buyers already own clusters of condos they rent out, so they have systems in place to add more. We are also selling some oceanfront and resort condos as true second homes.

Some owners are using offsite rental companies or handling their own rentals to generate more income than the on-site companies. This is not a “gimme.” Few offsite companies truly put more money in the pockets of owners than good on-site rental companies and incomes for owners who handle their own rentals are only as good as their management skills and the time they are willing to invest.

For buyers, there are still good opportunities. Please contact me, Teressa or Kevin. 

That’s all for now. Check out all our usual Grand Strand Market Reports, Sales and Listing Updates, and new Beach Pro Team reviews.

Please Contact The Beach Pro Team If:

You are thinking of buying or selling an oceanfront or resort condo in our area

                                                                  Or

You are considering moving to our area or know someone else who is

                                                                   Or

You are an agent who has clients thinking of moving here or buying or selling in our area

                                                                   Or

You currently own a condo in our area and want a permanent home here

Greetings from The Grand Strand,

It looks like the groundhog was right, at least for our area. Sure enough, as Phil predicted, we're enjoying an early spring. Unlike the groundhog, I usually refrain from prognosticating. However, occasionally the signs are so compelling that I feel that I have to pass my thoughts on to my readers. It’s not always good news. Last February I predicted we would see much higher insurance rates for condos which would result in much higher HOA fees. Unfortunately, this has indeed come to pass. 

I’m sure this newsletter will not be seen as welcome news by most owners. But when I see a situation this glaring, I feel like I have an obligation to report it. It’s up to you to decide how to use this information. I’m now seeing unmistakable warning signs for oceanfront and resort condos. I’m going to skip my usual monthly marketing report and the Best Buys this month but they will be back next month.

Investment Condos, Net Incomes, and ROIs

Listings are coming in way faster than they are selling, creating a basic supply and demand imbalance. This is why inventory has been increasing for 11 straight months. There were 325 oceanfront condo listings this past March, and as of today, there are 871. There have been 620 new oceanfront condo listings this year but only 248 closed sales. By the way, we are seeing similar numbers for condos off the beach.

The majority of this activity is occurring in the condotel type properties which are primarily bought by investors looking for vacation rental income. These make up the majority of our oceanfront condo market. Investors’ decisions are rarely based on emotions and it doesn’t matter how rich they are - they will generally not pay a penny more than they think the numbers indicate a property is worth. Investors generally decide how much they’re willing to pay for a property of this type by reverse-calculating the value based on two numbers – the net income to the owner after expenses and the return on investment (ROI) they are hoping to achieve. 

Of course, different people use different methods to calculate the rate of return but to roughly compare properties “apples to apples”, I’ve always used the following method and it has generally done a good job of matching actual market prices with incomes. Simply divide the net income after all expenses by the price to calculate the ROI. For example, $10,000 net income/$200,000 price = .05 (5%) ROI. So to work backward to calculate an approximate value: If a property nets the owner $10,000 and the buyer wants to obtain a 5% return, the calculation would be $10,000/.05 = $200,000. If the net income for the same property goes up to $20,000, for an investor wanting a 5% ROI, the property’s value has now increased to $400,000 ($20,000/.05= $400.000).

5% ROI has generally been a good benchmark for investors for this type of property in our area. By contrast, investors buying mobile home parks in the Midwest might want 10% returns. I’ve been told by real estate agents in Manhattan that 3% is considered to be a good return there. Anyway, 5% has always been a good number to work with in our area (See my comments on this in “What Does This Mean”). 

Over the years, whenever I’ve seen ROIs increase to significantly above 5%, investors start snapping them up, the sales pace increases, inventory drops, future listings ask for and get higher prices, and this cycle continues until the ROIs are back around 5% again. Unfortunately, this also works in reverse.

This cycle is why prices increased by about 60% in just six months back in early 2022. The 2021 incomes were far higher than in any previous year - 30% to 40% more in some cases. For most properties, a 30% increase in rental income results in an increase in net income of about 50%. Since no other costs changed much, using our model above, an increase of 50% resulted in the value of a property going up by about 50%. For example, if $10,000 net income translated into a $200,000 value at a 5% return, an increase to $15,000 in income translated into an increased value of $300,000 to generate the same 5% return. The jumps in values during this time period were real - not just the results of hype and emotion.

What Has Changed?

So what’s happening now to cause listings to come in fast and furious and buyers to be hesitant? In a nutshell, the net incomes have dropped. By a lot. In many resorts, rental incomes have declined 10% to 25% from the 2021 levels. In 20/20 hindsight, the 2021 season was probably an anomaly, a banner year. We were just coming off the pandemic, everyone had cabin fever, and our area was one of the first in the country to open up and do away with mask mandates. 

In addition to the drop in rental incomes, HOA fees have skyrocketed, with increases of as much as 50% due to the much higher insurance costs. The combination of lower incomes and higher HOA fees has severely diminished the ROIs for most condotels and other properties primarily bought by investors. 

Here are the results of an examination of net incomes for 1BR condos in 5 different oceanfront condo buildings. Four are in Myrtle Beach and one is in North Myrtle Beach. All are condotels and I used onsite rental management incomes. I compared projected 2024 net incomes (calculated with 2023 incomes (assuming they will not drop more in 2024) and 2024 HOA fees) with 2021 net incomes (calculated with 2021 incomes and 2021 HOA fees). These are approximations and I’m sure some other buildings did better and some did worse. 

Building A   Income down 10%. HOA fee up 31%. 2024 net income to owner down 48%.

Building B    Income down 17%. HOA fee up 27%. 2024 net income to owner down 48%.

Building C    Income down 2%. HOA fee up 46%.  2024 net income to owner down 40%.

Building D    Income down 26%. HOA fee up 25%. 2024 net income to owner down 60%.

Building E    Income same.       HOA fee up 32%.   2024 net income to owner down 22%.

Some comments:

It’s certainly possible (but not guaranteed) that an owner could generate higher rental income with an offsite company or by handling the rentals himself (See explanation below in “Good News” ). By the way, I checked with several offsite companies and most of them also reported lower incomes in 2023.

I didn’t look closely at all costs. I assumed that other ownership expenses didn’t change much. See below in “What Does This Mean”  for a possible exception this year.

All these were 1BR condos or efficiencies. The dynamics for prices for larger condos are somewhat different. See below in “Good News” for an explanation.

So What Does This Mean for Owners Going Forward? 

Most owners are not making as much money as they did a few years ago—their ROIs are lower. If you are an owner, you may want to examine how much is actually going into your pocket after higher HOA fees and insurance assessments (if your building has had any of these).

Prices in many resorts have already been impacted and they will be affected more unless there is an unexpected correction of some sort. In the first paragraph, I went out on a limb and said I was going to make a rare prediction. Unless something drastically changes—much higher incomes or dramatic reductions in insurance costs—prices will work their way down to levels needed to attract investors. In the short term, while the prices don’t match up, this means there will be a slowdown in sales, something already reflected in the increasing inventory. The cycle we saw in early 2022 is reversing.

My benchmark 5% ROI may not be good enough going forward. In an earlier paragraph, I mentioned that I had generally used 5% ROI as a benchmark for these types of properties. I’m not sure that number shouldn’t be higher now (which would make even higher incomes necessary to drive prices higher). The investment environment has changed dramatically since 2021. At that time, interest rates were at historically low levels and there were no safe investments with any return to speak of so a 5% return on a rental condo was very attractive. Now there are CDs paying 5% and there’s a lot less risk in a CD than in an oceanfront condo.

Property taxes will probably increase this year because of a scheduled tax reassessment - which the county conducts every 5 years. In explaining my calculations, I stated that expenses other than HOA fees had generally not changed much but I didn’t factor in this potential tax increase. For sure, the county’s “Fair Market Values (FMV)” will be much higher than they were in the most recent assessments in 2019. FMV increases will probably result in increased taxes although that’s not a certainty. These new market value assessments will come out in the fall. I will publish a newsletter going over this process in detail between now and then.

Any Good News?

Your property is still worth way more than it was in 2021! Please contact me if you want to discuss your particular situation. 

Larger condo’s prices are holding up better than the smaller ones and we are not seeing as much growth in inventory. Whereas the smaller condos are purchased almost exclusively by investors and numbers are the only things that matter, larger condo purchases tend to involve more emotion. Quite often the buyers intend to use them personally and they want their families to like them. In fact there are some large oceanfront and resort condos that are really not influenced by rental income at all because they are designed to be true second homes or primary residences. There are relatively few buildings like this along The Grand Strand and most are in the Arcadian section and North Myrtle Beach.

There are still people buying investor condos. Most are doing 1031 tax-deferred exchanges (because even low ROIs are better than paying capital gains taxes). Some of the other buyers already own clusters of condos they rent out, so they have systems in place to add more. We are also selling some oceanfront and resort condos as true second homes.

Some owners are using offsite rental companies or handling their own rentals to generate more income than the on-site companies. However, this is not a “gimme.” Few offsite companies truly put more money in the pockets of owners than good on-site rental companies and incomes for owners who handle their own rentals are only as good as their management skills and the time they are willing to invest.

For buyers, there are still good opportunities. Please contact me, Teressa or Kevin. 

That’s all for now. Check out all our usual Grand Strand Market Reports, Sales and Listing Updates, my Best Buys, and new Beach Pro Team reviews.

See you at the beach!

Please Contact The Beach Pro Team If:

You are thinking of buying or selling an oceanfront or resort condo in our area

                                                                  Or

You are considering moving to our area or know someone else who is

                                                                  Or

You are an agent who has clients thinking of moving here or buying or selling in our area

                                                                  Or

You currently own a condo in our area and want a permanent home

Here are some new reviews published on Google. 

• Both Gene and Theresa are the very best sales team. We bought property with Theresa and sold with Gene. We bought seamlessly. We sold quickly. They are first rate professionals! Shannon. Dunes Village. Myrtle Beach.

• Kevin was an amazing realtor. He listened to me and from that knew exactly what I was looking for. Together we found it. He did his homework prior to showing so it was easy to put together our strategy on negotiating an offer. He was there every step of the way as a few minor hurdles up through the buying process. He is a worker who is available to his clients whenever they need day or night. I'm glad I found him and will do business with him for many years to come. As far as the rest of the beach pro team although I never actually met them they were terrific. I was impressed with their service. Without prompt after my offer was accepted. They reviewed my master to deed to see if I would need additional insurance and sent a bunch of recommendations since I did. They also have a free service that helped set up my utilities. I highly recommended Kevin and the Beach Pro Team. Thanks again! Mike. Magnolia Pointe. Myrtle Beach.

We just started collecting Google reviews. At this time we have over 20 Google Five Star reviews and over 150 Zillow Five Star reviews which can be seen on our website Beach Pro Team reviews. 

Grand Strand Market Report - January 2024