Investing in Austin Real Estate
Why Investors Like Residential Real Estate
- You can get someone else (your tenant) to pay for your asset.
- You can leverage your purchase to multiply your return 3-5x (see definition and examples below).
- Tax deductions increase your after-tax cash flow. Deduct repairs, fees, interest, insurance, taxes, etc.
- Real estate has demonstrated stability. Shelter is a fundamental need.
- Residential property is the most liquid of all real estate investments. Homebuyers are everywhere.
- You can build equity with both debt reduction and appreciation.
Why Investors Like Austin
Austin uniformly
represents what is best in America. Beautiful and diverse scenery,
hills and lakes, comfortable weather, multicultural outlook,
enthusiastic business climate all help make Austin a fabulous place to live
and work. Many other lesser known factors contribute to Austin's value;
for example, did you know that that each year, the
film industry infuses millions of dollars into Austin's local economy?
See for yourself in the
following chart: Austin shines brightly enough that Austin area home values have
held up well through the stock market difficulties, tech industry layoffs, and
the aftermath of September 11th.
None of us can predict the
future or can accurately assess the effect of current economic conditions.
But you can use historic data as a tool to help determine where you might best
invest. Although I have no crystal ball to tell you how your investment
will fare here or anywhere else, Austin's long term real estate history shows
that Austin has been a fine place to own property. Currently, sales are up
significantly (see chart below) and Austin has more inventory than it has had in
years; the frenetic pace of sales has moderated enough to where some investors
are finding excellent buys. Following are some examples of recent years'
appreciation in the the Austin area:
Average Sales Prices
|
1990 |
1995 |
2000 |
2003 |
Avg. Annual
Appreciation |
|
$87,600 |
$125,700 |
$191,200 |
$197,000 |
6.25% |
Source: Texas A&M Real Estate Research
Center
Note the increase in numbers of sales for
2005 on the
following chart:
In 2001, after
ten years of strong appreciation, Austin's housing market so heavily favored
sellers that buyers felt they had to jump on the next acceptable property that
came on the market. Buyers worried they'd be priced out of the market.
Then from 2001 to 2003, as in many fine cities, Austin homesellers found
themselves confronted with four economic realities that affected home sales:
- The dotcom bust
- High tech layoffs
- Stock market bust
- Post 9/11 economics
One would have expected
numbers of sales to drop off. Yet, in Austin, sales remained remarkably
consistent. While numbers of listings went up, numbers of sales stayed
the same, easing pressure on buyers to buy the first home they saw. The
result is that upward pressure on prices disappeared, and prices remained almost
flat. Now sales are up, inventory is down,
Austin is back on track, and you can see evidence of new appreciation in the
following chart.
Source: Austin Board of REALTORS
National Business Experts Promote Austin as
Among the Best in the Nation
Nationally respected
professionals have each done their own research and conclude that
Austin is indeed a very fine place to live and to do business.
Texas - The
Nation's Leading Exporter
"The US Department of Commerce (headed up,
incidentally, by Texan Don Evans) crunched the 2002 numbers and found
that Texas has become the nation's leading exporter--surpassing
the other giants, New York and California. In 2002, the Lone Star State
accounted for a significant 13% of all exports.
For years we've told you how Texas has been
affected more and more by global affairs. Long gone are the days when
cotton and cattle drove our economy. But it's only been in recent years,
when Texas has become a major business and high tech center, that products
produced in Texas become heavily reliant on world markets."
This means that that Texas continues to
diversify its economy, which is good for Austin investors.
Austin Geography
Austin is located on
Interstate 35, deep in the heart of Texas. Exceptionally central to major Texas
cities, Austinites enjoy moderate drives to Houston (2 ½ hrs) Dallas & Fort
Worth (3 ½ hrs), and San Antonio (1 ½ hours).
First time visitors are
often pleasantly amazed with the unexpected variety in local terrain within 30
minute drives around town. Geographically, Austin is split vertically by the
Balcones escarpment, yielding lakes and cedar covered limestone hills to the west and flatter farmlands of black clay to the south and east. Austin is also
bisected horizontally by lovely Lake Austin, formed by the Colorado River. The
following neighborhood characterizations are generalizations, with some
semblance to the truth
. . .
Typical Austin Neighborhoods
 |
Central Austin is urban living:
University neighborhoods, cultural activities, eclectic shopping,
downtown lofts, hike and bike trails along Town Lake (Colorado River).
Downtown is healthy, bustling with business, new construction and reclamation of
old
neighborhoods. |
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|
 |
South Austin, affectionately known to include counterculture and artistic
types, is home to many famous and not-so-famous musicians. Austin's well
deserved reputation as the Live Music Capital of the World is evidenced
by the highest per capita number of live music venues, most of which are close
to downtown. |
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|
 |
North Austin, along with close neighbors
Cedar Park/Leander, Round Rock and Georgetown is more mainstream. North
Austin is home to Dell Computers and tech companies like IBM, and has a mixture
of more affordable homes and premium properties, depending on how far west and
how close homes are to the hill country. |
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|
 |
West Austin is situated at the edge of the Texas Hill Country features a
dramatic change in terrain. Many homes are situated on
the sides of steep limestone hills, enjoying stunning views. Property values are
high for Texas, but still bargains compared to other states. |
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|
 |
East
and
Southeast
Austin are the most affordable areas. For years, Austin's airport was located in
east Austin and stunted its growth. Now with a brand new airport southeast of
Austin, east Austin is being revitalized. |
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|
 |
Northwest
and
southwest Austin are more like west Austin, transitioning from the flat
farmland to
limestone hill country, with midrange property values. |
Investment Opportunities
Where is the best part
of Austin to invest? Inner city neighborhoods of fine old properties are good
for appreciation, suburban areas are better for cash flow. Suburban areas are
where one finds modern homes that have fewer maintenance problems.
Inner city properties
are fine for local investors who can easily oversee maintenance and
improvement issues.
Out-of-town investors are probably better off with much newer buildings,
which are mostly located in suburban neighborhoods.
Historically in Austin,
the short-term investor usually must hold a property at least two years
before recovering equity in a sale.
The long-term
investor (at least 8 years) does well to choose neighborhoods where growth
is prominent, where some infrastructure is still in development, and where rents
are high enough to support the sales price and cover a significant part of the
monthly payment.
Residential Real
Estate ROI Example
Leverage is multiplying your gain by investing a small amount of money in an
asset that is worth much more than the initial investment. Typical
investments in stock and bonds do not use leverage. For example:
Not using leverage:
Invest $30,000 in stocks that yield 5%. Your return is $1,500 (5% return
on $30,000).
Now Let's say you invest just
enough money in a rent house so that the rentals pay for overhead, and let's say
your property appreciates at, say 5% per year; then you receive a much greater
return than if you get 5% only on the amount invested. Illustrating
the concept of leverage at its simplest:
Using leverage: Invest $30,000 in a $150,000 property that appreciates at 5%. The
return is $7,500 (5% of $150,000). This is equivalent to a 25%
return
on the $30,000 investment.
That's the leverage concept.
The actual return is less when considering operational and sales expenses;
however, return can be quite a bit more when appreciation is higher. And
holding property for several years can produce astounding results due to
compounding appreciation.
Tax savings are achieved by writing off expenses and depreciation. For
example, say you have a $150,000 property you bought with 20% down and a
$120,000 mortgage. The following figures are a greatly simplified
estimates used for illustration purposes only, are subject to change, and are
intended only to give you a glimpse of the possibilities. Please consult
an accountant for accurate tax advice.
|
Yearly Interest |
 |
$ 7,800 |
|
Yearly Insurance |
|
$
650 |
|
Yearly Taxes |
|
$ 3,765 |
|
Yearly Management fees |
|
$ 936 |
|
Rental charges |
|
$ 780 |
|
Depreciation |
|
$ 4,364 (paper loss) |
|
Total annual write-offs |
|
$18,295 ($13,931 actual losses) |
|
Rental income (11 months) |
|
$14,300 |
|
IRS sees a loss |
|
$ 3,995 |
|
Gain before appreciation |
|
$ 369 |
|
After tax cash flow |
|
$ 1,569 (not including appreciation!) |
What does this mean to you
tax wise? It means that you could afford to lose $1,569 and still have a
break even cash flow after taxes. It also means that although you may have
made money, IRS sees it as a loss, reducing your taxes. So the money you
would normally spend to pay taxes actually helps pay for your asset.
Note that the rental income
with one month of vacancy is $369 greater than the expenses, pretty much a break
even cash flow before taxes. A wonderful benefit comes after tax: Because
IRS allows you to depreciate the property, your after-tax cash flow is a
negative $3,995, a net loss that reduces your income tax. The example does
not take into account repairs, which you need to figure in; the good news is
that they can be minimal on new properties.
Are you in the 30% tax
bracket? If so, for every additional dollar or thousand dollars you make, 1/3
goes to IRS. Every additional $4,000 you make, $1,200 goes to IRS.
But if you have a net loss of $4,000 IRS looks at it as if you have $4,000 less
income. This would mean a tax savings of $1,200. So if you own more
properties, you could save thousands in taxes, the properties could pay for
themselves, and you could get appreciation on multiple properties instead of
just one. |
