What does your "1%" rule look like in the Austin Market?

[Jeremy VanDelinder]

Hey fellow-BPers,

I'm on my second flip in the Austin market (this one is Pflugerville/Round Rock) and own another rental in Florida, but my long term strategy is to get more buy-and-hold here in this (greater Austin) Market. For those of you doing buy and hold (esp. multi-family) around here what is your rule-of-thumb metric? I know a lot of the national books/podcasts/discussions use the 1% rule--that the monthly rental should be at least 1% of purchase price-- but that varies from market to market. It looks a little difficult to attain here in the metro. What do you use as a reasonable benchmark? .7%?  .8%? or do you just hold out for the rare 1% find?

[Alex G.]

With the prices where they are, these 1% deals are hard to find... But they are there. They are rarely in the MLS, you have to buy off the market. It might be a little easier to get that 1% in Pflugerville and Round rock since the prices are lower than in Austin.

In fact, about a month ago a local wholesaler offered a decent duplex in RR with a $185K price tag. It was vacant, but the potential for total rents was in the $2,000-2,100/mo range. That is your classic 1% rule purchase for cashflow buy'n'holders. I passed since on that one since I'm looking for buys with a lot of built-in equity or upside from remodeling. Plus for my taste, RR and Pflugerville aren't growing at the same rapid pace as Austin. 

It's a good bit harder to make the numbers work in the Austin proper but again, not impossible. Usually these are "sweat equity" or rather "sweat cash flow" deals, such as 2-4 unit buildings where owners haven't raised the rents in a long while. The units will need to be remodeled to catch up with the current rental demand from the upper level renters who want nicer units. 

Unfortunately, once they go into MLS, they are priced as if the owner has already remodeled them and raised the rents (which he didn't!) -- so you must look for off market deals and negotiate hard with the owners.

For example, I bought a duplex near downtown about a month ago for $225K. It's in a great location where there is a demand from the upper level tenants willing to pay a premium for a nicer, modern rental. It also has a bonus 3rd unit (a stuidio) that will generate extra rents to push up the numbers.  

I am rehabbing it now. Will probably end up spending close to $180K in remodeling, so I'll have about $400K in it when all said and done. But my projected rents are going to be $5K conservatively, and possibly even as high as $6K/month. Again, way better than 1% of the costs. The building will also increase in value up to $600-700K. 

As the market softens (and it will at some point), the owners of the buildings bought recently at less than 1% rents with 80% loans will feel the pinch. They will have to reach in their pockets to sustain the property. 

Whether you compromise and buy at less than 1% is a personal decision. Aggressive portfolio builders and risk takers might just decide to do that. But you've got to have reserves to be able to support the properties during the times when they don't pay for themself. For my personal risk and leverage tolerance - I just look for those better deals.

Happy bargain hunting!