Investing in Austin or San Antonio (Round Rock, Pflugerville: low income, section 8, real estate)

[charmed4947]

Hi All,

I live in Los Angeles but I have been researching Texas for real estate investment for a couple of months now and I kinda narrowed it down to San Antonio or Austin.

The reason I want to invest in San Antonio or Austin is that I want to eventually move there. I have read some really great things about both cities and I am planning a visit this summer to see both places.

From an investment stand point which do you think would be a better fit. I plan on moving with in the next 3-5 years. Probably looking to buy a house or duplex, price range $150,000 to $250,000.

Any advice would be great.

Thanks

[austin-steve]

Austin, hands down (in my opinion)

San Antonio may provide a better initial cash flow on an investment property (as will new neighborhoods east of Austin), but it's so big and disjointed that I wonder how anyone picks the areas to consider and avoid.

I personally do not like new neighborhoods (for investment) in which starter range homes (below $150K) are being sold. Those tend to get over-sold to investors and potentially become mainly rental neighborhoods. Newbie investors love buying new homes in these types of areas. This has already ruined some of the newer neighborhoods northeast of Austin as they are populated by section 8 renters and low income home-owners who bought zero down but can't afford to improve or maintain their homes.

I advise investors to stick as close in to Austin as you can afford. Stay in a developed area that's alread built out (i.e. - not flooded with new construction), stay in the better schools, purchase at the average or median price range for the area in which you're buying. I like South Austin, areas 10, sw and W and I also like the NW areas of Austin that attend Round Rock schools. These areas are rock solid for buy-and-hold investing.

I wrote up a typical deal yesterday - $200K for a 10 year old home in a very established and desireable South Austin neighborhood with good schools. That home will rent for $1300/mo. and the buyer's monthly costs, including projected maintenance and vacancy will be just under $1600/mo. This is with a 20% downpayment. That's about a $300 month negative cash flow, but homes in that area are appreciating at 12% over the past year, or roughly $2,000/mo. Try accomplishing that with a mutual fund.

If you're not willing to accept negative cash flow, and you don't have at least 6 months cash reserves, purchasing investment property isn't a good idea. You can of course avoid the negative cash flow by making a 40% down payment. You also have to buy in to the idea the appreciation will outrun the negative cash flow over time. Many of the homes we sold to investors a year ago have increased in value $15K to $30K, which easily offsets (on paper) the negative monthly cash flow.

Finally, what you are contemplating is something I've seen a lot of these past couple of years. Buyers pre-purchasing in Austin not necessarily because you are an investor, but because you fear that waiting will result in paying a much higher price in a few years and you'd rather lock up your place now and rent it until you move. I think that's a smart way to approach it.

Steve

[AustinGuy]

Originally Posted by austin-steve

Austin, hands down (in my opinion)

San Antonio may provide a better initial cash flow on an investment property (as will new neighborhoods east of Austin), but it's so big and disjointed that I wonder how anyone picks the areas to consider and avoid.

Steve, that is a great post filled with great advice (+ rep points for you). I would advise that the OP be cautious on doing negative cashflow deals which depend on appreciation to make your gains for you. It is working great right now, but we've seen in other markets how quickly things can turn around. Plus, when determining your investment gains, you also need to consider the lost interest income on the 20% downpayment you put into the house.

What Steve says about avoiding the starter neighborhoods as investments is great advice. This is doubly true if you are planning on moving into the house you buy 10 years down the line. You might be surprised at how quickly some of these new starter neighborhoods can turn into eyesores. In 10 years, that starter neighborhood may very well be a place you would not want to move to.

[austin-steve]

Plus, when determining your investment gains, you also need to consider the lost interest income on the 20% downpayment you put into the house.

Great point. Many of the investors over the past 5 years were stock market refugees, and your point above has been mute, especially in the 2 or 3 years following the tech bust. But now that the stock market appears to be a vehicle investors are at least willing to consider again, it is certainly prudent to ask ourselves if the hassle of real estate investing is worth the risk.

I put it to investors like this:
If you were to take your $40K downpayment and invest in a mutual fund instead of real estate; and you were to feed the mutual fund the equivilent of your monthly negative rental cash flow for 5 years, are you convinced that your net gain after selling the home (if you were to cash out after 5 years) will be substantially better than the value of your mutual fund?

There are other factors (income tax bracket, risk factors, liability, etc.), but that's the quick and dirty of it.

If one is not convinced that the real estate investment will be substantially better, they shouldn't do it in my opinion. It's simply too risky to accept a marginally better return.

That said, I believe Austin real estate is a great investment. I just bought another rental home for myself yesterday. I really like our economic outlook and growth projections. But investing isn't for everyone and certainly many investors get hosed either because of bad luck or listening to the wrong advise or both.

Steve

[charmed4947]

Thanks Austin Steve and Austin Guy, both are really great advice. I have a lot to think about. I am planning a trip during the summertime and will check out the area.

I wouldn't buy a new home, I like older houses and more established neighborhoods that are up and coming.

[montevista1]

San Antonio, much better pricing and cash flow. Anything in Austin that is near downtown has horrible cash flow! I live in LA and own 2 properties in San Antonio.

To live though i would choose austin, to invest san antonio.

[jwb123]

Please don't.

Seriously, there are enough California investors coming here, buying multiple lots in a subdivision and turning good neighborhoods into rental communities.

[love roses]

Jenbar, I was just about to post the same thing. For example, the neighborhood I'm in started out looking like It'd be a great place. It wasn't by any means built out, so what we saw at the beginning we liked. All of the houses were capital pacific and Legacy, craftsman vintage look with big long front porches. Even cobblestone came in with some nice, higher priced homes. That's when it started falling apart. All of their homes were bought by investors, so all of them are rentals now. I guess they figured they couldn't sell anymore, either because the price was too high or too many investors were trying to come in. Well, now, here comes D.R. Horton and they are now finishing out the neighborhood (Thankfully, Legacy still has some lots to fill). They are putting in all very plain, small, ugly (IMO) starter homes with no porches and the style doesn't even match the first half of the neighborhood by a long shot. When I looked at the appraisal website, I noticed that a giant chunk of them were held by investors. My next door neighbor said they are charging like 160 but I find that very hard to believe. He is also a landlord and owns some investment properties elsewhere, so I don't guess he'd lie, but still. This being our 2nd home, I'm glad I'm paying attention to all the things that are bugging me, so that when we move again, I'll know what to say no to. I DO like my neighbors and generally speaking, my neighborhood is a safe, decent place...But it could have been so much more. I don't know why D.R. Horton had to mess it up.

[achtungpv]

I sold my first house in June '06 to an investor from San Diego. It was funny seeing her talk about "The Numbers" and how everything worked out great. The goal was $1340/mo rent. I kept my mouth shut. There's tons of houses for rent. It took her 7 months to find a renter. From driving by, they appeared to stay 2 months. It was vacant again for at least 2 months. I wonder if she counted on that additional $12,000+ negative cash flow the first year due to the difficulty finding a renter.

[austin-steve]

Originally Posted by achtungpv

I sold my first house in June '06 to an investor from San Diego. It was funny seeing her talk about "The Numbers" and how everything worked out great. The goal was $1340/mo rent. I kept my mouth shut. There's tons of houses for rent. It took her 7 months to find a renter. From driving by, they appeared to stay 2 months. It was vacant again for at least 2 months. I wonder if she counted on that additional $12,000+ negative cash flow the first year due to the difficulty finding a renter.

I work with a lot of real estate investors, and what you describe is exactly how dumb a lot of them are.

They look only at the monthly payment compared to their expected rent (which is almost always too optimistic), and seem to have a deaf ear when I start talking about the "silent" costs of vacancy, turnover expenses, repairs, leasing and management fees, etc. I tell investors if they are not prepared to handle a $500/mo. negative cash flow and they don't have the cash reserves to withstand a 6 month disruption in rental cash flow (in case of a rough turnover/vacancy), they shouldn't be purchasing rental property in Austin.

I educate them away from the new starter home areas (where the cash flow looks better on paper)and into well established areas where the impact of another rental home on the neighborhood will be minimal.

It's funny though, how many won't listen and simply go do what they want anyway, with a different Realtor who doesn't care where they buy (we simply won't take them to Hutto, Manor, Pflugerville, etc., so they have to find someone else). Most of these investors are losing money both on the cash flow and the fact that they bought in cheaper starter home areas that are not appreciating as well as the established areas.

Steve