Step-by-Step guide to buying an Investment Home in Austin Texas
This blog is the sixth part of a multi-part blog about buying an investment home in Austin. It is broken down into several different articles for ease of reading. This series is going to concentrate on investing in one-four family houses with an investment strategy of buy, hold, and rent. This is not a blog about flipping homes.
Which areas of Austin offer the best investments?
Learn the lingo of real estate investing
How to properly analyze if an investment home is a good investment
Learn the lingo of real estate investing
Welcome back to my blog about investing in Austin! This part of the series is designed to educate a first-time investor by explaining the terms and lingo used in residential real estate investing.
Is the home in move-in ready condition or are significant repairs needed in order to make the home livable?
The current homeowner owes more on their mortgage than it is worth. Advantage – It may be possible to find a move-in-ready home at a very good price. Disadvantage – Purchasing a short sale may be a lengthy process and may typically take 60-90 days to close. Also, if neither of REALTORS© involved have experience with short sales, it may be difficult to close.
REO means Real Estate Owned. REO properties are foreclosures that are being unloaded from either a bank or the US Department of Housing and Urban Development. Advantage – There is a high likelihood of obtaining a home a well below market value. Disadvantage – Plan on doing significant repairs. People don’t like being foreclosed upon and may destroy the home prior to being evicted. It is a rare find indeed to find an REO that is in move-in ready condition.
Estimated Purchase Price
In order for a home to be considered a good investment, the investor must be able to negotiate a substantial discount over list price. A good buffer is 5-10% off list price.
Estimated Rent per Month
The estimated amount of rent you can expect to earn on your property. Please read How to properly analyze if an investment home is a good investment for a detailed explanation of this.
Estimated Gross Rental Income
The amount of the estimated rent per month multiplied by 12 returns the estimated gross rent for the year.
Vacancy & Credit Loss
This is a certain percentage of the estimated gross rent that should be set aside for delinquency and vacancy. Your REALTOR© can help you determine this number based on the absorption rate of rentals in that community, but as general rule of thumb, use 5%.
Estimated taxes are the amount of annual property taxes on this investment. Since this property is an investment and not a homestead, there will not be any exemptions allowed on the property taxes.
Home Owner Association (HOA) Fees
HOA fees are the yearly amount of estimated amount HOA dues. The property purchased may or may not be a member of an HOA.
Maintenance & Repair
Maintenance and repair is an estimate of 1-2% of the purchase price every year that will be reinvested for repairs. Some years this may be higher, other years it may be none existence. Budget accordingly, and if you are pleasantly surprised at the end of the year, great!
As an investor, you will need to cover hazard insurance for the structure and possibly flood insurance if it is near a flood plain. You will not to cover the tenant’s personal property. Expenses for this category may be approximately .75% of the purchase price per year.
Property Management Fees
This expense is the amount that your property management company will charge for their services during the year. For investors that will self manage, there is no need to include this in your worksheet.
Estimated Net Operating Income
Estimated net income is the sum of vacancy and credit loss, estimated taxes, HOA fees , maintenance and repair, insurance, and property management fees subtracted from the estimated gross rental income. This value is exclusive of debt servicing.
Cap rate is the determined by the net operating income divided by the purchase price. Higher numbers are better. Look for cap rates of at least 6.5% or higher. A cap rate of 8.5% on rental real estate is phenomenal.
Gross Cash on Cash Ratio
Gross Cash on Cash Ratio is the net operating income divided by the down payment amount. This value is exclusive of debt servicing.
Positive cash flow
Positive cash flow is perhaps the single most important number as it determines how much an investor’s profit is at the end of the year. Calculate it by subtracting the Estimated Net Operating Income from the annual principal and interest payment. Divide this number by twelve to calculate the monthly profit. Stop and think about this for a second. If an investor owns a rental property that pays them $500 a month after all expenses and debt servicing, then that is $500 a month that person didn’t have to work for!
Net Cash on Cash Ratio
Net Cash on Cash Ratio is the ratio of positive cash flow over the down payment. Look for numbers at least 7.5% or higher. This number is used to determine approximately how long to recoup your investment.
This sums up all of the terms that an investor should be familiar with in order to make an appropriate investment. An investor needs to have a working understanding of these terms in order to communicate to their REALTOR what their investment strategy is. Using the information above, a REALTOR can help to analyze which properties will make the best investments.
About Jordan Gouger
Jordan Gouger is a buyer’s agent with Keller Williams Realty’s South West Austin Market Center. He specializes in working with first time home buyers and buyers of residential investment properties. Among his areas of expertise are South Austin, Gracywoods, Quail Creek, North Central Austin, and Scofield.
Jordan places customer service above anything else and always goes the extra mile to help his clients achieve their real estate goals. He has experience working with out of town buyers and is able to help coordinate everything locally to ease your peace of mind. For all of your buying needs, please contact him at 512-693-9297 or firstname.lastname@example.org