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Investing in Austin Real Estate

Why Investors Like Residential Real Estate

  1. You can get someone else (your tenant) to pay for your asset.
  2. You can leverage your purchase to multiply your return 3-5x (see definition and examples below).
  3. Tax deductions increase your after-tax cash flow. Deduct repairs, fees, interest, insurance, taxes, etc.
  4. Real estate has demonstrated stability. Shelter is a fundamental need.
  5. Residential property is the most liquid of all real estate investments. Homebuyers are everywhere.
  6. 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
$87,600 $125,700 $191,200 $197,000 6.25%
Source: Texas A&M Real Estate Research Center
Austin Real Estate Average Sales Price Chart

Note the increase in numbers of sales for 2005 on the following chart:

Austin Real Estate Residential Sales 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.

Austin Area Real Estate Market Statistics

Current Market Summary
May 2005

All Single Family Sales

+ 56% All Single Family Sales
All Active Single Family Listings
-  17% All Active Single Family Listings
Single Family Median Price
+ 0% Single Family Median Price
Single Family Pending Sales
- 3% Single Family Pending Sales
  Austin Area Real Estate Market Statistics

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.
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.
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.
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.
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.
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.

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