A couple difficult questions

6 Replies

Hey guys, I wanted to ask a couple difficult questions that have been stuck on my mind. Apologies if these have been answered somewhere already (they probably have)

1. Say I own a house outright, and then use that equity to buy another home, with financing. As both houses are renting, I'm paying down the mortgage on home #2 at 2x rate. Say the note is 1.5k a month, I'm consistently putting down 3k. After 6 months of that, suddenly both houses go vacant for a period of 2 months (worst case). If I don't make any payments during this time, are all my previous payments taken into consideration? Am I up to date or behind if I start paying 3k again 2 months later? Also, if that is my payment plan, does a 30 year fixed still make the most sense?

2. For someone who has assets but isn't very liquid, what is the best way to find homes for buy and hold in my area (Austin TX)? Realtor.com and Loopnet.com are okay, but was hoping someone has a better option. 

All markets are cycles. Where do you believe the Austin housing market cycle is? What zip codes would you recommend investing in? What cap rate should I expect on a Buy and Hold? I've heard the 78704 but would love to get more info.

Sorry for the long questions on my first post, hopefully someone has some answers!

Hi Mike, to answer your first question: when you pay more than your monthly mortgage amount, that difference is applied directly to the princpal, therefore you would need to keep making the same monthly payment - the only difference is you'll have fewer payments to make and your interest cost goes down. You could at that point refinance, or if you have a good relationship with your lender, ask them to reammortize and give you a two month extension. Not all will do it, but some will.

I won't address your second question because I'm not familiar enough with the Austin, TX market to give you an accurate opinion. As for your first question, you will not be "ahead" on payments and if you stop making the minimum mortgage payment you will immediately be behind on your payments. I highly recommend you take some of that $3,000 and stash it into a savings account until you have enough to cover 3-6 months of payments (in case the property does go vacant). Once you've done that, by all means pay double on your current mortgage note. You'll pay it down faster and build up equity faster. A 30 year fixed mortgage is still a good idea because if you ever need to stop paying double on your mortgage, or you get tight on money for some reason, having the lower payment of a 30 year fixed will give you wiggle room. However, 30 year vs 15 year is something you should determine for yourself after considering all your options and goals.

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As for your second question, direct marketing or a reputable wholesaler. Austin inventory is low and the market is becoming efficient. That means there are more tear-downs and new builds to maximize supply. I am far from an expert on the Austin market but I don't believe market rent is keeping up with market home values. If a house is 400k I doubt you are going to get 4k per month in rent. You can do better with creative buy and hold strategies like short term rentals. 78704 is a hot zip code but that is an A level investor area. I cant afford 650k SFR buy and holds so I wouldn't know much about that zip code. I do know that I wouldn't put 150k+ as a down payment into a SFR as a buy and hold...ever.

If you are looking for SFR buy and holds then I would look in Georgetown, Round Rock, Cedar Park, Leander, Kyle, and even the often maligned Del Valle. I like Del Valle a lot more this last year than I did anytime before. It is a peculiar area that is seeing a lot of commercial growth. In all honesty you can put a thumb tack in the middle of Austin and draw a radius of 30 miles out and you will be in areas that you can direct market to for more reasonable deals.

Determining market cycles is speculation at best but we are closer to peak prices than not. Austin is a different area and I think it is comparable to California markets. I think home prices will stabilize only when they get closer to San Fran prices. I think young professionals will continue to drive the market and I think Austin and the bay area are the two areas they will choose from. The insane property taxes tend to apply some drag and keep prices from truly exploding. I am not sure Austin is a great place for Buy and Hold strategies but I could be wrong.

The first question is pretty straightforward and has been answered very well by @Jason Hirko and @Walter Key , so I'll just address the second question:

78704 is a red-hot zip code, but that's well known, and future appreciation expectations are already priced into the market there. If you can buy an SFR and only lose $1000 a month you should count yourself lucky. The strategy there is an appreciation play which I (and it seems most of BP) think a risky move.

In Austin in general, it's very hard to buy SFR and cash flow without doing significant value add. I'm currently investing in fourplexes the 78724 area, which is a lower-income region, but has a lot of improvement potential. It has a lot of out of state owners who have hired really bad local property managers which have devalued the area for a long time. You can definitely hit the 1% rule which people here like to tout, but I expect that to increase once local landlords are able to clean it up a bit. Feel free to PM me if you want to talk more.

Looks like you have some good options for #1, so I'm moving on.

2. The best way to find homes for sale in Austin is going to be Realtor.com (or use a realtor to help you find off-market deals!). In true Texas form, a buyer is not required to disclose the purchase price to the government - meaning, the purchase price is not public record. This means, Zestimates and many other 3rd party syndicators are really inaccurate. So many times clients call me about a property they saw on Zillow only to be very disappointed to find it's been pending for DAYS or even WEEKS! Realtor.com is connected directly to the MLS and is the most accurate resource on the web, hands down. Redfin is also alright, if you want a more user-friendly site and their FSBO can be pretty good.

3. The Austin housing market has no outlook to really slow down in the sense of lower values. I believe when interest rates do eventually rise (as the fed keeps threatening) the competition will lessen and home sale volume in Austin will align more with the national statistics. However, I do not believe home prices will go down anytime soon. I focus on 78757 (zone 2) and I'm constantly astounded by how high the sales prices keep ascending. The job outlook in Austin is still insanely high, thousands of new jobs are still expected to be created over the next 12 months. That said, the closer to downtown you are, the better your investment. I'd also consider schools, since good school districts will always bring buyers (even slow ones) in a down economy.