Investing? Compare different parts of the Austin metro …

As you have seen in posts and articles here and elsewhere, strong demand and severe under-supply have driven Central Texas residential prices upward over the past few years.  In the early part of that period, residential rents largely kept up, but during the past two years, the supply of rental properties has gained ground.  That growth was mostly in the apartment market, but it has affected the ability of owners of other property types to increase their rents.  This chart shows the relative changes for single family homes across the Austin metropolitan area during the past ten years:

The change in the relationship between sale and lease prices has complicated opportunities and decisions for some investors.

Real estate investors may use any of several calculations in considering how much they might pay for a rental property.  The Gross Rent Multiplier is one of the simplest, and it’s easy to compare without making detailed assumptions about operating costs.  Using that measure, here is a ranking of some of the major market areas in the Austin metro:

One very simple rule of thumb some investors use is simply the ratio of gross rent to purchase price, and 1% used to work for many properties.  Notice in the far right-hand column of the table that none of those market areas produce that kind of income (on average) anymore.  (And they really haven’t for quite a while.)

The Gross Rent Multiplier is essentially an inverse look at that calculation:  it’s the purchase price of a property divided by annualized gross rents.  For GRM, lower is better.  For comparison, a property for which monthly rent is 1% of the purchase price would yield a GRM of 8.3.

(Note that in creating the table above, I first identified the average floorspace (square feet) in each market area for all executed leases reported our MLS system and then searched completed sales in the same market area within a relevant range around that floorspace.)

Does this mean that there are no attractive investment opportunities in North Austin or in Dripping Springs?  Absolutely not!  Nor do those calculations indicate that investment opportunities are everywhere in Elgin or Kyle or Southeast Austin.  You might find a property in Central West Austin that will produce a GRM of 0.8 or 0.9, and you can almost certainly find properties in Manor that would yield GRMs of 0.5 or less if purchased as priced.

There is a lot more to evaluating an investment than floorspace and gross rent and price — property condition, how it will be financed, property age, style, appearance and amenities of the surrounding area, likely price appreciation in the area over the investor’s planned holding period, specific location (busy corner or quiet cul de sac), demographics or crime statistics in the neighborhood, coming changes in and around the immediate area, access (major thoroughfares, public transportation, etc.), and more.  Every investor has his or her priorities, property management style, risk tolerance, and target market, and with experience comes to understand the financial trade-offs that may be required by a chosen strategy.

There are also many other financial tools available — Capitalization Rate, Return on Investment (ROI), Internal Rate of Return (IRR), Cash-on-Cash return, and more.  If you’re in the market for real estate investments, think carefully about what you want to accomplish, when you want to accomplish it, what you’re willing to do to accomplish it, and what ultimate return you need, short- and long-term.

The information I’ve provided here won’t guarantee making the right decision on any specific investment, but it might help to guide your search.  I hope it is helpful.