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We've put our home in Highpointe on the market, and with part of the proceedings we're looking to invest in a rental property somewhere in Austin. Having lived (and loved living) in Austin for the past 3+ years, we've gotten to know some -- but not all -- areas.
Looking for a net gain of around $1000+ per month after expenses, which area/neighborhood would be potential targets? Some factors in play:
Budget: up to $270k (w/o mortgage)
Management: will be handled by a property manager (~8% of rent/mo.)
Experience: 1st time investment property buyer
Others: will be "long-distance" owners
Plans to return: very unlikely to return and live in Austin
We're also familiar with Round Rock as we lived there for a year house hunting.
Thanks very much in advance for your input & advice!
I live abroad and left rental properties (in another city) in care of property managers. It is really hard to find good ones and its so hard to keep up on things from far away. The first ones we had didn't hold out anything from the security depost for serious cat damage. I ended up having to pull carpet and moulding out of the basement,seal the floors and put new carpet and moulding back in. It was very expensive and I couldn't get any of it back. Property managers make money when they don't have to do much. I would encourage you to buy a rental where you are moving to so you have over sight.
We've put our home in Highpointe on the market, and with part of the proceedings we're looking to invest in a rental property somewhere in Austin. Having lived (and loved living) in Austin for the past 3+ years, we've gotten to know some -- but not all -- areas.
Looking for a net gain of around $1000+ per month after expenses, which area/neighborhood would be potential targets? Some factors in play:
Budget: up to $270k (w/o mortgage)
Management: will be handled by a property manager (~8% of rent/mo.)
Experience: 1st time investment property buyer
Others: will be "long-distance" owners
Plans to return: very unlikely to return and live in Austin
We're also familiar with Round Rock as we lived there for a year house hunting.
Thanks very much in advance for your input & advice!
In general (meaning there is an exception to every rule), but in general, the best rental investment stock is a single family home, at or near the average/median price for the neighborhood/area in which it is located, attending a good to better than average school track, and in good serviceable condition. This in turn attracts a good, quality renter, which is the most important element of investing.
Ratios have moved the areas in which that can be accomplished. Now it's mostly Cedar Park/Leander, Round Rock West. Many investors like the further outskirt areas, but I don't. I like established "what you see is what you get" areas with fewer variables than the emerging areas. For example, investors flocked to Hutto mid-2000s. Didn't turn out well.
Clearing $1,000/mo after expenses will be tough. It will generally take 4-5 month's rent to cover property taxes and insurance. Another 10% of gross annual income toward maintenance/repairs. Another 10% of gross annual income toward vacancy loss and leasing. Another 10% toward management fees.
Not much meat on the bone after all that. I could never purchase and make the rental homes I own today work at today's sales prices/rents. We do still get high net worth, high income investors buying in Austin, and they are not wrong to do so, but one has to examine how real estate investing fits into the overall long term financial goals. It should be done with extra, left over money, after retirement accounts are being funded at full value, all debt paid, etc.
In general (meaning there is an exception to every rule), but in general, the best rental investment stock is a single family home, at or near the average/median price for the neighborhood/area in which it is located, attending a good to better than average school track, and in good serviceable condition. This in turn attracts a good, quality renter, which is the most important element of investing.
Ratios have moved the areas in which that can be accomplished. Now it's mostly Cedar Park/Leander, Round Rock West. Many investors like the further outskirt areas, but I don't. I like established "what you see is what you get" areas with fewer variables than the emerging areas. For example, investors flocked to Hutto mid-2000s. Didn't turn out well.
Clearing $1,000/mo after expenses will be tough. It will generally take 4-5 month's rent to cover property taxes and insurance. Another 10% of gross annual income toward maintenance/repairs. Another 10% of gross annual income toward vacancy loss and leasing. Another 10% toward management fees.
Not much meat on the bone after all that. I could never purchase and make the rental homes I own today work at today's sales prices/rents. We do still get high net worth, high income investors buying in Austin, and they are not wrong to do so, but one has to examine how real estate investing fits into the overall long term financial goals. It should be done with extra, left over money, after retirement accounts are being funded at full value, all debt paid, etc.
Steve
There are other suburbs besides Leander/Cedar Park/RRW that have good/better than average schools, Steve. I wouldn't call Pflugerville "emerging" at all.. Not like I am encouraging the OP to invest in Pflugerville, because that's the last thing anyone needs -- some novice, absentee investor ruining a neighborhood with their rentals. Sorry to sound so harsh, but I am just sick of the investor rentals. I actually appreciate the rising house prices because it is making things that much harder.
To the OP, you aren't going to net an extra $1,000 per month nowadays anywhere. Property taxes in most good areas, Round Rock and other suburbs included, are higher because the home prices are higher. In addition, rents can only be but so high. Add to that all of the other expenses that Steve mentioned and you'll be lucky if you get a little bit over. Austin suburbs aren't the places to attempt to make a buck.
I had the same decision to make about two months ago, with a house I own in Cedar Park. Sell it or keep it for a rental. Would have cleared about $400 a month. Looking at the rentals in my area that are handled by an outside management, I decided no.
Yards are not watered, flowers planted, weeds take over and there dose not seem that anyone ever checks. Who knows what the inside looks like. Always a carpet cleaning truck, repair truck and cleaning people after a move out.
If you are not going to live where you can check your property out, I would not do it.
I disagree somewhat with this sentiment that your investment property will go down the tubes if you are an out of town owner. If you're interested in owning rental property AND have a concern for the well-being of your property, you'll make it happen. Come into town once in a while and check on it, have a friend or relative do a drive-by, whatever.
I can 100% guarantee you, in my neighborhood near downtown Austin, some of the worst kept properties are owner-occupied. On average, however, I'd have to agree that owner-occupied will take better care of their house than out of town landlords.
Anyway, to the original question, as one with a bit of experience in investment property, I'm also skeptical of opportunities in Austin right now. I cannot seem to make the month-to-month numbers work, regardless of neighborhood. So if you choose to do it, I'd go for a neighborhood that seems desirable for long-term appreciation, as I agree that clearing $1000/month at that purchase price (even with no mortgage) will be difficult.
I had the same decision to make about two months ago, with a house I own in Cedar Park. Sell it or keep it for a rental. Would have cleared about $400 a month. Looking at the rentals in my area that are handled by an outside management, I decided no. Yards are not watered, flowers planted, weeds take over and there dose not seem that anyone ever checks. Who knows what the inside looks like. Always a carpet cleaning truck, repair truck and cleaning people after a move out.
If you are not going to live where you can check your property out, I would not do it.
When we take new accounts, especially from owner-occupants who plan to return, I always explain that the home will degrade to some degree. I take much better care of homes I manage than the industry average, but we still get HOA notices for yards, and most tenants do in fact not do anything more than mow. But we only take select properties that attract good tenants, so they never get "torn up". Nothing more than some freshening up is needed at turnover.
That said, the objective is to keep the home at a good basic rental condition so that when an eventual sale happens, or owner moves back, it's only a minor makeready away from being brought back up.
I've sold a lot of homes out of our portfolio that we took in during the slump from 2008-2011 when sellers were reluctant to sell into a soft market. Without exception, those owners who held on, even with some negative cash flow, have enjoyed value appreciation that more than catches up the final financials.
For seller today who call with the "sell or keep" question, it's hard to argue against not selling into a hot market, unless the owner truly wants to become a landlord/investor.
Thank you all for the thoughtful responses. Believe me I appreciate it quite a bit.
I am optimistic about having the property in good shape and make sure it's kept up. Obviously the long-term goal is to keep it up so that when time does come to sell, it's an attractive asset.
I've gone ahead and punched in a various figures to the "calculators" out there and the numbers agree with pretty much all of you -- it'll be tough to clear the (mythical?) goal of $1k a month. Now if we think that the house will at least hold value in the next 5 years having $500/month clearance would be acceptable, but that means I need to think of opportunity costs for investing that money elsewhere.
@austin-steve: terrific advise and thank you. Coincidentally we have looked in RR West (we lived in central RR before) and based on the rental % map it's about 40% rentals -- surprisingly a bit higher than we thought. However, the going rental prices will barely clear the tax & upkeep costs. And yes, this investment "funds" are after putting maximum retirement contributions aside and all debts paid (our primary will be fully paid for).
@riaelise: not sure where the pushback comes from re: "novice, absentee investor". Obviously there are renters who need to find property, and property owners who provide the housing. Genuinely curious -- what negative effects do you think being "novice" or out-of-town property owners have on the real estate market? I imagine the higher home prices in general (whether you are for or against it) are overwhelmingly determined by new residents and not absentee landlords who must be just a fraction of overall buyers today.
@PittsburghAustin: thanks for sharing your experience. We most likely be able to check on the property once a year. It seems picking the right PMC is like picking the right RE agent -- it's difficult to find the right one.
@CoolerInTheShade: that's mostly how I feel (per my feedback @riaelise) re: absentee owners. But more importantly, the numbers do seem to suggest that a $1k goal is optimistic at best in this market. It means a lot to hear from you and others who actually have experience in this market and finding it difficult to make numbers work. Which leads me to...
If we were to continue to pursue buying a property, would $500/month net be a much more realistic goal given the market?
Thank you all for the thoughtful responses. Believe me I appreciate it quite a bit.
I am optimistic about having the property in good shape and make sure it's kept up. Obviously the long-term goal is to keep it up so that when time does come to sell, it's an attractive asset.
I've gone ahead and punched in a various figures to the "calculators" out there and the numbers agree with pretty much all of you -- it'll be tough to clear the (mythical?) goal of $1k a month. Now if we think that the house will at least hold value in the next 5 years having $500/month clearance would be acceptable, but that means I need to think of opportunity costs for investing that money elsewhere.
@austin-steve: terrific advise and thank you. Coincidentally we have looked in RR West (we lived in central RR before) and based on the rental % map it's about 40% rentals -- surprisingly a bit higher than we thought. However, the going rental prices will barely clear the tax & upkeep costs. And yes, this investment "funds" are after putting maximum retirement contributions aside and all debts paid (our primary will be fully paid for).
@riaelise: not sure where the pushback comes from re: "novice, absentee investor". Obviously there are renters who need to find property, and property owners who provide the housing. Genuinely curious -- what negative effects do you think being "novice" or out-of-town property owners have on the real estate market? I imagine the higher home prices in general (whether you are for or against it) are overwhelmingly determined by new residents and not absentee landlords who must be just a fraction of overall buyers today.
@PittsburghAustin: thanks for sharing your experience. We most likely be able to check on the property once a year. It seems picking the right PMC is like picking the right RE agent -- it's difficult to find the right one.
@CoolerInTheShade: that's mostly how I feel (per my feedback @riaelise) re: absentee owners. But more importantly, the numbers do seem to suggest that a $1k goal is optimistic at best in this market. It means a lot to hear from you and others who actually have experience in this market and finding it difficult to make numbers work. Which leads me to...
If we were to continue to pursue buying a property, would $500/month net be a much more realistic goal given the market?
Well since you asked, ok. I'll tell you the reasoning behind my words and I don't really want to sound harsh, but....I'm not gonna sugarcoat my feelings on the subject. During the housing slump many suburban neighborhoods EVERYWHERE (not just Hutto) were overrun with absentee landlords that knew jack and squat about maintaining properties or what being a landlord entailed. They punted the can to Fester the property manager, who did little other than handle tenant requests and take rent payments. Oh, and be a barrier if there were complaints from the HOA. Many of the renters themselves more often than not did not subscribe to home maintenance and oftentime allowed the properties to fall into disrepair and easily mar the aesthetics of an entire block. ("It's not mine....") For the people who are living next to rentals, there's that trepidation that naturally occurs when tenants move out and move in year after year - who knows who you're gonna get as a neighbor. Might be the nice family OR it might be the frat house. You might get the house with the 4 large dogs. In addition, if there were repairs that needed to be made to the rental house that would affect your house, you'll be waiting some time to hear from Fester the Property Manager. I just went ahead and repaired the broken pickets myself.
While my neighborhood is nowhere near 40% rental, I can tell you that without exception most of the disturbances/crappy looking properties are owned by out-of-state, absentee landlords who haven't set foot in the neighborhood other than surveying the house during the inspection period. As a homeowner who has had to deal with some of the ripple effects of real estate investors, I can tell you that I am tired of it. Thank goodness the home prices have risen and the market has recovered. The rentals are now being purchased by owners and the neighborhood is as good as it has ever been. But make no mistake, the speculative real estate investing has its toll. Since you are able to afford up to $270,000, that tells me that my next neighborhood must be full of homes that are at least 350k and up, so that I can at least not have as many rental properties. I fully intend to check TCAD/WCAD and search the surrounding blocks to see how many of the properties are rentals. Exhaustive work, yes, but necessary given what I've both seen and experienced.
ETA: unless you're one of those people who purchased when the prices were CHEAP and managed to sell for a good hunk of coin, the money is just not going to be pouring in. People are only going to pay but so much living outside of town. Whatever hidden cost you had as a homeowner you're gonna have to deal with as a landlord. If I were you, now isn't the time. That's just my opinion.
ETA2: Also, affordable homes are at a premium these days. I'd much rather a first time family get a home vs. an investor waving gobs of dollar bills who will ultimately turn a home into a rental.
Completely understood. It's one thing to have a few rentals here and there but when it brings down a good portion of the neighborhood, I can see where no good feelings will be spared towards who you perceive to be the issue.
In fact, we were one of those that bought at the end of the "down" cycle and been tremendously lucky in catching the boom. We had also been through the roller coaster before and after the 2007 housing market in NYC, so we know there'll be ups & downs.
Our currently home does have one rental property in the neighborhood and I'd be lying if I didn't think about who's coming and going. It's a predominantly home owners neighborhood but still. So I hear you.
Having said that, I'm still not sure if all the issues you're mentioning have specifically due to either 1st timers and out-of-town owners. Yes, the general effect of having too many rental properties in a given area certainly. But how could all that be contributed to the landlords that knew "jack and squat" or who "punted the can"? How would you know anyway -- is there some magical heat map that shows the years of experience & primary residence of every rental property owner in your neightbord? Couldn't the poor landlords just as easily be "seasoned" investors handling dozens of properties who live right in town?
See, as a couple that 1) fully intent to keep up the property as much as we possibly can 2) intent to hire the best property manager available 3) know the value of our asset and would like to maintain it, it seems the brunt of your frustrations should be directed towards unethical property managers or the actual renters who go beyond "wear and tear" and damage the property. After all, RE investors have to start sometime, somewhere, and every investor has been a "1st timer" at once, right?
Either way, we'd be doing our due diligence in the Austin market and see what the realistic return would be and just generally arming ourselves with more information as we continue to hit pavement. RR West as mentioned above would be our next spot to hit. If anything, we're enjoying seeing parts of Austin that we never got to see the last four years and thank you for taking the time out to respond.
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