What does your "1%" rule look like in the Austin Market?
Real Estate Coach · Round Rock, TX · Member since 2015 · 431 posts · 235 votes
Hey fellow-BPers,
I'm on my second flip in the Austin market (this one is Pflugerville/Round Rock) and own another rental in Florida, but my long term strategy is to get more buy-and-hold here in this (greater Austin) Market. For those of you doing buy and hold (esp. multi-family) around here what is your rule-of-thumb metric? I know a lot of the national books/podcasts/discussions use the 1% rule--that the monthly rental should be at least 1% of purchase price-- but that varies from market to market. It looks a little difficult to attain here in the metro. What do you use as a reasonable benchmark? .7%? .8%? or do you just hold out for the rare 1% find?
With the prices where they are, these 1% deals are hard to find... But they are there. They are rarely in the MLS, you have to buy off the market. It might be a little easier to get that 1% in Pflugerville and Round rock since the prices are lower than in Austin.
In fact, about a month ago a local wholesaler offered a decent duplex in RR with a $185K price tag. It was vacant, but the potential for total rents was in the $2,000-2,100/mo range. That is your classic 1% rule purchase for cashflow buy'n'holders. I passed since on that one since I'm looking for buys with a lot of built-in equity or upside from remodeling. Plus for my taste, RR and Pflugerville aren't growing at the same rapid pace as Austin.
It's a good bit harder to make the numbers work in the Austin proper but again, not impossible. Usually these are "sweat equity" or rather "sweat cash flow" deals, such as 2-4 unit buildings where owners haven't raised the rents in a long while. The units will need to be remodeled to catch up with the current rental demand from the upper level renters who want nicer units.
Unfortunately, once they go into MLS, they are priced as if the owner has already remodeled them and raised the rents (which he didn't!) -- so you must look for off market deals and negotiate hard with the owners.
For example, I bought a duplex near downtown about a month ago for $225K. It's in a great location where there is a demand from the upper level tenants willing to pay a premium for a nicer, modern rental. It also has a bonus 3rd unit (a stuidio) that will generate extra rents to push up the numbers.
I am rehabbing it now. Will probably end up spending close to $180K in remodeling, so I'll have about $400K in it when all said and done. But my projected rents are going to be $5K conservatively, and possibly even as high as $6K/month. Again, way better than 1% of the costs. The building will also increase in value up to $600-700K.
As the market softens (and it will at some point), the owners of the buildings bought recently at less than 1% rents with 80% loans will feel the pinch. They will have to reach in their pockets to sustain the property.
Whether you compromise and buy at less than 1% is a personal decision. Aggressive portfolio builders and risk takers might just decide to do that. But you've got to have reserves to be able to support the properties during the times when they don't pay for themself. For my personal risk and leverage tolerance - I just look for those better deals.
Happy bargain hunting!
With the prices where they are, these 1% deals are hard to find... But they are there. They are rarely in the MLS, you have to buy off the market. It might be a little easier to get that 1% in Pflugerville and Round rock since the prices are lower than in Austin.
In fact, about a month ago a local wholesaler offered a decent duplex in RR with a $185K price tag. It was vacant, but the potential for total rents was in the $2,000-2,100/mo range. That is your classic 1% rule purchase for cashflow buy'n'holders. I passed since on that one since I'm looking for buys with a lot of built-in equity or upside from remodeling. Plus for my taste, RR and Pflugerville aren't growing at the same rapid pace as Austin.
It's a good bit harder to make the numbers work in the Austin proper but again, not impossible. Usually these are "sweat equity" or rather "sweat cash flow" deals, such as 2-4 unit buildings where owners haven't raised the rents in a long while. The units will need to be remodeled to catch up with the current rental demand from the upper level renters who want nicer units.
Unfortunately, once they go into MLS, they are priced as if the owner has already remodeled them and raised the rents (which he didn't!) -- so you must look for off market deals and negotiate hard with the owners.
For example, I bought a duplex near downtown about a month ago for $225K. It's in a great location where there is a demand from the upper level tenants willing to pay a premium for a nicer, modern rental. It also has a bonus 3rd unit (a stuidio) that will generate extra rents to push up the numbers.
I am rehabbing it now. Will probably end up spending close to $180K in remodeling, so I'll have about $400K in it when all said and done. But my projected rents are going to be $5K conservatively, and possibly even as high as $6K/month. Again, way better than 1% of the costs. The building will also increase in value up to $600-700K.
As the market softens (and it will at some point), the owners of the buildings bought recently at less than 1% rents with 80% loans will feel the pinch. They will have to reach in their pockets to sustain the property.
Whether you compromise and buy at less than 1% is a personal decision. Aggressive portfolio builders and risk takers might just decide to do that. But you've got to have reserves to be able to support the properties during the times when they don't pay for themself. For my personal risk and leverage tolerance - I just look for those better deals.
Happy bargain hunting!
Hey Jeremy.
I wholeheartedly agree with Alex. 1% deals are extremely difficult to find here in Austin. A good wholesaler is really going to be your best option, and even then, hitting that mark can still be a difficult task. Even if you get something deeply discounted, you'll still need to factor in a rehab budget.
Appreciation is just outpacing the rental market. Your single family residential sweet spot is really going to be the outer suburbs such as Round Rock, Cedar Park or Georgetown. The rental market in these areas are really solid and they have working class people moving there every day.
Great input. Thanks. This is encouraging that I'm looking at the right strategy. Both of my flips have come through a wholesaler. Rarely do I see things on MLS that I like the numbers. Also, I live in Round Rock and am focusing more on deals up this direction.
Hey guys, I have something I'm about to make an offer on. The duplex will sell for $215,000. It is currently rented and rents will be going up to $2150/month ($1075/side) in January. There is a single meter, so the water bill is currently an expense, but the current owner is looking how much it will cost to put in a second meter to pass the bill onto the renters. If interested in picking this up, PM me.
@Jeremy VanDelinder, I'm not too familiar with Austin, but it looks like there are 3/2 SFRs East of I-35 around William Cannon Dr. on the MLS for ~$150k. Those might be able to meet the 1% rule, especially if there is some negotiating room on the sales price.
Honestly, with the way values have climbed in Austin, this area is much better suited to buy and flip than long term holding. Once the values cool off a little bit, and they likely will, then the buy and hold tactics will again be profitable.
Just my 2 cents.
I have to agree with @Russell Cavin on this one, even though every ounce of my investment being says buy and hold is the way to go. I've been buying up smaller multifamily units in Austin for the last couple years (closer to the 2% rule that they used to talk about, but that's another story) but if I'd just bought single-family flips I could have made significantly more over the same period. The market seems to be sustaining relatively well, although not at the breakneck pace of 2011-2015, so I would suggest you stick with your flip strategy to build up reserves for when (if?) the downturn comes.
I see lots of talk about RR/Georgetown and up north, but nothing about Buda/Kyle. Are these being avoided for any reason in particular?
@Preston Rhone I can't speak for others, but I for one am looking up north because that's where I live and would like for my properties to be within a 20-30 circle from my house.
I personally think Kyle and Buda are good places to look as well @Preston Rhone and have looked there personally for buy and holds but not purchased anything (they have come up in price pretty substantially since I was looking about a year ago) but still cheap compared to Austin.
@Jeremy VanDelinder I too look North primarily; Cedar Park mostly but have started looking in PF/RR because I live in NW Hills in Austin. CP has done well for me as that is currently where my investment property is (but those home prices are going up up up as well so it's getting harder to find something that meets the 1% rule).
I bought a duplex back in 2015 that I found on the MLS that had been flipped, it was completely empty no tenants. It had new everything from top to bottom. It was on the east side of Austin in the MLK area, which is a hot area. I bought it for $345K with 5% down, I did an FHA owner occupy. It currently has one side renting for $1800 and the other side for $2000, giving me a combined $3800. This property is meeting the 1% rule.
My mortage is $2300
Property is a 3bd 2.5 ba 1300sq. ft. per side.