I previewed some real estate listings today that I wouldn’t own for free. These were condos in SE Austin priced in the $30Ks range. I’ve seen these listings online and I know the area, but curiosity finally got the best of me so I went and had a look to see just how bad a listing has to be to be priced in the $30Ks.
I don’t like condos in the first place. Yes, condos have their place in the spectrum of real estate product, but I don’t like owning or managing units with shared walls. I’m especially averse to not having control over water leaks from above or the sides. If a tenant calls and reports a leak coming from the ceiling in a single family home, I make 1 phone call to my roofer or HVAC guy, depending on the type of leak, and the problem is solved.
With a condo leak, I have to deal with the HOA and/or find out who owns the unit above and hope they make the proper and permanent fix to the problem. I don’t like that scenario because my action choices don’t have defined outcomes. I have to rely on someone else to cooperate in a competent way. There are also the issues and disputes with neighbors over parking and noise, neither of which come about with houses.
Nonetheless, how bad could it be that I would say “no thanks” even if (hypothetically) someone offered one of these condo units to me for a purchase price of zero? One word. Exposure. Exposure to risk. I don’t like certain types of risk.
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October saw a huge 31% increase in the number of sales in Austin over the same month last year. Remember though, Oct 2008 took a 28% dip from the year prior, so while this October did see a good increase in sales volume, due in part to the $8,000 tax credit program, we’re comparing a dreadful month one year prior to a turbo-charged market this year, thus the big swing. Nonetheless, brisk sales for October was not an unwelcome result.
Let’s take a quick look at the monthly home sales prices in Austin for the past 20 months.
You can see that May 08 and May 09 were both the peak sales prices in their respective years and that sales prices drop in the off seasons. This year is no different but our sales volume has picked up more than usual.
Let’s see in the graph below how October 09 compares in all the metrics to October 2008.
One of my commercial tenants skipped out on me earlier this year, so I have my office building on Manchaca Rd. for rent again. I knew it could possibly take 6 to 12 months to find a new tenant, and so far, even after dropping the rent from $1,700 to $1,495, I still don’t have it leased. Bummer.
This unfortunate reality is one of the first big differences between owning small commercial investment property versus single family homes in Austin. It would never take 6 to 12 months to rent a house (well, if you have a lousy Austin property manager it could I guess). But extended vacancy is not unusual with a commercial property, especially in this economic climate. Meanwhile I am absent the $1,700/mo. rental income that the former tenant, a tow truck company, provided. Ouch.
Ironically, I could have leased this property immediately, which would have been a streak of incredible luck, but I decided I didn’t want the type of business that the business owner wanted to set up. This is the second big difference in owning commercial investment in Austin versus residential rental property, making sure the tenant is a good fit for the property and the community.
The tenant prospect wanted to open up a “gaming room”. I wasn’t even sure what that was until I looked into it a bit more. It’s legal, apparently, but I just don’t want 40 or 50 of these gaming machines, which are a cross between bingo and slot machines, in my building, with gambling addicts sitting in front of them till midnight smoking, guzzling coffee and blowing their money trying to win Visa gift cards. It just doesn’t seem like an activity that adds value to the community of Manchaca, or society in general, so I don’t want to be involved by providing the venue. And I worry that even if the business is technically legal at present, our friends down at the Texas State Capital, who have a fondness for trying to legislate morality, might change the laws and cause me a vacancy. So I passed on the quick lease-up for personal reasons.
With residential property, you can’t do that. Applicants either qualify or they don’t, and even if the applicant owned a business I don’t like, it would be improper for me to decline rental on that basis.
Plus, that’s too many gamblers flushing my commodes in a property serviced by a 30+ year old septic system. On the other hand, the $15K in lost rent between then and now would have paid for a brand new septic system.
So, in a nutshell, this small commercial investment property is a cash cow when it’s leased. I paid $58K cash for it in 1998, and immediately invested another $17K remodeling it, so I’m in $75K for a property that was paying $1,700/mo. rent until it went vacant. Not a bad return. I can’t buy anything today that even comes close to that kind of ratio. Plus, it’s appreciated nicely to a value of about $250K today, and it’s located in the fastest growing zipcode in Austin, 78748. Had I invested that $75K in the S&P 500 10 years ago, I’d still have about $75K. Today, rent proceeds plus equity buildup make this a good investment.
But when it’s vacant, it stays vacant for a long time. Much longer than a typical house. As an investor, if you’re thinking about small commercial, you have to ask yourself if that’s ok. Can you handle extended vacancy or will it drive you crazy? I’m in it for the long haul and the vacancy, though unwanted, is just part of the business of investing in small commercial real estate, so it’s not upsetting or distressing to me given the return the property has already produced. But I don’t think the average small investor wants to own a property that is this difficult to rent. It’s high return, high risk and I think most small investors would prefer a more predictable real estate investment.
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Today’s Austin Statesman has an interesting, if not predictable article about California investors being disproportionately represented in Austin area foreclosures. We’ve participated in several sales by California investors (not ones that we sold to though) bailing out, some of which were short sales or pre-foreclosures.
As the Austin real estate market rebounded at the end of 2005 and through 2006 and the first part of 2007, Sylvia and I were deluged with calls from investor prospects, mostly from California, wanting to invest in Austin real estate. We were careful in screening those buyers. We never departed from our philosophy of sticking “closer in” rather than chasing better cash flow to the outskirts. As stated on the Investing in Austin page of our website;
Our approach to investing seeks to do more than simply help you buy or sell a rental property in Austin. We have some specific ideas and values about the manner in which real estate investing should be approached, and the effects it can have on neighborhoods and the greater Austin Community. If you agree with our viewpoint, we want you to consider working with us.
Mainly, we do not wish to participate in the mass caravan buying approach that other real estate agents have implemented in Austin in recent years. We don’t think riding in a bus full of other investors out to a new home neighborhood where you buy what your “real estate investing club” tells you to buy is very smart. This approach results in the overselling of homes in many of the new subdivisions around Austin. Especially in the “starter home” areas that young families and first time buyers can afford.
We think you should spend a little more money and buy a better home in an area that less enlighten, short-sighted investors stay away from. Or consider purchasing your investment property in a mature and established neighborhood. While other investors are looking for the cheapest homes with the best cash flow, you should be looking at the neighborhoods with better appreciation potential, where the homes are well cared for, or the area is undergoing a renewal.
The above is verbatim what we’ve told investor since 2005 when we started working heavily with real estate investors buying in Austin.
How did we do?
Were we right in holding this viewpoint?
This philosophy of ours eliminated a lot of potential clients who would have been easy sales for cheap homes in Pflugerville, Round Rock, Hutto, Kyle, etc. We left a lot of potential sales and commissions on the table by turning away misguided buyers who wouldn’t agree with us on where they should buy rental property in Austin.
What happened to those investors who disagreed with our long term approach and found other Realtors to work with? Let’s look at an example quote from the Statesman article:
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