Newbie investor - should I go for this?

Question

hi everyone, I'm new to real estate investing and plan to invest in buy-and-hold options in Austin, TX. Since it is difficult to cash flow in Austin right now (unless you put a lot of cash down), I should consider an owner-occupied new build.

Hence the option below and I'd like to get some advice to see if it makes sense for a first-time investor:

- new build (complete in Aug 2017)

- fixed price ($223K); 3 BR/2.5 Baths, 1,350 sf

- part of a new estate area (Phase 1 has ~70 units) = higher property taxes @ 2.55% (versus average ~2.23% in Austin, TX)

- current SFR prices in the area for a 3 BR / 2 Bath ~$249K (source: Zillow estimates); this can fall as the new estate builds up (tentatively planned for 70 new builds for Phase 1)

- negative cash flow for 1st 7 years; primarily because of higher property taxes (can be offset as I plan to move in)

- using revenue and opex growth estimates (2-3%) over 10 years; cap rate = 3.5, Year 1 cash ROI= -5.5%, Year 1 Total ROI= 16%

Thanks in advance!

Joe Scaparra · Answer

I'm a little confused, is this a pure RE investment, house hacking, or is this just an owner occupy first home buy ever.   If you don't plan on having income from the purchase then should not really be considered an investment.  Cashing flow positive on a new build is hard to accomplish.

Adam Sanders · Answer

New construction is usually the most expensive option when it comes to purchasing an investment property unless you are developing yourself and have experience. I'm unclear how you are coming up with a 16% ROI in year one if it is going to take you 7 years to get positive cash flow....

Mike Reynolds · Answer

Have you looked at San Marcos or New Braunfels? It's appreciating fast but you can still get in cheaper than Austin. Only a short drive away too.

Jeff Wallenius · Answer

@Eugene Peh are you stuck on the Austin market or willing to go elsewhere to invest? I have much of the same scenarios here in the Portland market which has driven me to invest in the midwest and south where I can get some nice cash flow on rentals. As @Aaron Gordy mentioned, you can find some deals but it's going to mean hitting the streets and putting the time and work in. Best of luck, but know that there are other options to invest across the nation.

Aaron Gordy · Answer

@Eugene Peh Its possible to find cash flowing deals in Austin metro area. The most important thing is to be ready to pounce when a good one comes on the market because there are a bunch of folks trying for the same thing. As an investor one has to put down 20% generally. There are so many ways to work a deal though. For example, my partner and I bought a house recently for $160k. It needs about $10k make ready. And we will be renting it for $1500. The catch is that we were ready. I found the house and had to jump on it immediately.

It seems that you are thinking about owner occupying it. Have you thought about renting out the rooms and you keep the master room? I have a friend that bought a newer house and rented out the 3 of the 4 bedrooms and he lives for free.  One has to be clever.

As far as operating expenses go that is a tough one too. If its a new house then your op exp should be minimum. If its an older house then you will need reserves. In fact, its better to have reserves anyway just in case things hit the fan. The mantra is location location location. The second one imo is reserve reserve reserve.

Property taxes are a beast in Texas but hey, we don't have an income tax. Protest your taxes and that is a simple process here in Travis County,

I don't really like new homes as one doesn't know about the viability afterwards. We have so much ground movement in the city that I would not touch a new house development as its risky. How are you guaranteed that your house foundation and your neighbors houses won't crack in the 2nd year? And the builder/developer is long gone. I don't want to be holding the bag. My two cents. Two, what if the economy goes belly up after you have bought the property and the rest of the development isn't finished? You will have an eyesore for many years until someone thinks its profitable enough to finish the build out.

Yeah, forget Zillow. Its great for marketing for agents but the accuracy of Zestimates is laughable.

Negative cash flow = too much risk unless you know. For example, if you buy a rental property in zilker park area and its negative cash flowing by $100. Then that is a good one because its such a high demand area that within 1 year or so you will be able to easily ask for more rent. And in 10 years you have a cash flowing cow!!

Good luck!!

Brent Coombs · Answer

@Eugene Peh, I agree with Joe. This looks to be purely a LIFESTYLE choice rather than an investment. By the way: pay ZERO attention to "Zestimates". Only SOLD comps count.

And you shouldn't really put all your faith in "revenue and opex growth estimates" either.

Are you paying too much attention to the SELLER's marketing? More research needed!

Also, the smaller your deposit is, the less relevant ROI is to your overall risk. All the best...

Newbie investor - should I go for this?

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