Remember during the height of the housing bubble, when some real estate investors vowed to jump in like vultures and scoop up properties when the market turned south?  The Wall Street Journal (”WSJ”) recently chronicled this bottom-feeding in “Florida Bust Spawns Vulture Culture” by Jeff P. Opdyke.  Home buyers and investors have flocked to Florida sifting through the glut of housing properties looking for a deal.  In Miami-Dade county alone, there are 25,000 condos available for sale.

With those numbers, you would think that a good deal is a no-brainer.  Prices indeed have dropped drastically.  According to the WSJ, prices in Miami have falled as much as 40 percent.  However, reading another article in today’s WSJ (”Open Season for Bargain Hunters”), I noticed an interesting statistic.  In spite of the large drop in prices, housing prices in Miami still remain about 64 percent higher than they were in December 2002.  Is the 40 percent off condo still considered cheap?  It’s like going to what you think is a fabulous sale at your favorite clothing store and snapping up an outfit at 40 percent off that was marked up four times by the retailer.

Price drops by themselves don’t mean that a property is a good deal.  My husband’s company stock reached an all-time high of $160.00 during the tech boom.  A 40 percent drop in the stock would yield a price of $96.00 per share.  Guess what the stock ended up trading at, when the smoke cleared?  A $1.50 per share.  Ouch!

So, as an investor, how do you narrow the field to determine what might be a good deal?  My rule of thumb - can you rent it out at a monthly rent of at least one percent of the purchase price?  This rent would need to cover your mortgage, real estate taxes, insurance, homeowners’ fees, maintenance and repairs, as well as tenant vacancies.  This rule eliminates a lot of potential deals, but it saves you a lot of pain, particularly when you have to hold on to a property for a long time, perhaps several years before seeing an appreciable gain in the price.  After you have weeded out the overpriced deals, ask the following questions.

• Is the rental market strong in the area?  If it is Miami-Dade county, probably not.  Ideally, you’d like to buy a property with a tenant lined up already, unless the price is rock-bottom, or you have sufficient cash reserves to carry the property for several months.
• What is your financing cost going to be?  If your mortgage payment is at least 90 percent of your expected monthly rent, it’s probably too close for comfort.
• What is the price history of the property and surrounding properties? 
• How much intrinsic value does the property have?  Is it located in an area with limited housing stock or in an area like Miami-Dade, where housing stock is virtually unlimited.  This question goes to how much appreciation you might see in the property’s value.

Obviously, I’ve only skimmed the surface of questions that you should answer before entering into a deal.  Buying real estate is not a transaction that should be done on a whim.  The key to investing success is doing your research, knowing your market, and looking at everything with a healthy dose of skepticism.