Acceptable negative cash flow in Austin/ i35: corridor

[Nick Anderson]

I’m curious what people who are currently investing in Austin and surrounding areas (buda/Kyle/San Marcos/round rock etc.) are willing to accept for negative cash flow in order to get in on appreciation?

I know there are deals out there that are break even or maybe cash flowing $50-100, but are you missing out on appreciation by waiting for that deal?? What are y’all willing to take on in general in order to capitalize on appreciation?? Thanks!

[Greg Scott]

Buying a property with negative cash flow in order to get appreciation is the same as paying someone monthly to own a stock. Would you do that?  In both cases, you are paying for the privileged to speculatively hope it goes up in value.

Getting positive cash flow on a property is getting paid every month to own it, and appreciation is the icing on the cake.

[Jordan Moorhead]

@Nick Anderson I won't buy something with negative cashflow. I've certainly relaxed my criteria and am now looking at a deal with close to an 8% CoC but won't pay to own a rental property.

[Jhanel Wilson]

Negative cashflow, speculative  appreciation, is what was going on before the crash of 2008.  

[Dan Burstain]

Anyone have an idea what the largest drop in price has been in Austin in 40 years?  2.9%...1.9% during the housing crisis (worst thing ever to happen to real estate).  Do you think every city in the US is like that?  Do you think a huge government and university job base may have something to do with the lack of a roller coaster ride in prices you see in other cities?  Does it make sense that not all cities share the same investment makeup?  People who tell other investors they should never buy something with negative cash flow in a city that they don't have a strong understanding of the data history for that city are not helping that investor.  Despite your track records.  Despite what you have had success with.  Let me tell you people have made millions in real estate in Austin and will continue to do so despite not breaking even or showing positive cash flow in years one and two.  So to blanket statement saying never invest in negative cash flow may be something that resonates with you but should not be the rule of law for investing.  I am looking to buy my 7th investment property here in Austin and none have started with positive cash flow and all have positive cash flow now.  Just about every home in Austin went up $100,000 or more in the past year.  How much positive cash flow and appreciation did you make last year?  Is it a spike, a bubble?  Well if it is it would be the first in our history and oh, 1700 companies moved here from California the last few years.  Apple, Tesla, Oracle, Samsung, Amazon, have yet to open their new facilities here.  150+ people move here a day and all based on jobs, jobs, jobs.   

[Nicholas L.]

@Dan Burstain I think you're right about everything you said, but... it's probably not a good strategy for a beginning investor.  Agreed?

[Nick Anderson]

@Greg Scott @Jhanel Wilson I think in general both of you make really sound points, and I agree with the basis of your claims. Being said, consider this scenario: with a home buying grant and a low money down option, a new investor could get into the Austin Market for low or no money down. Let's just say a $200,000 home for give or take $5,000 down after closing costs. If it costs this person $300 per month after all expenses are accounted for, you are sitting negative ~$3,600/year. Over 3 years you are all in at ~$16,000 for a house that may have appreciated 40% over that period (Jhanel, you're right, that is a big "MAY"!!) But to @Dan Burstain 's point, the likelihood of the Austin MSA depreciating or even appreciating by only 3% YOY is statistically almost insignificant. So I guess my original question should have been more specific in that, Yes, this strategy is a gamble, but the risk to reward in this particular market makes a lot of sense. SO, assuming that it's a gamble, how much cash flow negative are investors in this area willing to take per month, at least to start.

@Jordan Moorhead you make a good point in that if you can find a property that net's positive, it is a no brainer in this market. If it takes 8 months to find that deal, and the market appreciates 5 more percent in that time, it becomes a tricky math problem to know which is a better play.

Thanks to all for the good conversation!! This is something I have been thinking about for a while, and I'd bet others in this market are too!!

[Stephen Stokes]

@Dan Burstain I have seen you posting these figures of small single digit declines are the worst case scenario for Austin and citing historical impact from the Great Recession. What is your source because as someone who lived through REI in Austin in the timeframe you are citing, I can personally attest from direct experience that was not the case.

[Damaso Bautista]

@Nick Anderson

I think one issue with your line of thought is that it appears that we are at the top of the market right now.  If you are ok with that then I would say buying for long term appreciation 20 to 30 years would be fine, but betting on the crazy one to two year appreciation rates that we have seen recently is very risky.  

If you are ready to be patient then go ahead with your plan.  If you are planning on collecting your appreciation quickly I would think your plan through a bit.  

Just my thoughts!

[Ryan Kelly]

Cash flow is created when you have enough down payment of the home at purchase to create debt that will be lower than the income. That used to be easy with lower down payment options, but today in Austin, most investors buying a nice single-family home will need to put 40% or more down to reach a cash flow positive stage in year one. As the cash flow yield goes down, your amount of cash to reach cash flow positive at purchase goes up. If you want to put 20%-25% down, you are unlikely to cash flow in most scenarios unless you are getting creative on the income-generating side (AirBnB, rent by the room, etc).

[Greg Scott]

Originally posted by @Dan Burstain:

Just about every home in Austin went up $100,000 or more in the past year.  How much positive cash flow and appreciation did you make last year? 

The people that got absolutely ruined in 2008 were the ones with negative cash flow buying for appreciation.  

Were there any cities in the United States that DIDN'T see tremendous appreciation in the last year?   I know all of my properties went up a ton, many of which are also in Texas cities with tremendous job growth.  I have positive cash flow and appreciation on every property.  

[Rick Stein]

I would never buy a property with negative cash flow. You are trying to time the  market. If you are right, you can make money but if you are buying at the top of the market, and you will know that until it starts going the other way, you will lose your shirt. 

[Jordan Moorhead]

@Nick Anderson I think about it all of the time. I just know where my risk tolerance is and what my goals are. When my passive income is 100% of my lifestyle expenses I'll maybe take these risks, but probably not.

[Eric James]

You don't need a market tank to ruin investments based on appreciation. All that has to happen is for major appreciation not to occur. There are places I could see possibly investing for appreciation. TX isn't one of them. (I live in TX).

[Russell Brazil]

You need to shift your thinking.

All occupied properties cash flow.

Ill say it again. All properties cash flow.

When they do not, it is not because of the property, it is because of the leverage.  

The risk of negative cash flow has zero to do with the actual property, and is entirely dependent on your leverage. If little or negative cash flow is your concern, then you need to lower your leverage amount to the amount you feel comfortable with.

[Nick Anderson]

I appreciate all of the responses.

@Nicholas L. Do you think it isn't a good investment for a "beginner" because of the risk? Because of the assumption that a new investor doesn't have the funds to cover a few bad year? Truly curious here! What makes it good for a seasoned investor?

@Stephen Stokes I don't think there are many things more valuable than first-hand experience. Curious what, if any, indicators you see in today's market that throw up red flags for you?

@Damaso Bautista You make a great point. I don't have any intentions of being out of this market in the next 5-7 years. Cash flow is not my driver for REI, as I love the W-2 role I have and have no plans to replace it with cash flow.

@Ryan Kelly Nailed it, this is the core of my thought process. The question then becomes if it requires 25% down or more to find cash flow, does that mean that only people with that capital should invest here? Some of these responses suggest that! I still don't necessarily agree with the idea of crossing off a market because 40-50% DP isn't an option

@Greg Scott You're right that most markets significantly increased. I'd argue that most BP users have only been investing in a Bull market and have not seen the tide come out yet (myself included). That said, I'd push back in that I don't think you can find a market that appreciated more YOY than Austin MSA!

@Rick Stein Fair point. Do you invest in Austin? If you buy one property per year over 10 years, you effectively eliminate the idea of "market timing". Right?

@Jordan Moorhead PM'd

@Eric James You dont see investing in Texas, specifically Austin, as a good appreciation investment??

@Russell Brazil I fully agree, and I think this is the core of the debate. Given the state of the Austin Market, as @Ryan Kelly eluded to, it most likely takes 30%+ DP to generate a cash flowing property year 1. In your opinion, does this mean if someone isn't willing to put that DP down, they shouldn't invest here??

[Ryan Kelly]

@Nick Anderson You can invest in any market you wish, just weigh the risks and rewards. I have plenty of investors purchasing in the Austin metro area to take advantage of the long term growth. It does help if you have a strong capital position.

[Rick Stein]

If you need a large DP in order for the property to cash flow, you must ask yourself, "what is my cash on cash return?" Can you deploy that DP elsewhere for a better return? Wayne Gretzky said he doesn't go to where the puck is but to where it is going to be. I am investing where the market is emerging, within an hour circumference of the city. As the city becomes more and more UNaffordable, people are going to where it is MORE affordable. Invest in those places with cash flow and enjuyt the appreciation.

[April C.]

@Dan Burstain agreed - Austin is insane and has been through the ups and downs. I think the question is how big is the negative cash flow. No one can afford to rent at the price folks are buying at. If you are new to this market it will be negative. I’m wondering more about mid length rentals marketing to traveling nurses on the I35 corridor. No need to go negative just get more creative.

[Greg Scott]

@Nick Anderson  I see properties with GREAT returns and cash flow every day.  The are just down the road from Austin in New Braunfels and San Antonio.

As @Rick Stein said, it is important to do the math.  For example (hypothetical), to have positive cashflow in Austin you may need to put 50% down, but you might get the same amount of cash flow in San Antonio for 20% down.    If both appreciate at the same rate, San Antonio wins due to more leverage.  If this example is correct, Austin would have to appreciate at 2.5x the rate of San Antonio to make them equal investments.  This sort of math would give you an apple to apples risk-adjusted comparison of the two markets for war-gaming.  Remember, nobody in the industry is any good at accurately predicting appreciation consistently.

[Ross Kerne]

To echo what others have said, I also think that buying only for appreciation is gambling. You can make lots of money gambling and speculating, but you can also lose it all.

With that being said, by personal home in New Braunfels has gone up around $150K in 2 years. Cashflow is what I want, but the appreciation that is happening around here cannot be ignored.

[Stephen Stokes]

@Nick Anderson biggest red flags for me right now is everything everywhere you look seems to be in a bubble. RE, Stocks, Bonds, heck even used cars. That said, I do not have a crystal ball to say when the party will end I just know I don't want to be caught in a bad position when the music stops playing. That said, if you get a good off market, deeply discounted property, the risk of timing is somewhat negligible. However, if you are buying MLS / retail priced properties and expecting to never lose money, timing becomes much more important. Hope that helps.

[Rick Stein]

I have been an REO agent for about 30 years. I have seen bubbles before, although not like this. The current madness is not sustainable. It will end. The question is, "when"? When it does, those who paid rediculous prices and need to sell will either have to bring a big check to the table to unload the property or will find themselves underwater.I am a very conservative investor. I buy properties with private money. It is one thing if I want to risk my own money. if I make the wrong decision, I am answerable only to myself. However, if I make the wrong decision with a lender's money, I have much bigger problems.I can not base my decisions on what I think the market will be 6 months or longer from now. I must base them on the market comps are NOW. I would never buy a property with negative cash flow because I believe (hope) the loss will be compensated for with appreciation down the road. There are too many wannabes watching too many "reality" TV shows paying absurd prices for properties they will lose their proverbial shorts on. Perhaps I am venting. if so, I apologize.