Buying home/future rental - Buy nice or buy cheap? (Austin area)

[Scott Pigman]

We're moving to the Austin area soon and we're trying to figure out whether or not to buy or rent and if we buy, what kind of house we should get. 

I've tried to ask this in a general way, but for anyone who knows the area, we're looking in Cedar Park or Round Rock, TX, more or less near the Lakeline mall.

If we buy, the options are:

1. Buy a nice house in a good neighborhood. In a year or so we could turn it into a rental but the returns aren't great (rent < 1% of purchase). Or we can continue to live there. 

2. Buy an okayish house in an okayish neighborhood for less money. The rents are also going to be lower, so it's not like it's going to be a better cash flowing property. We wouldn't want to stay there for much more than a year. The advantage is that we're spending less money today.

I'm wondering what any of you would do, and how you'd make your decision. For the record, I'm in my forties and we have a three year old. So I'm looking at this differently than I would have when I was a 23 year old bachelor.

My thinking is that the nice house will likely (no guarantees) appreciate more than the okay house, and so will the rents. The cheaper houses are cheaper for reasons that can't be fixed, like they're near a major expressway. So I think they're probably not going to perform as well. 

This isn't a pure investment question since we will be living there ourselves. Buying a house with the great cash flow that we wouldn't live in ourselves isn't an option. (Besides, there really isn't anything with "great" cash flow in the area). But still, we don't want to have negative cash flow if we decide to rent or be upside down if we decide to sell.