Over the past several years, Austin remained a target for real estate investors, even as “bargains” dominated many other metro markets around the country. Interest remains high because the Austin area continues to demonstrate economic vitality and remains attractive, personally and professionally, for employers and employees. As you have seen reported here and in many other sources, there is a shortage of housing in Austin that is unlikely to be resolved soon.
In a previous post (Austin-area Building Permits and New Construction) I noted that new construction plans and dollars are virtually all focused on single family units and larger multifamily projects (i.e., apartments and condominiums). Very few 2 to 4 family properties have been built in the area since the mid-1980s. That existing stock remains attractive to some investors, but others are concentrating on single family homes that offer acceptable cash flow and the opportunity for value appreciation.
If you’re in the market for investment properties in Austin/Central Texas, where should you concentrate? One approach is to go where most of the leasing activity is already happening. With that in mine, here is a quick look at the 20 MLS areas where the most new leases were signed in the past year:
There are a number of ways to compare investment opportunities. For the purposes of this post, I used one of the simplest: Gross Rent Multiplier. This measure requires the fewest assumptions about operating expenses, etc., but provides a good, basic yardstick to consider relative opportunities from one area to another (or to compare specific neighborhoods or properties, for some investors). The list above is ranked so serve as a sort of legend for the graph below:
As the inset on that chart indicates, GRM is simply the ratio of purchase price to annualized gross rents. Since a large number of properties are involved in most of these areas I worked with average rental rates and sale prices. The details of particular properties or neighborhoods may vary. At this level, the tool is a coarse filter that may lead the way to further analysis.
Since the properties leased over the past year are generally not the ones that sold recently, I used a 12-month sample of leasing data but only a 90-day sample of sales data so that the sales prices best reflect the current market. Note that the mix of property types in some areas distort the GRM calculation, so it will be important to look at least one layer deeper. For example, a large portion of rental units in an area like DT (Downtown) are condominiums, and monthly association fees are not reflected directly in a comparison of purchase price to monthly rent. On the other hand, there areas 4 and UT include many properties for which lease listings show square feet data from tax records even though there are 2 or more dwelling units in the structures. You can see an indication of that in the supporting data by looking at the number of bedrooms in comparably sized lease units vs. sold properties.
There are certainly other, more sophisticated tools for comparing investment alternatives. GRM is a crude instrument, but one way to begin paring down a very large amount of market data. Make sure your investment objectives are clear, then narrow your search and match more sophisticated financial tools to your needs. I hope this top-level view is a useful start.