Hi Mark, for me, I wouldn’t. I agree with Sylvia. We like Leander for investors who seek better ratios.

Getting further away would require building an entire new vendor list of plumbers, a/c people, etc. who service that area. Or hiring a property manager. The problem with $30K-$50K properties, in my opinion, is that the repair expenses represent a disproportionately high percentage of the rent. Swapping a water heater out for $900 turnkey is 3/4 of a month’s rent on a $1200 rental, but its 2x a month’s rent on a $30K home renting for $450. Same with everything else.

I’ve been contemplating the idea of the “perfect” or “optimal” rental property but I haven’t come up with the answer yet. My intuition tells me it’s a $1250/mo rental though, at least in Austin. High enough rent to cover expenses but low enough to be in the sweet spot for good quality renters. I shudder at the thought of a 4-plex renting for $450 per unit, with 8 commodes, 4 HVAC systems, 4 fridges and 4 dishwashers to maintain. Uggghhh!

Steve

Problem with the Central located 4-plexes is that the land values are so high the purchase price and ongoing property taxes kill any cash flow advantages.

Steve

We actually stay away from 4-plexes. The better “on paper” cash flow quickly evaporates due to high repair/maintenance costs and the fact that 4-plexes do not attract quality tenants.

I’ve written about this before:
http://crosslandteam.com/blog/2006/05/22/why-we-advise-against-buying-in-or-near-austin-4plex-neighborhoods/
and
http://crosslandteam.com/blog/2007/08/13/another-problem-with-investing-in-4-plexes-in-austin/

Steve

The flip side of these investor “barriers” to entry in normal markets like Austin that did not see massive price declines, foreclosures and REO inventory, is that as the current inventory gets absorbed as primary residences, and as new multi-family construction financing remains tight, that the rental market should firm quite nicely assuming net in-migration and job creation that most see for the Austin metro area.

A final point is the lack of investment alternatives for long term wealth building. The stock market provides a highly volatile, non-leveraged alternative where overt and hidden fees skim a large percentage of the average investor’s returns over time. Bonds? Well, 3-4% before taxes is a pretty slim return without any inflation protection. CD’s? rofl. Gold/Silver? You start getting pretty exotic and taking on holding costs, also fairly volatile in price over the short term. Pay down your mortgage? Maybe not a bad choice, but most now have 5% and under mortgages, so when you take out the tax advantage of the mortgage interest deduction, you are looking at 3.5% returns. If you have credit card or consumer debt above 7%, then that is a better alternative to pay down, but beyond that, someone will have to make the argument to me that investment real estate, prudently bought, financed and managed is not the best longer term choice for discretionary investment dollars.

As usually your comments add a lot of value and perspective to my articles. Thanks.

It does remain though, that someone with $20K laying around 12 years ago could purchase a positive cash flow property for $100K in Austin with 20% down on a 15 year loan.

Today, someone with $45K available to invest would have to buy a sub-$150K property with 30% and a 30 year loan to achieve the equivalent positive cash flow of 12 years ago. That means slower equity built-up, longer free-and-clear date, and still the higher repair costs.

The advantages of real estate investing have not changed, I agree. But the financial strength required to capitalize on those advantages has become greater, thus making real estate investing an option for fewer people than before.

Steve

First is cash flow. As an investor, I always want to buy a property with cash flow. If a property cash flows, then over any particular year or series of years where there is no appreciation in price or negative appreciation, my property still churns out a steady net cash return. Cash flow takes the first level of stress out of the property.

The second benefit is amortization. Your tenants pay down your mortgage over time, slowly building up your equity in the property. Today’s lower rates also help here, and to the extent you can afford a shorter term 15/20 year loan vs a 30 year loan, this will also boost your benefits from amortization. Personally, amortization is the most satisfying part of owning rental real estate. I am using other people’s money to build my equity.

Third is depreciation. Depreciation often shield the benefits from our first two attributes, cash flow and amortization from taxation in years in which they are earned. Depreciation can be doubly valuable for veteran investment real estate owners who use phantom losses from depreciation on newly acquired properties to offset taxable rental income from more mature properties which are throwing off larger amounts of cash flow and/or paying down larger chunks of principal on older mortgages.

Fourth is appreciation for capital gains. Like investing in stocks, long term appreciation is where real wealth building occurs with real estate. However, like stocks, in any particular year (or even decade in the most extreme cases) this attribute can be delayed or even be negative. Because of this, the ability to identify and own a property that cash flows, and to be able to see amortization at work over these flat to down cycles, becomes very important both financially and emotionally for the real estate investor. Capital gains can be very lumpy and come in spurts, but if one is modeling the value of a property based on a smooth progression of appreciation, then your spreadsheet can become a source of frustration.

Finding cash flow properties that you would want to own over the long haul is a challenge in today’s market. The biggest positive factors out there today are low financing rates and the looming lack of new housing supply on the near horizon, both from new homes and from new multifamily projects in the pipeline. With luck, these factors will provide a nice supply/demand balance towards increasing rents until the drivers of job and income growth return to the economy.