Challenge to all Austin TX investors

[Costin I.]

I see a lot of discussions about investing in Austin, TX MSA, in a very hot market - currently with most properties selling 20%-25%+ over asking with nearly all contingencies waived, waiving inspections, cash or with very large down payments, and high earnest money, covering appraisal gap, quick close or close date that seller wants, without lease backs rent, etc. basically an absolute seller market.

I’m trying to understand the “investing” perspective of someone buying an “investment” property in these conditions.

I understand the speculation aspect, where one hopes that property will double and triple in price in the next 5-10-15 years, thus realizing a nice profit …but one has to carry said property for 5-10-15 years, with all the expenses involved. Property taxes raise annually with the property prices, same with insurance costs, and rents are not keeping up with the same pace. Buying an investment usually requires 25%+ down payment for financing – in this market, it's likely you'll have to put 30-40% DP just to break even, and that translates to CoC ROI under 1%.

So, what kind of financial modeling you use to justify this kind of appreciation play? How much money are you willing to park at under 1% interest (the DP), and how much money are you willing to lose yearly (the negative cashflow), in hopes those 3 lemons will align in 3/5/10/15 years? And what happens if that jackpot is not coming after 3-5-7 years – what is your exist strategy if the appreciation bet doesn’t go your way?

It is said “you make your money when you buy, not when you sell”. It is said “buy low and sell high”. I never heard of “buy high, hope to sell even higher”. Convince me how this strategy is wise investment, and not hopeful speculation. Teach me how to be an investor, not a speculator.

[Victor Steffen]

Hi @Costin I., crazy market we're in for sure. Round Rock, Pflugerville, Austin... All share a similar story right now. 

As of today, 684 homes sold in the last 30 days within the city of Austin. The average close price was 1.96% over list price. Not 25-30%. That would be banana town. Even if you were to look at sale data closer to the median +/- 100k the average sale price is 3.34% above list. 

Everybody has a different investment strategy. I personally own a small portfolio of cashflow heavy assets in rust belt towns. Net cash flow is ~8k per month. I also own several houses here in ATX all purchased within the last 3 years near the median sale price. All of them are cash flow positive because I use a rent by the room strategy, and most were purchased with less than 5% down. Strategy here being the rust belt (depreciating) assets and my income as a Realtor provide the cash stream, while high quality assets in hot metros like austin allow me to participate in aggressive appreciation on levered money.

Regarding "buying high and selling even higher"- this assumes that Austin prices are high, and they are high relative to previous years. Are they high relative to the budding value in tech/ manufacturing/ healthcare/ legislation/ education/ lifestyle? I personally don't think so. Though I'm thankful for the differing opinions, otherwise our markets would not exist. 

I'll continue to buy low, cash flow neutral, watch my equity grow by 15-20% per year, then sell high and turn this mythical "equity" into substantive returns.