New Austin Landloard - What to do now?

Question

My wife and I got married and move to the Austin suburbs back in 2017. Right away she started pressuring me to buy my first house, so we drove out to Leander and picked up a new build for $230,000. It was the FIRST house in a new master planned community nearby the Leander transit oriented development. That is the Austin metro rail.

She sold her former home (purchased in 2014) soon after we moved in and pocketed $200,000 in cash.

So in July 2020 we decided to use that money and become landlords. We built a 2nd home in the same area. The 2nd home is in the same master planned community and cost us just $314,000.

We have been shocked at the rapid price increases in our neighborhood.

House #1 = 1700sf

Contract price in 2017 = $230,000

Builder base price in 2021 = $451,990

House #2 = 2800sf

Contract price in 2020 = $314,000

Builder base price in 2021 = $489,990

We currently have house #1 rented below market at $1800/month and believe the actual market rate is $1900. Our estimate is based on other professionally managed rentals in the neighborhood.

My question is really what now? My income is kinda low (75k year) for Austin, so more mortgage debt is out of the question for at least two years. I need to get my career back on track first.

If the 1st property is actually worth $451,990 and it only rents for $1900 then we aren’t making much return on our cash. It’s completely paid off and that’s a lot of cash for a middle class family. The 2nd house has a $300,000 mortgage that we could payoff with those funds. However, the wife and I are 100% in agreement that we want rental property.

Thoughts and advice please....

Blaine Alger · Answer

Congrats on getting in early. I wish I could afford something in Austin.

I don't know a ton about the area besides the market is crazy hot/competitive and some are saying it is what San Francisco was 25 years ago. If yall want to continue investing in that area, I don't see any other options besides going after  more creative deals (pre foreclosures, tax auctions, etc.) and really putting in the hustle.

If i were in yall shoes, I would look into getting a HELOC on the property that is paid off and then using that cash to invest in the surrounding areas ( an hour or so radius from where yall are). The competition from Austin will likely still be in those areas but I think this move would drastically improve your chances of finding the right deal.

I hoped that provided you a little bit of insight.

-BA

Mike B. · Answer

@David Peskind @Blaine Alger

Thanks for the feedback. My pan is to just work on my W-2 career for now, learn more about being a landlord, and get ready to buy another house in a couple of years.

Our goal is humble. We really just want enough cash flow so that we never get taxed out of the Austin market. Also, we want to retire someday and when we die it would be nice to leave assets for our kids. I think 3 properties would accomplish our goals.

The wife and I both come from poverty. To think we built about $650,000 in equity since 2014 blows my mind.

Marian Smith · Answer

@Mike B.  You could sell no capital gains tax if you lived there 2 of last 5 years.  You didn't mention your retirement assets.  You are young and the stock market has a much better chance of good returns vs a paid off house.  Leverage is the power behind real estate gains.  Compounding and time for stocks.  I would consider selling if you need to beef up your retirement savings.  Put a chunk in the stock market and totally forget it.  Buy a cheaper house to rent and leverage.  You still won't have a good return but you took money off the table and diversified. IMO.

Joshua Noth · Answer

I think that @Blaine Alger has the right idea - a HELOC on that first property could give you some options for your next investment.  Moreover, he's spot on with moving out a little further from where you are, or at least looking around.  As I'm sure you've seen, and as literally indicated by the impressive appreciation of your homes, Leander and those surrounding suburbs are quite hot.  Areas like Jarrell, Liberty Hill, etc. might be options as well that aren't *AS* competitive as others.

Dan Hunter · Answer

@Mike B.

I’d probably do a cash out refi on the first property. HELOC is hard to get for a rental property, so most likely your best bet is cash out refi. Take out what you can, but make sure your rental is still cash flowing. Use that to invest in 1 or 2 more rental properties.

David Peskind · Answer

I agree with Blaine here, getting a HELOC on the paid off property seems like the best opportunity for you. Otherwise, keep on track and get your finances in order. No need to sprint into anything that doesn't make sense financially. Keep cash flowing and build up your reserves and the deals will come.

Mike B. · Answer

@Marian Smith I love all the feedback.

You are right. For now, I'm going to focus on becoming a professional landlord and do well with the 1st rental house. I want to be sure we are running the 1st house like a business and build some experience. The most important thing is we have taken that first step and we are learning.

Marian Smith · Answer

@Mike B.  You did it the way I see as the most successful.  Buy a modest sized rentable house financed as o/o.  Convert to rental and move into a new/better place.  If you are determined to stay in the re market then it doesn't really matter which of your home or your rental is paid off, as long as one is safe/low stress for your income.  You never want to be one of those names on three separate properties at the courthouse steps auction.  Seen that.  Steve Crossland is a long time Austin property manager, investor and was a blogger and outside of Austin he always recommended nw and Leander for investing.  I personally think Leander is way out there but it is all new, growing, has a train line and close to the lakes, I guess.  I like areas close to big employers but my tenants are never what I expect and now with remote work no telling.  Congrats on your astute purchases...and marital choice.

Mike B. · Answer

@Marian Smith Our retirement savings should be good enough. We plan for rental property income to supplement our normal retirement and then just want to leave a nice inheritance to our kids. Based on the comments to this post, I think our original plan is probably the best path forward for my family. Work to increase w-2 income and then buy another rental in either the liberty hill, Georgetown, or Leander areas.

Ideally, I want to avoid a cash-out refinance. It's nice to have the cash flow and I'm not really comfortable with multiple mortgages. I'd rather take my time and do this slowly.

Mike B. · Answer

@Herly C. Normally, I make the best decisions when I listen to my wife. ;-)

New Austin Landloard - What to do now?

Most Popular Reply