Invest or not invest

18 Replies

Hi All, I just arrived to Austin, TX. I have cashed out several rentals in Chicago, as the numbers did not really work well. In addition, those rentals were with 10 y.fixed, so cashflowed minimally. In any case, I am somewhat ready for a new investement. However, in the prime areas of Austin the cap rate is about 4%. Well, the cap rate is usually give by listing agent which is far from the actual cap rate. I was checking loopnet primarily. All in all, my question is should I invest now or wait for whatever recession. Any hopes that the market will cool down in the near future? Thanks in advance for your replies!

Waiting for a recession could have you waiting for a while as nobody knows when or if it will happen.  Nobody says that you have to invest in the prime areas of Austin or in Austin at all.  The surrounding cities are much cheaper and you may have better luck there.

@Matthew Baltzell I completley agree with article. But I dont want to put mil to a deal and get 50k per year and headache in return. I would like to scale up and to bet on apriciation might not help me much in doing that. I kind of expect cash flow in a first place. I dont mind stabilizing a property, my issue is I dont see anything at all. I watched Austin's market for about a year now, even before I started to move to it. Possible I am wrong in what I am saying. Any advise would be great.

I think most markets have seen about as much appreciation as they are going to get. I sold rentals and primary when moving out of California over the past year or two and took the growth with me to western Wa. Now I am investing strictly for cash flow and not worrying about recession at all-just looking at rent return.The cap rates in the primary areas in this market suck now too. Olympia wa thinks it is San Francisco! So I am looking at nice neighborhoods in towns up to an hour from my home. Still no Bonanza; but picked up a couple of solid buys last year-strictly cash flow. Don't resign yourself to lesser returns or get involved with lower class tenants; look harder and get to know the area better and be patient-and don't forget local REI meetings!

@Kate J. I never speculate and have no idea when the market will “cool down”. Historically it’s a bit slower in the winter but trying to time the market just doesn’t work in my opinion.

Kate:

If you wait for the next recession, you may be waiting years. In the Denver, Colorado market the last up-turn in real estate values lasted 17-years. Denver is not Austin, but they have many similarities in terms of commercial real estate investment which will, eventually, have an impact on the values, cap rates and cash flow of smaller rental properties. 

"All real estate is local," so what goes on in Southern California is unlikely to parallel the real estate market tin Austin. The dynamics driving value are different. For example, real estate investment capital is leaving the "gateway cities" (LA, SFO, NYC, etc) and moving to secondary cities (Austin, Nashville, Portland, Denver). The money is leaving those gateway cities because the big funds cannot generate the returns their fund prospectus requires. Why these cities, you may ask? Because that is where the businesses are going and taking their employees with them. They understand that the gateway cities are becoming unaffordable.

Within these secondary cities I mentioned within the central business district (CBD), the same thing is happening. Office space and housing  rents are increasing. The companies and thus the real estate investments are looking for more affordable locations.

In Denver, for example, the Class A office rents in the CBD are running at $50 PSF, while in a suburb like Aurora, or Lakewood, the rents are $20 PSF. The same is true for Class A apartment rents. There is a differential.  

I would study the Austin MSA's suburbs and identify where the new offices are being built. I would also look at which of these has the best mass transit, easiest access, and some type of amenities. Further, school quality os a critical factor. Once those are identified by snooping around (not via LoopNet or CoStar), you can begin to look at rental income, cap rates and cash flow. 

This strategy is working in Denver. Cap rates are being compressed and it does not appear that that process will subside. However, my crystal ball is perpetually cloudy, so I try not to predict. I just look at the fundamentals and often just trust my gut. 

@Kate J. A cool down is not the same as a recession it is far more likely that prices stagnate.  Austin still has room to grow outward but it has bad traffic, which will likely lead to higher prices in the prime areas.  It is one of the fastest growing major cities in the country.  It may not have been your intent but dismissing someone because of their location doesn't sit well.

@Aaron K. Sorry, not sure whom I dismissed. It wasnt my intension for sure. I just move into Austin myself, and I kind of desperate as I dont see an entry point. Chicago rental caps are way better, but I can't keep all of them as I need to be around the rental I invest in. I watched meet kevin on youtube, I like this guy and what he says. He said that he believes that the recession started in his area, in south cali. Is it really the case? I honestly dont know, I did not watch that part at all. I have crazy idea on investing in vacation rentals out of US. A friend of mine just got a hotel in Jamaica, she claims it will pay off in 3 year. But I would think it's too risky.
@Rodolfo Canon you are making good point. I know loopnet is not the place to look, but it was good for a passive research. Do you think there are many properties that are off MLS and websites? What would be the best way to find them? I have expierence with off market properties with up to 4 units per building, but I think I am ready to get multi. My main issue is my w2 dropped me into very competitive water of Texas. I was hoping that the price stabilize, but after talking with couple people, they did not confirm.

Kate:

I am not in the Austin market. Maybe some others can provide on-the-ground experience and advice. 

However, in Denver, we find deals through our network. Since you are new to the market, you are starting at zero with your network. But so what? You are there and just need to get to work. I would begin with contacting realtors who have listed the types of properties in the locations you are interested in and tell them what you are seeking. The beginning is a lot of grunt work, but building your network will eventually pay off. 

Regards,

Rodolfo Canon

Short answer- ALWAYS BE LOOKING FOR DEALS.... Buy if you find one that fits your plan

Mid-Long- There will be another recession. That is a fact. Austin will not see a major effect of the that in the housing market due to numerous reasons. The best deals in Austin are few and far in between. Look at the outlying cities for better deals. 

@Kate J. You can certainly buy at a 4 cap and get it up if there is a value add play in the deal.  However, just buying a turn key asset and not increasing its value does not sound like that is something that works for you. If your looking at an asset that doesn't have a lot of value add and is stabilized maybe look in your surrounding areas outside Austin to get a property near a 6-7cap. 

@Kate J. - Have you considered real estate other than residential in Austin? My thought would be that you could probably buy a smaller mini or maxi storage facility and self-manage it. Or if you had some serious cash you could invest it in something larger and hire a manager. The returns can be pretty consistent whether the market goes up or down. Also, even facilities with lower CAP rates (5%) can return reasonable cash on cash with leverage (8-9%). If I were in a market as tight as Austin, Southern Cali, Denver, etc., I would be looking for self-storage. If a door or two goes unrented, you're not dead in the water.

Also, other properties that I love in booming cities are maxi-storage or light industrial buildings that contractors or service providers can call home for their businesses.  Again, you probably want something with a few units at a minimum so that if one goes empty you can still cover the mortgage.  The good news is that these units can get rented for many years without anyone moving out and costs for rental turn is pretty much $0.  Maintenance depends on age of the facility (as with pretty much everything in RE).

There is a bit of competition in the mini storage segment but smaller mom and pops can be found for reasonable CAP rates if you are self managing. And competition is much lower.

Maxi storage are hard to find but surprisingly, the returns can be really good if you find the right properties.  And the beauty is the location is less of an issue for these types of properties so you can do some "dumpster diving" as I call it.  The properties can look ugly, but I would shy away from bad parts of town as you'll have break-ins frequently.  Plus, you have some built in protection as most established cities are tearing down industrial to put up housing so I think it's harder and hard to come by these types of properties.  

My final note:  I would stay away from both asset classes (self storage and light industrial) in less populated areas.  It's easy to build mini and maxi storage in smaller towns.  I would probably stay away from these asset classes unless you did your due diligence (need, cost of construction, future development, etc.) .  But....if you can buy in a smaller town for less than the price of construction, you naturally have some built in barriers of entry.  

Good luck!

@Kate J.

I live here in the Austin area, and I don't invest here.  However, there are some other regions of TX that still have some meat on the bone - relatively speaking.  My partners and I are primarily in the self storage space but will consider other income producing commercial.  PM me if you would like to discuss opportunities.