Austin Investment Analysis focusing on the 78758 zip code.
Recently I had the privilege of working with a fantastic investor. After emailing and talking on the phone over the period of a month or so, we focused on a segment of the market that promised to be quite fruitful in both cash-flow AND appreciation. We submitted offers on three properties, and now it's time to negotiate the terms. Without divulging too much specific information, let me elaborate on the selection process and why these properties fit my client's needs.
He wanted properties that would maximize immediate cash-flow, minimize risk, and provide lasting value based on location.
By targeting mid-range, inner-ring suburban duplexes in North Austin, we accomplished all three.
Let's start with cash flow. With a duplex, you're almost always going to receive a higher margin as compared to a single-family home that’s occupied. People need shelter and are willing to share a wall for a nice price reduction or a better school district for their children, all while enjoying the benefits of a private yard and the feel of a house.
When viewing these duplexes, it's always a good sign that both sides are occupied. If the tenants are present and appear to be quality, all the better. I always make it a point to ask residents how they like living there, especially in front of my clients -- there's a risk of a bad review, but it’s valuable to know the inside scoop if you can get it. Finally, with Austin traffic causing more headaches each day -- roughly 4,000 people are moving here each month -- people want a good value in location without living out in the boonies. Austin is a downtown-oriented city, so properties within the 35-Mopac-183-Ben White loop are at a massive premium, especially in the sales market. However, going past these highways allows for a drastic reduction in asking price without much of a decrease in rent.
Minimizing risk was another important criterion of my client, who runs his own business and doesn't have time to deal with the nefarious downsides of property management. Since a duplex diversifies your holdings, you have less of a chance of your property going completely vacant. If your tenant in a single-family home were to skip out, you'd have to scramble to rent it out right away, possibly for a lower price and with pricey transaction fees. But if a duplex tenant leaves town in the night, you at least have the other half rented, and a large part of the mortgage covered.
In one of the properties we've targeted, the monthly payment, based on a purchase price of $275,000 with an interest rate of 4.5% and 20% down (and average property taxes and homeowners insurance), comes to $1,684 a month. This is a well-maintained duplex with two sides of happy tenants paying $1,295 for a 3/2 and $995 for a 2/2 for a total monthly cash flow of $2,290. When everything's purring along nicely, my client will net $606 a month. However, if the tenants in the 2/2 lose their jobs or get evicted for bad behavior, he's only running at a deficit of $389 a month. This wouldn't be fun, but since the monthly gains at full capacity significantly outweigh the proceeds at half occupancy, it's something that my client could live with for a few weeks while arrangements for new tenants are made.
In order to get the new tenants quickly and for top dollar, you want to shoot for the mid-range. This means having a quality product that doesn't need an overabundance of repairs, has a functional layout that can accommodate multiple living situations, be it roommates or families, and is in a well-maintained neighborhood that's close to major highways and ample shopping.
Although the lower-end price points are tempting, I recommend investing in the next tier up if you have the cash on hand to make the 20% down payment. With lower rents tend to come lower-quality tenants. Less stable employment situations and unkempt living quarters can lead to real vacancy crises. Even if you may be cash flowing slightly more at first, with the increase in quality tech-industry jobs, I don't see rents appreciating as much over time.
A property and neighborhood that aren't in great shape likely will affect how the tenant views a property and respects it. Choose a property where most of the yards are mowed, no cars on the grass, sidewalks (ideally), no trash blowing around, wide streets, few overgrown trees, and obvious signs of occupancy in the vast majority of the homes.
Just as Malcolm Gladwell in The Tipping Point exposes the simple, small tactics that NYC police officers used in the '90s to clean up the crime-ridden subway system (by immediately painting over graffiti and cracking down on turnstile jumpers to create a cleaner environment), your tenants' respect for your property is reflected in the setting you allow them to live in. It pays to uphold a level of quality.
My client’s third criterion was that the property not only will hold its value against inflation, but will appreciate nicely over time to secure significant capital gains after a period of at least 3-5 years. How do we assure this? It's simple -- a smart LOCATION.
We can't talk location without talking about schools. Although the quality of certain districts -- and schools within those districts -- can change over time (as judged through ratings), you'll want to know how potential tenants with children will react to where they'll be sending their most prized assets. If they're going to research it, you'd better, too. In the North Austin areas that we targeted, we made sure that the duplexes on our list were within the boundaries of Round Rock ISD, one of the highest-performing districts in the state. Oddly enough, a large portion of NW Austin falls within this district, so you can get good schools AND be much closer to Downtown than actually living in Round Rock. One of duplexes we targeted went to Westwood High School, which ranked 57th in the nation and is the top-ranked public high school in the Austin area. Westlake High School, in an area of great affluence, ranked 93rd in the nation, according to The Daily Beast's 2013 list of America's Best High Schools.
As an investor, it’s probably your goal to have a property that won't cost you an arm and a leg like the ones within the L oop but is still in close proximity to where the jobs are. With abundant land and a lower cost of living vs. South Austin, North Austin has proven to be the leader in job creation -- just look at where Apple, Google, Dell, IBM, National Instruments, and many other corporate stalwarts have landed. In fact, the job density in NW Austin is second only to Downtown.
By looking at the overwhelming success of The Domain, a massive vertical mixed-use development at Braker and MoPac that opened five years ago, we see the huge scale of demand for upscale living, dining, and hotel services that exists in this area. In addition, the zoning for adjacent areas along 183 and MoPac allows for massive high-rise office buildings that will funnel in more workers with stable incomes. I can see this area becoming Austin's "uptown," perhaps even being our version of DFW's Las Colinas in the next 5-10 years. With a Phase II, new Whole Foods, and a new state-of-the-art office building with HomeAway as its anchor tenant, there's no reason for the momentum to slow down anytime soon.
In a nutshell, with this stout influx of quality jobs -- especially tech-oriented ones in North Austin --demand will be for low-maintenance, mid-range living quarters in neighborhoods that will instill a sense of tranquility while not being too far away from the action.
So, there you have it. Although the execution of these contracts is still pending, I'm confident they reflect a winning formula for a lasting investment that will bring in significant cash flow while minimizing risk.
Please note that this post is partly anecdotal, though: there certainly are opportunities in all parts of Austin, from Round Rock to Buda to the centrally located areas in between.
To learn more about what's on the market and to get a detailed analysis of how different possibilities fit into your investment strategy, give me a call or email.
Stay classy, Austin.