Bigger Pockets Ultimate Starter Guide, 2 noobie questions

22 Replies | Austin, Texas

1. The guide says shoot for 2% of purchase price for rents, assuming that wont fly in Austin ? Also says for flips use the 70% rule and ive been presented a few deals now that are not close to the 70% ARV after purchase price and repair estimates. Are these both still valid ?

2. Is it a viable way to start by buying a new primary residence and renting out my current house ? house hacking may not work for us due to need for at least 4 bedrooms.  

You you just missed the back to school summer rental season. since you live in a good suburb with good schools, that's going to be your best bet for renting out your existing home. It's gives you about 8 months to plan for option two. Option one ain't going to happen.

Option 1 in the Austin area is probably 1 out of every 10,000 deals. If anyone disagrees please provide proof. (not he said/she said)

It may be diff in other areas... no clue

Flips at 70% are also rare here now unless the numbers are inflated on resale/arv and the rehab estimate is low. Especially if you are buying from a wholesaler..... You can find 70's if you source the deal yourself much easier. 

The 2% "rule" is a terrible rule, and I can't believe it's actually in the BP guide. Those kinds of deals are few and far between, or they're in areas that would be considered war zones. Sure, anything is possible, but that doesn't mean it should be your rule of thumb. In Austin it's very difficult to achieve even the 1% rule, which is what many investors are looking for these days. You can find those type of deals in many other markets, though. If you want to find them here, you better be willing to hustle hard to find them.

Generally speaking, the more appreciation that investors are anticipating in a given market, the lower the rent to price ratio will be. Overall, investors are expecting a lot of appreciation in this market, based on high demand to live here, low unemployment, and a strong & diverse economy.

Originally posted by @James Freeman :

@Kris Wong so the key to Austin is appreciation more than cash flow positive unless you are doing a sizable down payment? Seems logical. Im trying to learn more every day, thanks for the insight.

Yes sir. Appreciation is the game here. It's an inherently more risky game than cash flow because one market slip wipes out 10 years of appreciation and it can take another 10 years to build it back. That's what happened in Austin back in the early 80's. Big housing boom in the 70's followed by the Savings and Loan crisis in the early 80's. People who bought at the top in 79-80 didn't recover their lost appreciation until the early 90's. 

@James Freeman I would shoot for the 1% rule right now as a rule of thumb but always analyze deals. I've seen 1% deals that don't cashflow.

There aren't a ton of 4 bed multi's but they're out there. You could also get a SFH with 4 bedrooms with and ADU to rent.

I agree with the other posters on this one. Ignore the 2% rule. In Austin, if you can break even after all expenses, you are doing pretty well on a buy and hold. I am a small SFR buy and hold investor in Austin and have not purchased anything in 12+ months. You can find some deals that will barely break even in specific suburbs, but rising interest rates have made that even more difficult (rents have not caught up to the higher interest rates yet) Renting out your current house and buying another to live in can make sense. The primary benefit is that you get to keep your "homestead" interest rate on the rental and get another "homestead" rate on the new property. The difference in rates is typically a significant 0.5-1.0%. I started out by renting my previous residence and it worked out well mainly because I had built up significant equity before I did it and rates were near 4.0% for primary residences at the time in 2013. This likely won't work if you are in one of the hot areas of town. Rents just won't keep up with taxes in those areas.

@James Freeman Since you need a 4 bedroom, I would recommend that you look into the possibility of building an ADU, Accessory Dwelling Unit, to help supplement your current income. The simplest way that I've personally noted to routinely make money in Austin is to maximize the square footage on your lot and an ADU should help you with this.

@James Freeman I'm not sure what neighborhood you live in, but a lot of the neighborhoods around the Austin area encourage them as a way to try to maintain some type of affordable housing. If it wasn't for ADU's or multifamily units, eventually every lot would have the largest SFH possible which means fewer units and higher prices. I don't have a builder that I would recommend, and I personally became frustrated enough with contractors that I started my own residential remodeling company. I recommend that you start at the Austin Zoning Map Address Search and then look up the zoning code for the city and your specific neighborhood. There are several people that perform consulting services to walk you through the process and while I'm not a zoning expert, I'd be glad to answer any questions you might have or at least point you in the right direction.

@James Freeman , BiggerPockets has been around for 14 years. Some of this information was more currently earlier in our existence. 

What is this Ultimate Starter Guide? Can you provide a link? It sounds like it needs to be updated.

@James Freeman I'm not very familiar with Round Rock and their zoning, but I don't see a SF-S listed so it might be under some other type of zoning restrictions, or you might need to talk to the HOA and review your deed restrictions. I did find a SF-2, and it doesn't even allow garage apartments to be a separate dwelling unit. You would have to petition for a change or play further outside the rules and regulations than I care to tread.

1. 2% is a great deal and nearly impossible in Austin and the surrounding cities. 1% is the rule of thumb for cash flow positive properties. Though, as others have mentioned, the 1% rule is no guarantee, but those deals are worth analyzing. Even 1% is hard to find in Austin though. .2-.5% is what you’re more likely to find. I’m finding that buyers need to put down 30%+ to cash flow or break even in this market.

2. You could rent out your current home, stay in your current home and use a HELOC to pull out your equity and reposition it, or sell your current home and reinvest the money elsewhere. There are currently 2 MF properties, with at least one unit that has 4 bedrooms, within 15 miles of Round Rock. So a multifamily house hack is doable. Another novel idea would be to buy a 3-4plex with at least 2x2bedroom units and you and your family occupy 2 of the units.

@Reggie Wright all over the board man... you can luck into a 70 but more than likely you will see 80-90's from wholesalers if not worse....

Best to source your own leads if able. If not, you have to deal with a wholesaler.... WORD OF CAUTION- DO NOT TRUST ANYTHING ANYONE TELLS YOU OR SHOWS YOU- VET EVERYTHING YOURSELF