Location Education: An Investment Fundamental

Posted by Monte Davis on Thursday, September 30th, 2010 at 10:29am

All real estate investors need an education in location. Where do you want to buy and why? And what can you reasonably expect to be involved in the purchase, ownership, and ultimate sale of that property? There are four primary "rules" about buying:

- Go where vacant land is scarce,
- the demographics are good,
- the rents are $800 and up, and
- turnover will be low.

You can find areas with little vacant land in Austin near downtown, around the University of Texas, Town Lake, the Capital, or close to the better school districts. When you make a purchase in these spots, you're buying:

- location, and
- customer base.

One of the biggest draws to properties in these neighborhoods for me is a solid exit strategy. When these properties sell, they will likely attract an owner occupant. Plus, during the time you are renting the property out, you can expect long-term tenants who will more readily accept rent increases.

Note that these properties will require higher down payments to get into a cash flow position. Consequently, they tend to be purchased by investors moving money from a 1031 exchange, or those who know the value of appreciation and who can afford periodic negative cash flow.

Farther away from these hot-spot, high-demand areas, investors have more opportunity to gain cash flow using leverage. For instance north and south of downtown, you'll find wonderful bedroom communities.

To the south, in particular, you get good access to downtown via surface streets, exemplary schools, parks, and lots of other community amenities. (Think zip codes 78745, 78748, and 78749.)

In North Austin by way of I-35, you get close to major employers. We call it the "High-Tech Highway" running through Pflugerville, Round Rock, and on to Georgetown. (Zip codes 78728, 78660, 78664, and 78681.)

To the northeast, along Hwy 183, you encounter terrific communities like Great Hills, Anderson Mill, Cedar Park, and Leander. There's been a lot of good solid growth over the last decade in this region. (Consider zip codes 78759, 78727, 78729, 78613, and 78641.)

Remember, though, that regardless of where you buy, the way to keep your turnover low is to keep your tenants happy. Transitional tenants tend to be looking out for the bottom line in terms of their budget. Owners need to be conscientious and competitive. If you don't have good management and keep the property in good condition, you're going to have high turnover no matter where you are.

Since location is so crucial in the investing process, we'll be taking the next couple of weeks to look more closely at the topic of "where and why" in Austin, but again -- as we keep saying -- this is a great time to buy and there's a lot of great property out there!

2 Responses to Location Education: An Investment Fundamental

Pam wrote:

I was pondering the idea of purchasing a condo in Avery Ranch and using it as a rental property. Avery Ranch is still in development and probably will be for several more years. What are you thoughts on this?

Posted on Thursday, September 30th, 2010 at 1:59pm

Monte Davis wrote:

@Pam
Austin and surrounding communities have a large inventory of condos on the market. My advise in buying a condo for an investment, is to get it at real bargain. The fact is, there is nothing unique about your unit verses other units in the complex. The fate of your unit will be the same as the rest. If you are interested in low maintenance and condos fits this criteria for you, I would suggest that you watch the entire condo market--look for a foreclosure or distressed sales. Purchasing these types properties afford you a better opportunity to locked in profits when you buy. Then when you go to sell any additional profits are gravy. A search for foreclosure or distressed condos can be set up for you.

Posted on Friday, October 1st, 2010 at 3:57pm

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