The rental Market for Single family homes in Austin continued it’s trend of the past 4 to 5 years of over-all declining rents, lower rents per square foot rates, and increased days on market. The rental market for single family homes in Austin continues to be over-supplied even as the Austin economy is doing well, residential sales are brisk, home prices are rising, and the multi-family rental market is improving.
There are not yet enough Austin renters to lease all of the homes being made available by out-of-state investors. It remains a renter’s market for single family homes in Austin. I believe a turnaround will come, but it didn’t happen in 2005. As I tell every new real estate investor I meet, you’re not buying in Austin for cash flow unless you have at least 20% cash downpayment (and even 20% might barely get you break-even before vacancy loss and repairs). Instead, you are anticipating healthy value appreciation in the Austin real estate market during the next 5 to 10 years as Austin goes through our next growth cycle.
Let’s look at some leasing statistics below from the Austin MLS.
Below you see the Austin rental market from 1999 through December 2005.
Average rents in Austin topped out in 2001 at $1524 per month during the height of the tech boom, and have been falling ever since. The citywide average for 2005 fell to $1235. Our average and median rents for 2005 are still below those of 1999.
Let’s look below at what the “Average Days on Market” statistics have done over the same time period.
All through the 1990’s, and especially in 1999 and 2000, when my property management company leased on average about 2 or 3 homes a week in Austin, it was very rare that it took more than 30 days to lease a home. Often, I was moving people in on the 1st day of the month – the afternoon after the previous tenants moved out.
As you can see on the chart above, the median DOM in 1999 and 2000 was 23 and 22 days, which means half of the homes for rent in Austin leased in about 3 weeks or less. During these years, the inventory of available homes was about a 30-day supply, and there were so many people moving into Austin the rental supply couldn’t keep up. Also, for those who remember, the stock market was going full tilt, so very few investors were thinking of rental properties. People were online checking stock prices, not MLS listings. We did not have investors supplying the rental housing market with new rental home inventory as we do today.
In 2005, it took an average of 61 days to rent a single-family home in Austin, and we seem to hold steady at about a 3 month supply of rental homes. The median DOM was 49 days, which means half the houses took more than 49 days to rent, and half the houses took less than 49 days to rent.
As of January 1, 2005, there are 1374 single homes for rent in the Austin MLS. These homes have an average list price of $1323, and have been on the market and average of 55 days and have a median active days on market of 46 days. So, that’s 687 homes that have been on the market for a month and a half or more. Of these, 228 have been listed for 90 days or more! These kinds of numbers give Property Managers and Landlords heartburn, as there is nothing worse for a rental property owner or property manager than a prolonged period of vacancy.
Many of these homes that take longer to rent are over-priced and not properly prepared to be showed and leased. They are far from “move-in” condition. This still amazes me, but I’ll save my opinions about that for another time. Suffice it to say, be very careful when selecting a property manager to handle the leasing and management of your new investment property.
Let’s look at one more graph, Average Monthly Price per Square Foot for rental homes in Austin.
Renters continue to be able to rent bigger and better homes for their money in Austin each year. Renters have ample supply of homes to choose from, and they tend to choose the ones that are attractive both inside and out, and that are priced well in the best location they can afford. The trick in this market is to be patient and not become overly obsessed with trying to obtain an extra $50 or $100 per month in rent. Overpriced homes don’t lease well in any market, and especially in a renter’s market. It only takes 2 weeks additional vacany to wipe out the extra $50 per month rent on an average home. It’s much better to price your property below the competition and make sure it’s clean and well maintained.
So, does all this mean Austin is not the best place to invest in rental property? No, but it does mean Austin isn’t the best place to invest for all investors. You need to have the financial ability to make a large enough downpayment to allow the rental income to cover the carrying costs. If you want to leverage your money with smaller down payments, you need to be willing and able to invest an additional $300 to $500 per month in negative cash flow. If you can’t do either, you shouldn’t be thinking of buying an investment property in Austin, in my opinion.
Meanwhile, even with a property at or below break-even, the appreciation side of the equation will be doing its work over the coming years, and if things continue as they appear with our sales market tightening and home values rising, your investment will look very good on your ledger sheet, though you may still be “feeding” your property each month.
If you’d like to know more about investing in Austin, please visit the Investing in Austin page on our website or call (512) 301-5811.