Investment Property Update: Austin Texas

Here is some really good information about buying and running investment properties in Austin.



Outlook for Rest of the Year

Along with the stellar Spring weather comes the historical high point of the real estate sales season. Several factors suggest that 2010 will continue to see surging demand for small multifamily real estate in the Central Texas area:

Reasons for Optimism:

• Central Texas unemployment is the lowest in the US at 7.2% and continues to drop. (link to http://www.bizjournals.com/austin/stories/2010/03/22/daily45.html) As we've said many times, job growth is the single most important factor in real estate values. And our jobs are good ones. Most recent announcements of thousands of new jobs include Facebook, Yingli Solar Energy, and Hangar Orthopedics.
• Interest rates remain at all time lows.
• Our prices remain relatively affordable compared to other cities with a similar quality of life in other areas. U-Haul rates from California to Texas are still twice as expensive as rates in the opposite direction.
• We continue to be heralded in national publications as the best city in the U.S. for whomever and whatever (you name it). After watching the swarms of people attending this year's South by Southwest festival, I wasn't surprised to hear that $100M is injected into our economy every year from this event alone.

Potential Pitfalls:

• The $8,000 homebuyer tax credit expires April 30th. Some fear that the market will slow without this incentive, but I don't see the expiration as deeply reducing demand.
• The Federal Reserve will soon stop buying mortgage backed securities. This will almost certainly increase mortgage interest rates, though probably not too steeply.
• The Double Dip Recession seems increasingly unlikely, but remains a potential threat.
• Pressure to reduce the deficit will eventually require Washington to make some tough choices about taxes such as long term capital gains and possibly the mortgage interest deduction (which would both have an impact on real estate prices). Given how politically unpopular such moves are, however, we probably will not see any action here until 2011 or beyond, when the recession is an increasingly distant memory.

Remember, the days of rapid appreciation are gone, and will not return any time soon. Investors should always assume that real estate prices will rise in tandem with job growth and inflation. The more vibrant the area's economy, the more people moving to the area for jobs, and the more people buying real estate.

The Golden Rules of Property Investment Revisited

• Income must exceed debt service and operating expenses.
• Equity appreciation is nice, but should never be the primary factor in acquiring real estate.
• Focus first on cash flow, then on neighborhood, then on property.
• Working class neighborhoods are fine if they're in the path of progress and not at the end of their life cycle with deteriorating demographics.
• Like most experienced Central Texas investors, I like to stay as close to Central Austin as reasonably possible
• Keep a vigilant eye on operations.
• Are you protesting your appraised value with the county each year?
• Are you holding your property manager and leasing agents accountable for their performance?
• Make readies and maintenance shouldn't be eating up more than 20% of your monthly rental income.
• Don't raise rents! Wait until the tenant moves out, and then readjust to slightly under market value for the next tenant. Vacancy is the worst enemy of cash flow. Don't be penny wise and pound foolish.