1st time rental property buyer: which area in Austin to invest in?

[buffettjr]

Originally Posted by austin-steve

What you propose is a high risk, high reward investment. Rents can't cover carrying costs in the Central core without substantial downpayment. Homes often rent for less than 0.5% of sales value (i.e. $550K home rents for $2,400/mo).

There goes 6 month's rent to property taxes, another 3 to insurance, vacancy/leasing and maintenance repairs. That leaves about 3 month's rent to service debt, pay management fees, etc.

We do see some cash investors doing that to "park" money. But it's not something a beginning real estate investor should do. A beginning investor should buy a bread and butter rental stock home at or about median value of $225K +/-, in a standard but desirable suburban neighborhood with good schools. Then plan to hold at least 10 years.

Steve

I'd say OP has a substantial down payment on hand with $270,000 on hand.

It's true sales to rent ratio is skewed downtown, but your numbers assume that rent figure isn't going to rise over the next 30 years. Your rental in Cedar Park isn't going to be able to ever raise its rents much faster than inflation over the long term, and neither will your investment appreciate much more than inflation either. By contrast a home in the middle of downtown will see rents skyrocketing with population, traffic, and energy price growth, and on top of that you'll see outsized home appreciation while you get paid handsomely (over the long term) with quickly rising rents to own it. It's more of a sacrifice up front I suppose with less cash flow, but with far greater rewards in the not too distant future. At least, that's how I see it. If I had $270k in cash to spend and was resolute in spending it on a rental home in Austin, Tx, the choice would be an easy one for me. Imagine people who had purchased homes in Travis, Bouldin, or Rainey Street for pennies on the current dollar a few decades ago. Compare that to a person who bought at that same time in Cedar Park. East Austin near I-35 is the next Travis/Bouldin/Rainey. The location is too good for anything to stop that. It supercedes any other issue.

[austin-steve]

Originally Posted by buffettjr

I'd say OP has a substantial down payment on hand with $270,000 on hand.

It's true sales to rent ratio is skewed downtown, but your numbers assume that rent figure isn't going to rise over the next 30 years. Your rental in Cedar Park isn't going to be able to ever raise its rents much faster than inflation over the long term, and neither will your investment appreciate much more than inflation either. By contrast a home in the middle of downtown will see rents skyrocketing with population, traffic, and energy price growth, and on top of that you'll see outsized home appreciation while you get paid handsomely (over the long term) with quickly rising rents to own it. It's more of a sacrifice up front I suppose with less cash flow, but with far greater rewards in the not too distant future. At least, that's how I see it. If I had $270k in cash to spend and was resolute in spending it on a rental home in Austin, Tx, the choice would be an easy one for me. Imagine people who had purchased homes in Travis, Bouldin, or Rainey Street for pennies on the current dollar a few decades ago. Compare that to a person who bought at that same time in Cedar Park. East Austin near I-35 is the next Travis/Bouldin/Rainey. The location is too good for anything to stop that. It supercedes any other issue.

You may be right. Your assumptions may come true. Not arguing on that basis.

I still think first time investors need to play it safer. I've seen a lot of real estate investors lose badly over the years. The two main reasons are they focus too much on cash flow (and buy in low end areas with poor schools, where cash flow looks better on paper, or buy a 4-plex or ratty duplex), or they bite off more than they can chew right out of the gate, either by purchasing something too expensive or by purchasing too many homes at once, the result of which is they can't ride out any bad luck that might conspire against them because the carrying costs overwhelm them. They swung for the fence, but struck out.

With a Plain Jane started investment home, you do limit your upside, but also your downside. That home in Cedar Park is really easy to sell if investing turns out not to be everything the investor hoped.

Two of the homes I own are in Leander. I bought them both in 2001 for $120K each. Today they are worth $175K, and, amazingly, each rents for about the same as they did in the rental peak of 2001, $1,325/mo. They are standard 4/2/2, all brick, 1800 sqft, 1-story, on 15 year notes, and I'm getting ready to pay off each this month as the balances are now both below $25K.

Not exactly numbers to brag about. Neither has been a "home run", but these "singles" are nice additions to the retirement portfolio. We've had plenty of home runs, but those tend to come not by swinging for the fence, but by just trying to make solid contact.

Steve

[BriansZ]

Hoping to get 12k/yr out of 270k investment is around 4.5%. Strictly from a numbers perspective I'd look elsewhere to invest.

[buffettjr]

That is true, but that is a 4.5% return in addition to the price appreciation of the asset. If homes in central Austin are appreciating at 10% per year currently, aren't you essentially seeing a 10% return plus a 4.5% dividend? Of course 10% per year is not sustainable, but that 4.5% dividend that is rental income will rise mightily over the years.

[sojourner77]

Originally Posted by buffettjr

Sweet Jeebus, yes you should have. Hard to know the entire street would get zoning changed to commercial though!

Not really. This neighborhood was practically lodged inside downtown. If this was to happen to any neighborhood, Rainey was the obvious choice.

Same thing will eventually happen to all of east Austin, from 7th south to the river. 40 years from now, east Austin will look like downtown, and the run-down shotgun shacks will be commercially zoned, and worth 1M each lot.

[sojourner77]

Originally Posted by buffettjr

I'd say OP has a substantial down payment on hand with $270,000 on hand.

270K on hand?

Buy two houses in Dove Springs, and clear 2-3K every month in rent.

The rent price-to-house price ratio is very favorable in that part of town. It's more like 1%, unlike everywhere else in town, where it approaches .05%

[ericsami]

I have been a landlrod in an other state for 6 years now and here is what I know.

5% return in rental only happens for those big landlords in NY,SF. There is so much demand that they have the broker work for free for them. if you do the work yourself that is maintain things on your own and what not you might be able to get 4.5% if you are lucky. if you hand the work to somebody else it is unlikely that you will be able to clear anything more than 4%.





$270,000.00 * $0.04 = $10,800.00 $270,000.00 * $0.05 = $12,150.00 $270,000.00 * $0.05 = $13,500.00
here is the general deal if you buy houses in $hitty areas. you will have high turnover and folks who refuse to get evicted. but it is likely that your property might appreciate faster. generally lot more pain involved.

if you get good tenant make sure your increases are slowly below the market. (apartment complexes and what have you).
you would not imagine the amount damage done to a home by each tenant moving in and out. That is not even mention that you will have to get the carpet cleaned again, reconnect water and electricity, vacancy..

In Today's Crazy Austin Environment I would say do not expect anything more than 3.5% and that is if you keep the place 10-15 years so the closing costs would not hurt you too bad.