The Problem with East Austin Real Estate
I’m not sure what to think about East Austin. I still don’t recommend it to investors, though I know many investors have done well and are doing well there (selling mostly to other investors and brave young buyers), and I have friends who’ve invested there. One friend of mine purchased a 2 bedroom home a year ago for around $120K. He put $25K into it right away, fixing up the kitchen and bathroom and other cosmetic issues, and then rented it for only $650/mo to a couple of waitresses chasing cheap rent. Those numbers don’t work for me, but the tiny place is probably worth close to $200K now, so he’s thinking long term appreciation.
I myself have made at least a half dozen serious trips into East Austin the past year, previewing homes and making sure I’m not missing out on deals I should be recommending to my investors. Each time I do this, I see nothing that comes close to making sense for the type of investors we typically work with. Our typical Austin investor wants a clean newer home located in a popular, reasonably close-in suburban area with good schools that will attract quality renters. Basically, family neighborhoods with good schools where you see Moms pushing jogging strollers, kids riding bikes and Dad jogging with the dog. Think Circle C and Steiner Ranch for example.
Some of our investors are looking for rehab projects, but those have become nearly non-existent in Austin at prices that make the risk worthwhile. You have to seriously bird-dog for these deals now, and there are a lot of bird-doggers out there trying to beat you to the next deal. It ain’t like it was in the 1990’s when you could pick up fixers in Austin for a price with plenty of upside in the after-repair value. Everybody’s an investor now and the young couples and weekend warriors have skewed the economics of the rehab market by paying too much for beat up properties.
Sure, they live in it for a couple of years and do ok with the Capital Gains exclusion two years later after they’ve chipped away at the remodeling. Then they can take their tax-free nest-egg and pay too much for another fixer and do the same thing. But the discount on fixer homes is now often less than the cost of bringing it to full after-repair market value. A paradox that baffles me still.
In other words, I see houses that have an after-repair value of $450K, and need $100K in rehab to bring it to $450K value, and those homes sell as-is for $400K. So, to buy fix and flip something anymore, you almost have to live in it for two years (to allow appreciation to help out) or really know what you’re doing if you’re going to create a rehab that will pay for itself with some profit left over. There are ample fixers in East Austin and I frankly can’t believe the prices that people are willing to pay for them. For those of you succeeding in that niche, my hat’s off to you and you’re probably working too hard.
Back to East Austin – several issues have caused me to remain cautious about East Austin. 1) The schools are underperforming and that’s not going to change anytime soon, 2) Government Housing projects dot the area and will remain there forever probably, 3) Rent-to-Sales value ratios are worse than Austin in general and 4) most homes are in bad condition and/or over-priced for long-term rental investment purposes. From a more anecdotal perspective, much of East Austin remains very rough looking and I have yet to see Moms pushing jogging strollers in East Austin. I won’t go into the crime and prostitution, but that’s all still there too.
Now I have a new item to add to the list – The City of Austin is contemplating Land Trusts. The Austin Statesman published this story the other day (posted below also) explaining that the city wants to stem gentrification in East Austin by allowing people to sell the land under which their home rests, thereby unburdening those home owners from property taxes on said land (which they would no longer own) and keeping their home affordable so they can remain in the neighborhood. Where is the city going to get the money to subsidize the removal of these properties from the tax rolls? – from you and I. Here is a map of the area in which the City of Austin wants to do this.
Personally, I want to invest in areas where market forces can operate freely and equally on all real estate in that area. A rising tide should float all boats equally. Motivating people through government meddling to stay in rundown housing long after they might otherwise have cashed out interferes with the normal process of gentrification. I know, we think of gentrification as a bad thing, but the fact is it brings renewal, rejuvenation and investment to blighted areas.
Now, if Land Trusts are indeed put into place in Austin, I wonder how that might affect investors who are contemplating the risks involved in purchasing that very ugly beat up East Austin home with plans to invest $50K to $100K in it’s rehabilitation. What made little sense to me before now makes even less sense.
Without Land Trusts, part of the investment equation is the assumption that eventually most of the other beat up ugly homes will be bought and rehabbed, thus improving the aesthetics and desirability of the neighborhood, and eventually allowing the investors/risk takers to profit and make way for the more permanent residents who want to make the area their home.
If you’re one of the first to take a gamble on a rundown area, you’ll benefit down the road as others become brave enough to follow your lead. This is what has been happening in East Austin over the past few years in particular. This is what started happening off South Congress and South 1st Street about 10 years ago and now those areas are considered very desirable. Many assume this is what will happen in East Austin.
With Land Trusts, as I understand them, your rehabbed home might forever stand alone on a block of junkers if it so happens that those homeowners elect to take the Land Trust deal and don’t have to pay property taxes on the land value like you do. Your risk becomes greater and you may decide it’s not a risk worth taking. I know that’s what I would be wondering if I were contemplating investing in an area with Land Trusts in place.
You might also like to read our post about Austin Real Estate Investing – Then and Now
It will be interesting to see if the City of Austin follows through with this plan and what effects it will have on what is currently a very active and natural real estate renewal process in East Austin.
Below is the text from the Statesman article:
East Austin homestead-preservation district still isn’t a reality
City is stalling to avoid loss of tax base, housing advocates say.
By Sarah Coppola
Paula Simpson has lived all of her 50 years in East Austin. Her ancestors settled there, and many of her family members still call it home.
But Simpson has seen family and friends leave recently, too, driven away by high property taxes or big home resale offers as a development boom continues east of Interstate 35.
“All of a sudden, East Austin is the golden egg, and developers want a piece of it,” said Simpson, who runs a child care business from her home. “I want to make sure that I can stay here and my kids and grandkids can stay.”
Simpson is encouraged by a law that state Rep. Eddie Rodriguez, D-Austin, got passed last year to set up a homestead-preservation district in East Austin.
But city officials say the law, passed in May 2005, needs fine-tuning before it can be used to buffer East Austin homeowners from rising property taxes as intended.
The law’s aim is to build affordable housing in East Austin and help low-income homeowners there stay in their homes. It would plow some tax revenue from new, high-priced development back into affordable housing and allow existing homeowners to keep their homes but sell the land, which would reduce their property taxes and allow them to pay for repairs or other expenses.
The law could have taken effect in September 2005. But the Austin City Council must adopt the district first, which it hasn’t done.
City officials say the law has major flaws that must be fixed in the upcoming state legislative session, Rodriguez says he’s agreed to most of those changes.
Housing advocates say city officials are stalling because the law would require Austin to set aside a potentially big chunk of property tax revenue for affordable housing.
While the city waits, advocates warn, more residents are being displaced.
City officials “need to get over their fears and put this tool in place,” said Mark Rogers, who runs the Guadalupe Neighborhood Development Corporation, a nonprofit group that builds affordable homes and apartments in East Austin.
The rough boundaries of the district would be Manor Road, Airport Boulevard, Town Lake and Interstate 35.
The law would let the city set up an East Austin land trust. The city could either buy vacant land and build housing on it or buy the land beneath existing homes. A homeowner would retain ownership of the house and would have to pay taxes on only the home, not on the rising value of the land.
Homeowners who can’t afford to keep up or repair their homes might use the money from the land sale for that, Rodriguez said.
Eligible homeowners would be folks who earn a maximum of about $50,000 for a family of four and $35,000 for a single person, which is less than 70 percent of Austin’s median family income.
Housing that’s part of the land trust would remain affordable in perpetuity because the trust would mandate resale to low-income families.
“The problem right now is, you build an affordable home, and a family qualifies for it, and two years later they resell it to realize the value of the land. The land trust is a way of sustaining the affordability in the long term,” Rodriguez said.
Margo Weisz, executive director of the Austin nonprofit group PeopleFund, said other cities have created successful land trusts. The oldest began in Burlington, Vt., in 1984 and now contains 400 homes and 1,600 rental units.
An East Austin land trust “probably won’t happen in big, widespread pockets,” said John Henneberger of the Texas Low Income Housing Information Service. “There will be homeowners who won’t want to participate. I don’t think we’ll see the trust cover large portions of East Austin.”
The city could also add rental units to the trust. That’s exciting for projects such as the city’s redevelopment of Plaza Saltillo, Rogers said, because “dozens and dozens of units could be maintained at affordable rates.”
Money to finance the trust would come from the increased property tax revenue generated by East Austin’s development boom. The city would basically have to use that extra revenue to buy or build affordable housing for the trust instead of putting it into Austin’s general fund for basic city services.
If the preservation district began today and the city collected $10 million in East Austin property taxes this year and $15 million next year, it would have to use the difference, $5 million, to maintain the trust andbuild East Austin affordable housing.
“The very thing that is causing the problem and displacing people — a lot of new development — will be used as a funding mechanism to counteract the detrimental effects. That’s the stroke of genius in this bill,” Rogers said.
The city could also use money from the $55 million affordable-housing bond proposition that passed this month to add land and affordable homes to the trust.
Council Member Mike Martinez said the law should be amended so that the city has to contribute only some, not all, of the extra tax revenue. Rodriguez agrees that the percentage needs to be changed.
Another option would be to require Travis County or the Austin school district to add some of its increased tax revenue to the pot so the city won’t shoulder the whole burden, Martinez said.
The law also needs to be tweaked, Rodriguez said, to let the city use the money to pay for infrastructure, such as utility lines or sidewalks, near new affordable housing.
The City Council will adopt the district boundaries by the end of the year, Martinez said, so Rodriguez can go back to his colleagues and seek changes to the law.
“It would give him leverage to say, ‘Austin’s ready to do this; let’s make the amendments,’ ” Martinez said.
The law would also let the city set up a land bank, which would give Austin first dibs on parcels of vacant East Austin land that are about to be foreclosed. The city would have to build affordable housing on those parcels.
Martinez hopes to extend that right of first refusal to older homes, not just land, that come up for foreclosure, so the city can gain affordable housing units.
It remains to be seen whether the district will work. Other ideas to help low-income East Austinites gain or retain housing have languished. Former City Council Member Raul Alvarez, for example, championed a plan to help longtime East Austinites stay in their homes, but it never gained much steam.
Simpson said she likes the principles behind the bill but disagrees with some details.
“I’ve bought and paid for my home, and I don’t want someone else owning my land,” she said.