Tips on how to buy a good investment property in Austin

I’m a bit of a numbers nerd and I thought others might be interested in a discussion regarding investment property valuations. I’m sure there are other schools of thought, but here are two main ways I evaluate investment property.

It’s similar to equities, you have stocks that you expect to go up in price (appreciation plays) and stocks that you buy for the dividend (cash flow).

Cash Flow:
When you buy a duplex monthly rents should give you cash flow every month hopefully above your fixed expenses (mortgage, taxes, insurance and maintenance).  The difference between your rents and your fixed costs is your cash flow. When you are looking for homes for sale in Barton Hills, multi-family properties are selling for slightly cash flow negative (-4 to -5%) but there is an excellent reason for this (see appreciation below).

In the table below, I assume a 25% down payment in my model (that’s what was required for a while).  I’ve found is that in the high demand neighborhoods in Austin properties tend to sell at about -5% cash flow based on a this down payment. As you move out from the high demand central Austin neighborhoods investment properties are selling at prices that generate positive cash flow numbers. I’ve seen some recently as high as 10-15% Cash flow positive.

Appreciation:
I am not entirely sure but I think the high demand neighborhoods are selling at negative cash flow because the assumption is that appreciation in the next year or so will compensate for the negative cash flow.  Of course, this assumption of appreciation may be driven by the desirability of the neighborhood. (or something like this).

Here is a very simple example:

  • $400,000 duplex for sale in Barton Hills
  • 25% down ($100K)
  • 4.875 30 year mortgage (I always use a 30 year mortgage to take advantage of inflation – more on that another time)
  • $2,000 in rents

Cash flow is negative 4.05%  (you will lose $4,051 for the year)

This number includes, mortgage, taxes and insurance.  For simplicity I’m not using maintenance costs here.

If you assume a reasonable appreciation rate of 3% a year (let’s pretend for a moment we don’t live in the Disney Land of real estate where values go up double digits in a year.J)

Year 1: Property goes up 3% in value. $12,000 – net profit including cash flow = $7,649

For this reason investment property in central Austin sometimes sells around cash flow negative. As you get out from the high demand areas in central Austin the appreciation is a greater unknown so the properties sell at prices that generate a positive cash flow in the short term.

 

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to Tips on how to buy a good investment property in Austin
  1. Alex
    May 3, 2014 | 10:57 pm

    Thanks for the informative breakdown, Jennifer. For a balance of moderate cash flow and medium/high appreciation, can you recommend a neighborhood? I’m specifically trying to compare SF homes in either 78745 (north of Stassney) or 78723 (specifically Windsor Park). Thanks!

  2. Jennifer Smith
    May 4, 2014 | 11:03 am

    Alex-
    Happy to discuss. Send me a number or email and we can chat.