Cheaper is not always better!

Why Buying Cheaper May Come with a Hidden Price Tag
by KEN CORSINI on SEPTEMBER 7, 2012
 


I’ve been travelling and speaking for the last week and was reminded of a very important principle during my travels. I openly admit that when it comes to travelling, I like to find bargains on hotels, cars, etc. On this most recent trip I booked my rental car through one of the travel discount sites that allow you to select the provider based on comparative pricing across the different brands.  Never one to shy away from good pricing, I selected the lowest priced rental car provider in hopes of saving a few bucks. Of course, last Friday when I was dropped off by the shuttle to pick up the car, I immediately regretted my decision to rent from this company. Not only did the line take over an hour, the car I was given was scratched up and in less than stellar condition.

As I stood in line contemplating my decision to save an extra $3 dollars a day, it dawned on me how applicable this scenario is to real estate investing. In fact, when I finally got to the counter to sign paperwork and get the keys, I asked the attendant why they were so busy. He fittingly answered, “Aw man, it’s because we have the best prices!” Indeed, they did have the best prices, but I found myself wishing I had paid just a little more money for a better experience.

The same goes for investing. I’ve talked to a number of investors over the last few years who called my company specifically looking for the lowest priced property possible. They had heard that you could buy properties in Atlanta for $30,000 and wanted to know how they could get one.  While it is true that there are distressed properties in certain parts of Atlanta at this price point, the better question ought to be where  can I find the most profitable properties with a solid and consistent ROI?

The problem I’ve found with buying solely for the lower price point is there are too many negative characteristics to the investment that don’t initially pencil out on paper. Similar to my experience with the rental car, many of these nuances don’t show up until after a property is purchased.

Here are just a few of the concerns I personally have with buying at the lowest price points:

Super cheap properties often equal older housing stock. Old properties typically require more ongoing maintenance that can kill future cash flow.
Low end properties are typically harder  to lease.
Unfortunately, there is simply a difference in the caliber of tenants that rent in the lower rental amounts as compared to those that rent in the average and higher rent range. This typically means a higher rate of eviction and turnover.
Another highly correlated factor with lower priced properties is crime. Intuitively, the cheaper the properties, the worse the neighborhood and higher the crime rate. Most investors don’t factor cleaning graffiti off of their rental properties or replacing stolen A/C units when developing a pro-forma.
Another less tangible factor in lower end homes is the future resale of the property. Many of the lower priced properties today are located in neighborhoods that are mostly rentals and as such, may be difficult to sell at some point in the future …. At least not to a retail buyer and probably not in line with the appreciation rate in the market.
I realize I will probably get a lot of comments on this blog from investors who bought a deeply discounted property and have had tremendous success and cash flow ever since. It’s not impossible to have success with cheap properties. However, on the whole, investors have the opportunity to make just as good a return on a slightly higher priced property and avoid many of the pitfalls associated with low end properties.  In many cases, even just jumping from a neighborhood selling in the 60K range to a neighborhood selling in the 90K range can make a ton of difference on the overall experience.

The bottom line is that an investor who chooses to buy properties specifically for the rock bottom pricing will have a much better opportunity for success when going into the transaction with eyes wide open. If the initial pro-forma utilizes a very realistic and conservative approach (including additional costs and expenses associated with the factors I listed above), the possibility of being disappointed or overwhelmed by unexpected costs is reduced. Perhaps my experience with the rental car would not have been such an ordeal had I fully expected on spending an extra hour of my day in line in exchange for the discount I received.

7 Deadly Sins of Real Estate Investing

The Seven Deadly Sins of Real Estate Investing
by BRANDON TURNER on SEPTEMBER 9, 2012
 


Have you committed one of the seven deadly sins?

No, I’m not referring to gluttony, wrath, or sloth. I’m talking about the Seven Deadly Sins of Real Estate Investing. Ok, maybe they aren’t physically deadly – but they are possibly catastrophic to your business. If you are concerned about the health of your investments, make sure to steer clear from these seven sins:

Buying Based On Future Value
Also known as “pro forma” numbers, many investors buy property based on what it “could” be worth, not what it is worth. Real estate agents are especially known for emphasizing the future possible value (they are the eternal optimists) but neglecting the facts on the ground. Make sure you don’t fall victim to this sin and always know exactly what the current value is and don’t buy anything for what could be.
Blindly Following A Guru
Real estate investing is not a system. Anytime I see that phrase I cringe just a little bit. The typical real estate guru would have you believe that by simply following a step-by-step system you can make millions in real estate. Millions can be made, but its not by following a system – it’s from following your brain. Investing is about solving problems, and if your “system” is unable to account for flexibility or challenges – your dead in the water.
Being Unrealistic With the Math
The one deadly sin nearly every investor has made is not being realistic with the math. Whether overestimating future value, underestimating the repair costs on a project, or simply not taking the time to actually do the numbers- poor math will destroy an investment.
Relaxing on the Record Keeping
For many investors, “record keeping” is nothing more than an attic full of vintage Barry Manilow albums (get it? “record keeping”… no? Okay, easy – I’m an investor, not a stand up comedian!) If you don’t know the health of your investments – how can you make informed decisions for the future of your investments? By keeping adequate records and staying up-to-date with your finances, you position yourself to know exactly how well your investments are performing while also ensuring the long-term stability of your investment plan. Additionally, keeping good records makes tax time a breeze as well as simplifying the process when applying for a loan. For more information on record keeping for investors, check out Arthur’s post on record keeping.
Confusing Investing with Gambling
Do you invest or do you gamble? Do you even know the difference? Buying something with the hopes that it may someday bring a profit is gambling (or speculating). Flipping, building spec homes, and investing in raw land often resemble gambling much closer than investing. Notice I didn’t say that gambling was one of the Seven Deadly Sins of Real Estate Investing. The sin is not in gambling, but in confusing the two. Each strategy requires a different skill set and different financial resources. Be sure of what you are trying to accomplish and make sure you have the tools necessary.
Over Leveraging Yourself
Perhaps the most common real estate sin over the first decade of this century, over leveraging is the act of carrying too much debt than what the properties can maintain. If you are financing everything to the point that there is no cashflow, it is very difficult to weather the storms when they rise up. Just ask the thousands of bankrupt investors who learned this lesson the hard way.
Getting Bored and Getting Fancy
The path to wealth through real estate investing is not difficult, but it also isn’t super fast. In an earlier post on BiggerPockets, I mentioned how real estate investing was like playing a game of Super Mario Bros. The game is fairly simple and straightforward, thus easy to master. The difficulty, however, is that once the system has been mastered it is easy to get bored and decide to get fancy. Many investors know that wealth and retirement can be created using real estate, but get bored and try to hurry the process up by speculating and buying deals that don’t fit their plan. This is a sure-fire way to lose most or all of one’s wealth. Remember, it can take years to build up a solid retirement portfolio but only one stupid mistake to lose it all.
Have you committed any of these deadly sins? I know I have (you don’t want to see my organization system right now…)! Let’s talk about it! Add your comments below.

Market Data for Round Rock, Pflugerville, and Hutto — August 2012

Market Data for Round Rock, Pflugerville, and Hutto — August 2012

No vacancy: Major Round Rock office buildings are nearly full

No vacancy: Major Round Rock office buildings are nearly full

APPLE TO BUILD $304 MILLION CAMPUS, AND CREATE 3600 NEW JOBS IN AUSTIN!!

Colin Pope

Editor - Austin Business Journal

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Apple Inc.    will expand its Austin presence with a $304 million campus that will ultimately create 3,600 new jobs, according to an announcement today by Gov. Rick Perry.

The new campus will more than double the size of Apple’s workforce in Texas over the next 10 years. The new staff will expand customer support, sales and accounting functions for the region. In exchange for Apple’s commitment to create these new jobs in Texas, the state has offered Apple an investment of $21 million over 10 years through the Texas Enterprise Fund.

It’s unclear where Apple (Nasdaq: AAPL) would locate the campus.

Instead of expanding its existing campus, Apple is considering a new location in Austin, spokeswoman Kristin Hugoet said.

“Our operations in Austin have grown dramatically over the past decade, from less than 1,000 employees in 2004 to more than 3,500 today,” she said.

Julie Huls, president of the Austin Technology Council    , said Apple’s expansion in Central Texas would cement the region’s reputation as a technology hub.

“I think it’s a game changer for the state of Texas and Austin,” she said. “It’s a scale tipper for Austin to have an A-list company like Apple.”

If all goes as planned, this would be one of the largest job creation projects in the TEF’s history, which was set up in 2003 to entice large companies to move or expand here. To date, the governor’s office reports that the TEF has doled out more than $443.4 million and closed the deal on projects generating more than 62,000 jobs and more than $15.4 billion in capital investment in Texas.

Austin Rental Market Update – Nov 2011

by STEVE CROSSLAND on DECEMBER 9, 2011 · 2 COMMENTS

Rents continue to rise in Austin as more buyers opt to be renters and the supply of homes shrinks relative to demand. See the graph below for a snap shot of the wild ride Austin rental rates have taken since 1999.

Austin Rental Market 1999 thru Nov 2011

It took over a decade for Austin’s rental rates to return to their 2001 peaks. Good for renters but it’s been a rough 10 years for landlords. And not all homes are back to pre-2001 rates, these are just the averages.

For November 2011 compared to a year ago, let’s take a look at the chart below.

Austin Real Estate Rental Market Update Nov 2011
Houses only (condos, duplexes, etc. not included) compiled from Austin MLS data
	Oct 2011	Nov 2011	Nov 2010	Yr % Change
# Rented	733	620	717	-13.53%
Avg List	$1,541	$1,529	$1,439	6.25%
Med List	$1,350	$1,325	$1,275	3.92%
Avg Rent	$1,534	$1,512	$1,427	5.96%
Med Rent	$1,350	$1,300	$1,250	4.00%
Rent/List %	99.55%	98.89%	99.17%	-0.28%
Avg SQFT	1,995	1,918	1,961	-2.19%
Med SQFT	1,776	1,736	1,792	-3.13%
Avg $ SQFT	$0.77	$0.79	$0.73	8.33%
Avg DOM	27	29	39	-25.64%
Median DOM	19	20	30	-33.33%
# Expired	33	41	35	17.14%
# Withdrawn	89	101	119	-15.13%
Not Rented	122	142	154	-7.79%
Not Rented %	14.27%	18.64%	17.68%	5.40%

Average Rent prices are up 6%. Median rent values in Austin are up 4%. Homes are leasing 25% faster than Nov a year ago, average 29 days instead of 39. Median Days on Market has fallen from 30 days a year ago in Nov to 20 days this November. The number of expired lease listings has increased a bit, which seems at odds with the other stats, but it’s a pretty small number either way.

Finally, let’s look at the Year to Date stats for the Austin rental market for November 2011.

Austin Real Estate Rental Market YTD Update Jan-Nov 2011
Homes only (no condos, duplexes, etc) – Data from Austin MLS
	Jan-Nov 11	Jan-Nov 10	Yr % Change
# Rented	9421	8711	8.15%
Avg List	$1,557	$1,495	4.15%
Med List	$1,350	$1,295	4.25%
Avg Rented	$1,549	$1,481	4.59%
Med Rented	$1,350	$1,295	4.25%
Leased/List %	99.49%	99.06%	0.43%
Avg SQFT	1941	1937	0.21%
Med SQFT	1788	1781	0.39%
Avg $ SQFT	$0.80	$0.76	4.38%
Avg DOM	25	31	-19.35%
Median DOM	15	20	-25.00%
# Expired	328	402	-18.41%
# Withdrawn	911	1122	-18.81%
Not Sold	1239	1524	-18.70%
Not Sold %	12%	15%	-21.94%

 Year to date, average rent prices in Austin are up 4.6% from the same 11 month time period a year ago. More homes have leased, 9,421 homes leased in Austin Jan-Nov 2011, up from 8.711 during the same time period in 2010. Still, the demand has increased more than the supply.

I expect 2012 to be another strong year for rental rates in Austin. We’re seeing a lot of “buyer quality” renters leasing our homes. I’m seeing FICO scores over 800 from applicants with excellent income. When I ask why they’re renting instead of buying, the responses are a reflection of the general lack of confidence in the U.S. economy as a whole, and specifically the real estate market. Most will become buyers, perhaps within a year or two, but they do not feel a sense of urgency even with interest rate still close to 4%.