What is your ideal Buy & Hold deal in Austin, Texas?

Question

Hi - I'm a new investor and I’m trying to figure out what a good, hypothetical, Buy & Hold deal is in Austin to get cashflow. I'm struggling to see what I could realistically buy that's profitable (even if I hustled and found a low-priced, off-market deal).

I'm looking at Single-Family Homes, 3 bed, 2 bath. I'm estimating:
$1600 - $1800 for rent
180K - 220K all-in (which would include some combination of the purchase price + the rehab)
20% Down Payment, 3.5% interest over 30 years

Expenses:
2.2% Property Taxes
$100-$140 monthly Building & Hazard Insurance
5% Vacancy
5% Maintenance/Repairs
10% Capital Expenditures
(Would love to account for a 10% property mgmt expense but that makes it even more unprofitable)

Key Question: What is your ideal Buy & Hold deal in Austin (realistically) and how are you flexing your numbers?

Is there something I'm not accounting for (e.g. are you renting by the room to get more rent income, are there better price-to-rent ratios than what I've listed)? Are you primarily buying for appreciation, and foregoing cashflow as much as you can afford it because it's hard to come by? Is flipping or other RE strategies more common in Austin than Buy & Hold because cashflow is hard to find?

I've looked at a few Austin investor BP profiles with Buy & Hold investments listed, and I always have the same question - how is it getting cashflow?

Would appreciate any thoughts or insight.

Andrew W. · Answer

@Jonathan Rivette congrats on doing your research. I think your numbers are about right.

My tax rate has been 2.3% to 2.4% in Cedar Park / Leander and I am getting loans at 75% LTV, not 80%.

Example numbers from my deals:

Purchase $185k, 0 rehab, rent $1525, ARV ~$190k - Cedar Park

Purchase $183k, $20k rehab, rent $1600, ARV ~$230k - Cedar Park

Purchase $175k, $5k rehab, rent $1650, ARV ~$210k - Leander

I am buying in the suburbs to make the deals at least break even or slightly cash flow positive, and holding for appreciation. I find that self managing single family homes at this price point is pretty easy as long as you properly screen to get good stable tenants. After a few deals I am now buying off market from wholesalers so I am picking up some equity at time of purchase. This typically requires using cash or hard money to close in 1-2 weeks. I have found that Hard Money lenders will lend up to 70% of ARV which can be 85-90% of the purchase price if you find a good enough deal, so your cash to close can be ~$30k instead of the normal ~$50 to buy one of these the normal way.

If you have never done any deals I would recommend you start with househacking a 2-4 unit property or a house and renting the bedrooms. I would also recommend joining the Facebook group "Investor Underground" where wholesalers post tons of off market deals every day. You can start connecting with both wholesalers and hard money lenders, though I'm not sure they would work with you until you have done at least 1-2 deals.

Bryan Noth · Answer

@Jonathan Rivette your post title asks about an ideal buy and hold for investors in Austin.  This looks strikingly different from person to person.  Some try and squeeze cashflow, some force appreciation, some buy for appreciation.

If your focus is purely on the cashflow, using a standard model it is tight in the Austin area.  You can force cashflow with a larger downpayment, but we are not fooling anyone, your COC return drops as a result.  You can lower your Capex and maintenance budget with upfront rehab or replacements, but again, you just spend now instead of later.

The most effective model I have used is setting a cash reserve aside for the property. Put $5k aside for upcoming budget items to offset expenses down the road and I can comfortably run Capex at 7%, maintenance at 5%.  Vacancy is typically closer to 4%, and with good tenant placement and depending on the type of asset purchase, could average at 2%.  PM should be lower than 10% for the area.

I also think it is powerful to recall when you mention buy and hold to not forget the second component, holding.  Run your calculations with lower end growth projections for Austin.  Years 3-5 that property usually shines, even with conservative numbers.  When it comes to investment purchases in Austin, I do not buy for year one, I buy for the years to come.

Costin I. · Answer

@Jonathan Rivette

IMHO, I don’t think you can find deals in Austin that cashflow in reasonable terms. At least from the cashflow, passive income perspective, SFR long term rental (not talking about STR, house hacking, room renting, and other exotics, nor if you are willing to speculate on appreciation or your goal is 1031/nomad/escalator or other short term strategies).

Now, regarding your estimations, I don’t think you can build an approximate/average model. A variable or two outside of your range can throw the whole model out of whack or you can have the surprise that a more expensive property with a lower rent cashflows better just because the tax rate is smaller and it doesn’t have an HOA. With that in mind:

- The      rent is local. Same house in different locations will produce different      rent. A smaller older house closer to Austin downtown might bring higher      rent than a newer nicer house on the outskirts. A house within a great      school district will bring better tenants, lower vacancy than one in a      problem area. You have to run a Lease CMA on a case by case basis. The “1600-1800”      is a big range, that can be overpriced or underpriced.

- 180K-220K      is HOT territory – everything flies at this price range. You’ll find an      old house (~1980 or older), outdated, likely with problems, smallish      (under 1500sqft), in need of substantial rehab. If you are not a cash      buyer, you’ll have to fight in a bid war, with 10-20K over asking price. Anything      under 200K will be gone the day it hits the market – you’ll have to be      very, very fast with a decision and a very generous offer.

- 20%      DP is a good chunk, depending on your lender. Usually, for investment      properties, 25% is the norm for a good rate. The 3.5% helps a lot with the      cashflow, if you can get it. But it’s likely you’ll have to get north of      30% (likely in the 40%) to achieve positive cashflow. And when you put      30-40% DP, you Cash on Cash ROI will be in the 1% range – almost same as leaving      the money in the bank, not to mention other investments that promise substantial      better returns than that.

- The      taxes are also local and can vary quite a lot area by area. There are      neighborhoods that have 1.8% tax rate, next to 2.35%, next to 2.6, with      the newer ones 2.9-3.2%. You have to check the actual tax rate for a property,      can’t assume is 2.2%. You have to use the actual number, without exemptions      (current owner could have a series of exemptions, e.g the annual tax he      pays could be 3.5K, but if you buy the property, it can jump to 6+K next      year). You have to make sure there are no other taxes and fees – like MUD      fees.

- 100-140$      monthly for insurance sounds reasonable. I would even consider 100/m      reasonable. That’s 1200 insurance for a 200K house – I think is plenty.

- 5%      vacancy is optimistic. Vacancy is a cashflow killer, and unless you know      what you are doing, and are an expert at make-ready and turnovers in a      couple days, with nice properties in demand areas, your vacancy for SFR is      going to be > 8%. And that’s just in rent loss due to vacancy, not      including the make-ready expenses. I suggest you count 10% for the next      couple years, 8% for 3-5 years, maybe 6-8% once you stabilize the property,      get some more in your portfolio and get some experience under your belt.

- Maintenance/repairs      and capital expenditures depend on the state of property. I newer or      completely remodeled, you can go with 5% and 5%, but if the mechanicals      are old, roof is old, and you didn’t make a full remodel with long life      materials, I suggest to count 10% and 10%.

- And      generally speaking, for a variety of reasons, you should count 10% PM,      even if you plan on doing it yourself – after all, your time and effort      has value too.

It should be cashflow positive, ideally (for me) at least 100$ per door per month. If you can’t make it work with these numbers, maybe it’s not a good investment.

There are other reasons to invest in real estate, and several ways the investment might pay off, and depending on your goals and risk tolerance, it ranges from investment to speculation. So, you might find other opinions and strategies that would work from different perspectives.

As for your last question – how do you get cashflow – here are a couple alternatives:

- Find      yourself a distressed house/owner and buy it at 50% FMV (unlikely, but      possible). Apply the BRRR model. Due to low money in the deal, barely      cashflow becomes secondary. Or leave 35% in equity and you’ll likely cashflow      reasonably.

- Find      deals with owner financing or loan assumptions – rare, but possible – again,      because you take control of the asset with relatively low DP, it might      make sense as investment, despite low to none cashflow.

- Go      exotic – STR/AirBnb, corporate short term, student housing, specialty      housing, house hacking, etc…

Anyone else who tells you they cashflow with recent deals (acquired in the last 24 months), it is because:

- They      found the house and acquired it at extremely advantageous price (~50% ARV)

- They      have a huge amount in equity in the house (likely through DP), and their      CoC ROI is under 2%.

- They      mean something else as cashflow or simply don’t know how to properly calculate      cashflow (many consider rent minus mortgage only)

- They      acquired the rental several years back, not recent

- They      boast (I’m trying to be diplomatic here).

We can connect if you want more details, or to show you a tool I use to bring properties to an apple-to-apple comparison.

Ryan Kelly · Answer

I agree with @Jordan Moorhead and @Bryan Noth. Lots of ways to set goals in the market, but like Jordan, I do like to find properties that need more rehab and do that myself. You can find properties at a better price, fewer competitors, and better buy-and-hold options. Good luck!

Danny Webber · Answer

Cash flow is not terribly relevant in Austin. A break even cash flow deal with 7-10% annual appreciation and your principle reduction each month is a winning deal.

Neil Narayan · Answer

IMO you would either have to house hack or look in the outskirts of Austin

Jonathan Rivette · Answer

@Vik J. I know right lol

@Andrew Watson Thank
you! Your reply is super helpful. That's nice getting some validation regarding
the number ranges. Also the nuances you mentioned about Austin tax rate and LTV
is good to know. And I'll definitely check out the FB group!

@Spencer Keane Good to know!

Jonathan Rivette · Answer

@Bryan Noth That's
true, it varies by a person's goals. And that's good to get validation on the
low COC return. Your comment on holding for the years to come is a good one,
and I really like the idea on setting aside 5K of cash reserves up front. Thank
you!

Jordan Moorhead · Answer

@Jonathan Rivette my ideal investment is a multifamily property that needs a large rehab. I've found great deals by doing that and would love to pick up more!

Spencer Keane · Answer

@Jonathan Rivette if you can find places for that price point and rent amount I would say go for it, but it may be tough. Let me know if you find ones that meet that criteria as I would be interested too!

What is your ideal Buy & Hold deal in Austin, Texas?

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