Negative cashflow in Austin
Investor · Austin · Member since 2020 · 2 posts · 0 votes
Hello BP,
I am a new multifamily investor in Austin and its suburbs real estate market. I am monitoring the market for few months and analyzing the properties. My strategy is to buy and hold and focusing more on appreciation. However, it's very hard to find the properties which even barely have positive cash flow (including maintenance, cap ex and vacancy). Is that only me who is in this boat? Now, I am having second thoughts to invest in areas like Killeen, San Antonio.
As an experienced investor/realtor, what would you recommend me? Thank you
When you look for appreciation, that is what you get, negative cash flow. For now.
Over time, rents will go up, but so will taxes. In Texas our houses are appraised every year that we own them, so the chance that our over 2% taxes will go up is pretty high. Hopefully rents will outpace taxes.
@John Teachout I have to disagree with you that houses only make good investments in cheap areas. It's just the opposite. Rents are too low on cheap houses and expenses as a percent of gross rents are too high. Better class assets make better investments.
@John Teachout I have to disagree with you that houses only make good investments in cheap areas. It's just the opposite. Rents are too low on cheap houses and expenses as a percent of gross rents are too high. Better class assets make better investments.
You're not in disagreement with me, I didn't say that. I think houses make great investments.
The statements "I think houses make great investments." or "Houses don't make good investments." are relative. I think @Henry Lazerow was trying to compare SFH to multi-family.
I personally am a small multi-family investor. That is my niche and I have a lot of confidence and experience with it. I began investing in 2003 in duplexes. You may not realize it now, but in 2003 very few people were buying duplexes in Austin. They sat on the market, they were run down properties and no one wanted them. You could buy them with as little as 3% down. Most investors buying them only put 3% and rents were relatively low. I began buying for CASH FLOW only; told to forget about appreciation.
It is not that SFHs are not a good investment. Location, prices and your goals will determine the TYPE property to invest. Multi-family should cash flow better than SFH. If cash flow is the goal then generally multi-family is better. In the Austin market, multi-family has been on a tear not only in rental increase but most definitely appreciation over the last 5 years! You could say that on SFH as well but multi-family has outpaced since 2008 because the downturn stopped the builders producing starter homes. This has left a big void in lower income housing. In the Austin MSA, first time home buyers are now looking to multi-family for reasons of affordability than desire. This has led the charge not only in rental rates but also appreciation of multi-family.
In areas of the country where housing is not booming, SFH probably is going to outpace in appreciation and may be acceptable from a cash flow prospect. But in areas like Austin over the last 5 years there is no question that multi-family has been the better choice for both appreciation and cashflow relative to SFH.
There are other reasons to invest in SFH over multi-family. Turnover, and management of tenants might be a major concern to an investor and thereby choose to prioritize that over maximizing profits. No problem, that is where your goals dictate choice.
Lastly discussion about investing in Killeen. I believe VA loans are holding the Killeen market back. Why? VA loans requires no money down, and a lot of GIs are buying when they probably shouldn't and when they get transferred or get financially stress they sell causing a slow down in appreciation. Rents are not as strong due to a lot of housing forced into the rental sector on military transfers. Also Fort Hoot is huge and has a large capacity for soldiers, but as force levels change there are wide swings at times as to the number of soldiers stationed there. Just recently the post commander opened on post housing to civilians as they can not fill their housing on post with active duty soldiers. That action and the abundance of the VA loans has kept me from investing in Killeen. Cheers.
Ok, I am starting to have second thoughts on my staunch must cash flow position. This weekend, I went driving with an investor from NYC, showing her around Austin, Pflugerville, Round Rock and Georgetown. What I confirmed that this market is ON FIRE not only in terms of price of property but also rental prices. I have 14 units in the MSA and ALL 14 are way below market in terms of rent.
Crazy but what I am confirming is that if you have a simple 2 bedroom 1 bath duplex 800 sq ft or more you should be in the neighborhood of $1300 to $1400. Mine are at $1100. In the past, I would pass on duplexes not cash flowing or just breaking even. But if your really determine to get in this market or expand, I think you will be fine if you're just breaking even. There is NO LET UP in this Austin market. The only thing that stops this momentum is if the NATION goes into a deep dive. If that happens it doesn't matter where you invest. If that were to happen, I still think Austin's market would be one of the first to recover.
Listen to this, it blows me away. In the southeast corner of Georgetown there is a small community (two streets) of new luxury duplexes under development. About 22 lots, none complete, a few slabs waiting to be poured and the others in various phases of completion. BUT NOT A ONE COMPLETE. Asking price $395k. Called the realtor marketing the development and ALL OF THEM ARE SOLD! THIS IS CRAZY! https://www.realtor.com/reales...
When stupid money starts going in, that's when I take a step back. This is not limited to your market. The government has made it super affordable to buy a house, probably more so than any point in recent history. The result is people looking to sell their houses at a premium (lots of buyers, low inventory) and people buying at premium prices because, why the heck not -- money is super cheap for borrowing.
The adage of "you make money when you buy" still holds true. If you can find a property that is distressed against current ARVs in the area, then it's a good selection. Cash flow is the name of the game (for me) but sensibility is too. No reason to buy a market priced multi-family for a high price that doesn't justify the cash flow.
My point in quoting what you said is to caution you, because you alluded to it yourself -- "The only thing that stops this momentum is if the NATION goes into a deep dive." If the market we are in now is being propped up artificially, then its not difficult to envision this happening. Remember that the stock market doesn't represent Joe and Jane America. That's why if you buy at a discount, invariably when things will fall -- which is almost a given, it's just a question of how bad and for how long -- did you put smart money in or stupid money in? You can survive on smart money, but people lose their shirts when its stupid.
@Joe P. I feel you. Look it is hard for me to change my perspective here in Austin. I too, am a cashflow guy. Lucky for me my portfolio is mature and full. However, I keep analyzing this market and although I wish I could turn back time and buy up more properties 5 years ago, I can't. Generally, you make money in real estate either by cash flow, appreciation or a combination of both. I have always invested for cash flow and appreciation was icing on the cake.
Times are changing in Austin. Cash flow is extremely hard to find now days. I understand where you are and your perspective but if you live in Austin and have no desire to invest far from home is Austin still a viable opportunity? I say yes, especially for those who want to house hack, but also those that choose to invest even if their investment is breaking even or has a slightly negative cashflow.
Under the guidelines of break even or slightly negative cashflow, I would not classify it as speculative investing. If you classify everyone who invest in the stock market as speculative then you might have a point. Generally to make money in the stock market the stocks have to go up in price. Investors evaluate the companies, the economy and the industry and then make their decision to invest. Some people may still call that speculation, others might call it investing. Investing has no guarantees, saving account do. Savers are not investors. However, there are speculators and their courage to invest might not be as much about logic as it is on hope.
Yes, one could find properties being offered in Austin at prices that, I too would agree, are speculative but others even though are not cash flow positive, have a strong chance they will become that soon and anticipate appreciation. I would call that investing vs speculative. Here is why. From an investors point of view, prices are high in Austin (speculative trend), however, what is causing the prices to increase (hope and speculation, I think not)? Austin is the fastest growing major city in the US. Population is rapidly increasing, job growth is rapidly increasing, relative to other major population centers property values in Texas are competitive and lastly as the Baby Boom Generation is on the door step of retirement many northern Boomers are flocking to warmer weather climates and to states that have relatively low taxation. Texas is getting more than it's fair share.
If you are an investor in real estate, factors for success is a strong local economy with a bright forecast, strong job growth, continued projection of local population increasing and a projected commodity shortage of the investment. Those factors all exist here in Austin. If you're local and can do your own property management, you have a distinct advantage over those who can't. I certainly understand why someone from PA would be cautious about investing in Austin when they can find good positive cash flow in their hometown. But those of us in Austin still have investing opportunities, just not as nice as it was before. Cheers.
Sub-markets is where you'll find better cash flow for now in Texas...just too much demand in places like Austin and Dallas. I only buy below market and never bet on appreciation as I think it's fools gold and far too speculative. But if you're buying off the MLS, you're still playing in the retail pond.