Austin 2018 - Neighborhoods, Short Term Rentals?

18 Replies | Austin, Texas

I'm considering investing in Austin in 2018. I'm relatively new to the market.  A few questions: 

1. What areas do you consider up-and-coming? 

2. What are your expectations on regulation of AirBNB and other short term rentals? 

3. Expectations on rental value increase? 

4. Would you go for new build or existing? 

Thanks for the help! 

Hey William,

1. In general, ifyou could stand on Congress Ave. (our Main St) and throw a rock 25 miles in any direction you will likely see, at least, a little bit of appreciation. But if you’re looking for reasonable prices, $250 or less, with room to appreciate, ina solid area with good schools and job opportunities... I would suggest looking into the Hutto and Round Rock areas just North of Austin. They are both doing A LOT to increase the amenities and traffic (the good money spending kind of traffic)in their cities. Hutto; & Round Rock;

2. To own and advertise a Short-Term Rental in the Austin area is notoriously difficult. I don't say that to discourage you but I would be very careful about building a business plan based on STR's within the city of Austin I will leave it at that as I do not own any STR's and would rather differ that question to BP members who currently have solid STR cash flow models within Austin.

3. Rental rates will likely appreciate with the market (though we are seeing a slowing in appreciation throughout Austin and the surrounding cities). However, if its cash flow your looking for with a decent (ROI 8%+) your best bet is to once again get outside of the city. A 30-minute drive North, South, or East will offer better opportunities.

4. Because cash flow is difficult to find in Austin and new builds are obviously more expensive, I'm going to have to recommend existing. Turnkey is great but you stand to make a better ROI if you are willing to buy discounted properties and add value

The local property tax rates are also a buzz kill that will cause what should be a decent ROI to yield a less than adequate return.

There are so many brand new luxury apartment units that have recently or are currently be built that it is impacting SFR returns and ability to raise rents to accompany rising values.

The best (passive) ROI I have seen in the last few years has been partnering with class B apartment syndication offerings. As a partner you simply bring your money to the deal and let the syndicator do the heavy lifting. They normally follow a 5 year investment plan and have delivered returns well above the initial placement prospectus.

I have a number of short term rentals in Austin, and it's been great. Feel free to message, if you have other specific questions.

1) It's all booming now. But for STR, I personally focus on something walkable. All mine are downtown or close. But if you had a deal a little out, perhaps the savings would be great enough.
Just run the numbers on the property vs the or airbnb estimate.

2) I've had zero issues. My understanding is that they stopped enforcing it when the lawsuits came in and the state of Texas explicitly said they'd side with STR owners.

3) The cashflow is great. Who can predict the future? But it's good enough I'm happy regardless.

4) That just depends. Has little effect on STR, in my opinion.

@Drew Macomber   Have you felt airdna's data is good?  I looked at the Zillow comps they were using for one of the nashville zip codes and it was about $200K under what real values were, which was driving up their return numbers 

@William Oshea Welcome to BP Will and congrats on looking into REI. I would suggest first using Google street view to tour the neighborhoods and get a feel for the neighborhoods, stores and culture of the areas. Then I would get a plane ticket and come visit personally and see it for yourself and get an in person feel of the area. Coming in person is the best thing I can recommend and while you are visiting I would suggest staying in an airbnb there yourself to see what they are like and give you ideas. That plane ticket and airbnb cost may seem like a waste but trust me it will save you tens if not hundreds of thousands in the future from avoiding a bad deal, neighborhood, company or person. I would also suggest scheduling a meeting with the company, or person you plan to help manage or look over your property. See what they are like in person and how they act. Since you are out of state I would be very careful and find someone you trust with your life and money before buying a property. I've seen way too many out of state investors get screwed because they didn't do their due diligence on the property or the person they trusted with their money. Good luck and trust your gut feeling it's always right!

@Noah Mencia So is purely for short term rental estimates - revenue, seasonality, etc... 
I find it to be very accurate in my market, but don't trust it in cities with very small numbers. Or if a zip code only has 3 data points I don't trust it.

But where I live (78701) and the nearby area, the data has been very accurate at predicting revenue and the months. For example it says November is the slowest, followed by Dec, followed by Jan, and that's been true down to the details projected. (For me I averaged $2.5k per property this winter... Then it says you print money March - Oct :-p). 

Zillow, I love but don't trust. My only real experience is Texas  where privacy regarding sales prevent zillow from showing actual sales numbers. However, any realtor can pull those accurate comps. Only comps I get from Zillow are current listing prices.

Originally posted by @Noah Mencia:

@Drew Macomber   Have you felt airdna's data is good?  I looked at the Zillow comps they were using for one of the nashville zip codes and it was about $200K under what real values were, which was driving up their return numbers 

Doing analysis by zip code in Nashville would be too broad. You need to be more neighborhood specific. I also would pay attention to our Metro Council vote slated for January 16th. They are likely going to kill any new investor/non-owner occupant permits for STR's.

@William Oshea the regulatory environment in Austin is very hostile to investor-owned Short Term Rental in Austin. The City stopped issuing STR TYPE 2 (investor) permits in 2016 and the City is going to revoke the existing 300 STR TYPE 2 permits in 2022.

The penalty, if you get caught just advertising an STR without a permit, is up to $2000/day.

The City was very lax about enforcement as @DrewMacomber mentioned during the Texas Public Policy Lawsuit, but that lawsuit is moving to appeals and since the judgment, the City is tripling down on enforcement. They have more than 800 open cases against STR hosts who are either operating without licenses or failing to remit taxes.

We actually got a code violation notice last year on our primary residence, and we had never even listed it as an STR (or any kind of rental for that matter). The owners next door used their primary as STR.

@Mary S. Do you have any source to show that Austin recently opened 800 cases? I'd love a link of this specific data point.

Also, what judgement are you referring to? I thought the first case is still awaiting a verdict (and the bill against cities banning STR has only been passed through one side of the house)? I'd love a link on that? Also, it was Texas Supreme Court... so what court did it appeal to?

Would love some info/links so I can stay up-to-date.

@Drew Macomber -  Is the Texas Public Policy Lawsuit (Zaatari et. al v. City of Austin, et al., vs City of Austin) still in litigation? I thought there was a request for summary judgment, and it was going to a higher court. 

Very unfortunate about SB 451 not making it out of committee. I sat in on and testified at the hearings and it was very depressing. At one point, after 4 hours of testimony, a commissioner asked someone who testified about her "STD". She corrected him saying it was an "STR" and he still kept calling it an "STD". Clearly, they weren't paying much attention. Maybe another bill will get introduced in 2020.

I think Kalid (works in the STR dept) is the one who mentioned the 800 cases. I believe him. I know a couple of people who have gotten letters recently from Code Enforcement letting them know if they don't procure permits they'd be fined up to $2,000/day. Under the new ordinance, it is crime just to advertise a house for short-term rental without an STR permit. They are also REALLY serious about the 6 person occupancy limit.

@Mary S. It sounds like the biggest risk ($2k/day) is if you operate without a permit. However are permits simply not being issued at this point so effectively if you want to do STR you are forced to risk this level of fine?

@William Oshea The city stopped issuing new STR 2 (investor permits) in 2016 and is revoking almost all of the 300 "grandfathered" permits in 2022. Technically, you can still get a permit for an STR 2 if the property is zoned commercial, there is not another STR within 1000 feet and the census tract does not more than 3% of the census tract already have STR permits. Almost all houses in Austin are zoned residential. If a house is for some reason is zoned commercial the highest and best use (almost certainly) is not STR. Currently, the regulatory environment in Austin for STRs is harsh and will get even worse if we get a new Mayor in the next election.

The $2000/day risk just for advertising a property seems like a pretty big deterrent, but maybe I'm just risk-averse. 

@Mary S. - Yeah, I heard that Zaatari v Austin was still awaiting a verdict. Word was that it seemed to favor Zaatari, but who knows. But I thought it was at the highest level.

In regards to cases in Austin, just seems odd, as I have a few places over 6 people, and all my places are not permitted (obviously, as they can't be), and I've never heard a word. 
But how would they? Airbnb doesn't give them my address.

I have gotten lots of people with no reviews ask for an address and I give an area, and they don't book.

Who knows. I wouldn't pay a $2,000 fine if they charged it, and add to the lawsuit if it persisted. 

@Zachary Barton . I am newish investor in Austin market and I found it very difficult to realize good cash flow. Do you have experience investing in Round Rock and Hutto, as I am planning to expand my rental portfolio?

@Drew Macomber , you are totally right. I bought a house in Cedar park that I was planning to turn into STR. I posted it at on mid January, when the rental market was dead. I netted $800. I made the same return on Jan. I could not take that situation anymore, and I turned that property to long term rental instead.

@William Oshea I've been investing in this market for a few years. I've looked into STR, but haven't gone that route yet. A couple of my flips have been in Austin proper but the cash flow on buy-and-hold is better out here in the suburbs. Let me know if there is a way I can help on the ground here.

@Hassan Oukacha the average home price in the greater Austin area makes cash flow hard to achieve unless you are able to purchase highly discounted properties, negotiate assumptions, or put down large down-payments. When you run the numbers for ROI (the net cash return vs. the investors liquid cash used to purchase the property) the numbers become more dismal. STR's allow for a higher return and could potentially make the purchase worthwhile but STR's require more management so that comes down to thepreferences of the investor.

At the end of the day there are better markets for cash flow, and I have my eye on a couple.

The opposite is true of the Flip Market. There are homes/lots in every neighborhood that are in need of renovations, complete overhauls, or new construction. With the potential to yield great returns to whatever investor can get the property at a good deal.

Ill PM you!