Good luck with your journey of passing valuable information down to others who desperately need it.

Vlad Zakashansky

Based on our experience with the Arboretum area, I’m really interested in investing in property downtown. Again, the primary reason for this is location. I noticed on one of your charts you show the average rental amount for central Austin as .80+/sq ft. Unfortunately, I believe the Central Austin area is pretty large and thus covers a number of different neighborhoods. Do you have any numbers (rent price per square foot) near Clarksville and Tarrytown areas? With the traffic on MOPAC only getting worse as more people move to Austin, I see those two areas as being very attractive.

Somewhat related, what do you think about the development of Townhomes and/or Garden Homes in the Tarrytown area? Do you think it’s an advisable investment in Tarrytown.

Steve

The 620/71 area has terrible traffic problems and it’s also a very desireable area to live if you don’t mind the drive into Austin. Only 2 routes – north to 2222 or south to 620/71. If there is an accident or problems at either end and your trying to get home from Austin, to your kids game, to a meeting, etc., it’s too bad. Might as well pull into Starbuck and relax for an hour or two.

But it’s still a good area to be looking at, in my opinion.

Steve

I also have partnerships with two builders in the area. So if I can compete with new homes out here, what is the best price range, square footage, etc.? I am looking at trying to stay between $400,000 to $500,000 to the home buyer. I feel that 3000 to 3500 sq ft with better finish out is plenty of house. Also, better warranties and better dirt with a decent view seem to me to be desirable. Maybe 2000 to 2200 sq ft is plenty and we should be looking to turn at $325,000. I have no desire to be stupid, but I have no fear either.

With all that is going on at hwy 71 and 620, it seems inevitable that rates of appreciation in the area will increase. The mall, the lake, golf courses…….. This is vacation land meets city. I have spent much effort getting to know this area. Maybe I am nuts, but I am asking my partners to jump on this with me. Any comments appreciated.

It’s one thing to buy a house in good condition, good neighborhood and favorable setting with respect to transportation and amenities where the monthly payment on a 20% down 30 year fixed note is negative by $50 or $100 per month, but those condos in Florida and San Diego where the equivalent payment is 3 to 6 times market rental rates can’t stay up there forever.

In Austin, there are pockets that are out of whack in such an analysis. Some of them are sustainable because of special properties and limited supply means demand can support the prices, regardless of rental rates. Basically, these are neighborhoods in close in areas where rich people want to live.

But $200/sqft for those dinky little crackerboxes near North Loop and Lamar? You could justify such prices for that location if one could consolidate lots and build dense housing or primo quality houses with at least 1700 sq ft (being this close in will be very desirable when gasoline is $8/gallon, and believe me, it’s coming, and it will get here even faster via W’s skilled hand at diplomacy). But with current zoning restrictions and square footage limitations, economically viable use of these properties is verboten. Maybe people paying these prices know somebody on city council or the planning commission, but I don’t.

Just to follow through with the analogy to stocks, stocks do generate investment income. Companies generate profits, which are returned to investors in the form of dividends. It happens to be that many companies decide to reinvest their profits rather than return them to investors, in the hopes of growing to generate even more profit later. (not to mention the tax inefficiencies of dividends) When you buy a stock, you are generally investing in the revenue of a company, even if that isn’t directly returned in immediate cashflow. Perhaps you can argue that even this is still partially speculation, but it’s different from speculation in commodities, options or even austin housing.

Anyway – it’s a nice discussion. In the end, no matter how you choose to make your money, think important thing is that you know what you are getting into.

The “some of the same people …” comment relates to personal conversations I’ve had over the years with different people regarding real estate investing, and money in general. It’s a paradox I’ve noticed. High consumption spenders with little or no investment tend to be more critical and skeptical of real estate investing, and have more excuses for not doing it, than those of us that do invest in real estate.

Thanks for your comments.
Steve

* Even cash flow break-even properties result in a loss for tax purposes. The amount of these losses that may be deductable in a current year is capped for many investors at 25K or less. Buying negative cashflow property can cause an investor to have a reduced return from the tax savings avenue.
* The critera “property must cash flow under such-and-such financing assumption” can be useful as a *proxy* to criteria like “I must get a property for a below market price”.
* You can’t “eat” appreciation. You can only access it by selling or getting a loan. In order to continue investing (with your own money) you need to have cash available to invest.
* It is important as an investor to know how your investment will do under various likely scenarios – including under low or no appreciation scenarios. A property that does not cash flow will not fare as well under “worst case” scenarios as one that does.

PS: The paragraph begining with “Some of the same people who choose…” is not a rational argument. It’s like saying “Some people who disagree with me on this issue are also pedophiles. Would you listen to pedophiles?” On what do you base the claim that there is a correlation between the “cash flow is important” and “I like to buy lots of consumer junk” viewpoints?