Austin

Why Investors Like Residential Real Estate

Why Investors Like Austin

     Austin uniformly represents what is best in America.  Beautiful and diverse scenery, hills and lakes, comfortable weather, multicultural outlook, enthusiastic business climate all help make Austin a fabulous place to live and work.  Many other lesser known factors contribute to Austin's value; for example, did you know that that each year, the film industry infuses millions of dollars into Austin's local economy?

    But wait, you say: Is the time right to invest in Austin?  Samsung and Whole Foods think so!

    See for yourself in the following chart: Austin shines brightly enough that Austin area home values have held up well through the stock market difficulties, tech industry layoffs, and the aftermath of September 11^th.

    None of us can predict the future or can accurately assess the effect of current economic conditions.  But you can use historic data as a tool to help determine where you might best invest.  Although I have no crystal ball to tell you how your investment will fare here or anywhere else, Austin's long term real estate history shows that Austin has been a fine place to own property.  Currently, sales are up significantly (see chart below) and Austin has more inventory than it has had in years; the frenetic pace of sales has moderated enough to where some investors are finding excellent buys.  Following are some examples of recent years' appreciation in the the Austin area:

Average Sales Prices

Source: TexasA&MRealEstateResearchCenter

On the following  chart, note the dramatic increase in numbers of sales for 2005:

Chart courtesy Alamo Title Company

Want to see supply and demand at work?  On the following  chart, note the dramatic increase in sold prices and the decrease in inventory for 2005. 

     In 2001, after ten years of strong appreciation, Austin's housing market so heavily favored sellers that buyers felt they had to jump on the next acceptable property that came on the market.  Buyers worried they'd be priced out of the market . Then from 2001 to 2003, as in many fine cities, Austin homesellers found themselves confronted with four economic realities that affected home sales:

•       The dotcom bust
•       High tech layoffs
•       Stock market bust
•       Post 9/11 economics

     One would have expected numbers of sales to drop off. Yet, in Austin, sales remained remarkably consistent.  While numbers of listings went up, numbers of sales stayed the same, easing pressure on buyers to buy the first home they saw.  The result is that upward pressure on prices disappeared, and prices remained almost flat.  Now sales are up, inventory is down, Austin is back on track, and you can see evidence of new appreciation in the above and the following charts.

Source: Austin Board of Realtors
 

National Business Experts Promote Austin as Among the Best in the Nation

    Nationally respected professionals have each done their own research and unanimously conclude that Austin is indeed a very fine place to live and to do business.

Click on the following links:

Austin rated #1 best place for business and careers by Forbes Magazine
http://www.forbes.com/2003/05/07/bestland.html

Austin rated #1 best place for making movies (BIG $$$ flowing into Austin)
http://www.moviemaker.com/issues/53/top10.html

Rated #3 best housing market (for investment) over the next five years , The Meyers Group
http://www.namc.com/hottips/where_invest.asp?lrid=

Austin rated one of the three best big cities by MSN
http://houseandhome.msn.com/Move/BestPlacestoLive0.aspx

In top ten best places to live , Money Magazine
http://money.cnn.com/2002/11/08/pf/yourhome/bplive_austin/index.htm

#1 best place for families, Employee Relocation Council (ERC) and Primacy Relocation
http://sev.prnewswire.com/television/20041029/CLF05529102004-1.html
"Austin has done it again," said Matt Spinolo, Primacy's CEO. "It's already ranked number one for relocating families. Now it seems that Austin is the best city for transferees with or without a family." ERC and Primacy produced a related survey this past May, naming the Best Cities for Relocating Families.

Rated #2 best place to live and work ,  Employment Review June 2000
http://www.simplysiestakey.com/bestplaces.html

Top Ten best places to live and work, Monstermoving.com
http://www.monstermoving.com/Find_A_Place/FAP_Article/Americas_Best/Best_Places.asp

#2 out of 200 best places to do business, Forbes/Milken 2001
http://www.forbes.com/lists/home.jhtml?passListId=1&passYear=2001&passListType=Misc

#2 out of top 50 best places to do business, New Economy
http://www.neweconomyindex.org/metro/rankings.html

#4 in the nation for hottest job growth , Business 2.0 (via Austin Business Journal)
http://austin.bizjournals.com/austin/stories/2004/02/23/daily8.html

#6 in the nation for best schools , Forbes
http://www.forbes.com/realestate/2004/02/13/cx_bs_0213home.html

Insider News Report: This just in from the Neal Spelce Austin Newsletter, www.austinnewsletter.com):

"The US Department of Commerce (headed up, incidentally, by Texan Don Evans) crunched the 2002 numbers and found that Texas has become the nation's leading exporter--surpassing the other giants, New York and California.  In 2002, the LoneStarState accounted for a significant 13% of all exports.

For years we've told you how Texas has been affected more and more by global affairs.  Long gone are the days when cotton and cattle drove our economy.  But it's only been in recent years, when Texas has become a major business and high tech center, that products produced in Texas become heavily reliant on world markets."

This means that that Texas continues to diversify its economy, which is good for Austin investors.

Austin Geography

     Austin is located on Interstate 35, deep in the heart of Texas. Exceptionally central to major Texas cities, Austinites enjoy moderate drives to Houston (2 ½ hrs) Dallas & Fort Worth (3 ½ hrs), and San Antonio (1 ½ hours).

     First time visitors are often pleasantly amazed with the unexpected variety in local terrain within 30 minute drives around town. Geographically, Austin is split vertically by the Balcones escarpment, yielding lakes and cedar covered limestone hills to the west and flatter farmlands of black clay to the south and east. Austin is also bisected horizontally by lovely LakeAustin, formed by the Colorado River. The following neighborhood characterizations are generalizations, with some semblance to the truth . . .

Typical Austin Neighborhoods (click on pictures and links for examples)

Investment Opportunities

     Where is the best part of Austin to invest? Inner city neighborhoods of fine old properties are good for appreciation, suburban areas are better for cash flow. Suburban areas are where one finds modern homes that have fewer maintenance problems.

     Inner city properties are fine for local investors who can easily oversee maintenance and improvement issues. Out-of-town investors are probably better off with much newer buildings, which are mostly located in suburban neighborhoods.

     Historically in Austin, the short-term investor usually must hold a property at least two years before recovering equity in a sale.

     The long-term investor (at least 8 years) does well to choose neighborhoods where growth is prominent, where some infrastructure is still in development, and where rents are high enough to support the sales price and cover a significant part of the monthly payment.
 

For Those Who Want to Visit Austin

     Many investors want to visit Austin to get the "lay of the land" and to see what they are actually buying.  I welcome these visits and I usually spend the better part of a day with them.  To see what investors have said about this tour, 

     The investor tour is a rolling mini-seminar in my car, starting downtown and lasting from about 10:00 am to 3:30 pm.  This gives you plenty of time to catch a flight back home in the afternoon.

     During our time together, we visit neighborhoods with the current best matches to investor criteria.  You get a comprehensive view of business sectors in Austin, and an understanding of where Austin is growing and why.  You also get to meet with the property manager, with whom, over the next several years, you will be spending much more time than with me. 

     The best day for a tour is Wednesday, Thursday, or Friday.   Saturday is fine for seeing property, but you won't get to meet with the property manager, which is important.  On Sundays and Mondays, subdivisions are not open until after lunch, and you won't have time to see the choices otherwise available to you.  Therefore, Sunday is my day off.

     Typically, an investor arrives in Austin in the evening and relaxes at one of several reasonable hotels (I have a list I can email you).  Some like to stay right downtown so they can walk around and enjoy the local music and entertainment scene.   When you arrange a tour with me, I can pick you up at your downtown hotel the following morning, about 9:30 am.  Alternatively, you can plan your trip to fit into just one day, arriving in Austin about 8:00 am.  When arranging a visit and tour, three weeks notice is usually sufficient.

      Oftentimes multiple investors have scheduled a visit on the same day.  In that case you'll be riding with other investors, which makes for a lively experience, each one having different questions that everyone benefits from.  My car seats four passengers.  Occasionally, when we can't all fit into my car, the visitors who follow me in their rental car can hear the play-by-play with a set of walkie-talkies I have available.  We try to make this work for everyone.

      By the end of the tour, most investors are saturated with information; most often they want to take a day or so to figure out which properties they want. Then, it's first come, first serve.  You don't need to worry too much about another investor getting the house you want if you are ready to make a quick decision.

Definitions and Examples

    Leverage is multiplying your gain by investing a small amount of money in an asset that is worth much more than the initial investment.   Typical investments in stock and bonds do not use leverage.  For example:

    Not using leverage: Invest $30,000 in stocks that yield 5%. Your return is $1,500 (5% return on $30,000).

   Now Let's say you invest just enough money in a rent house so that the rentals pay for overhead, and let's say your property appreciates at, say 5% per year; then you receive a much greater return than if you get 5% only on the amount invested.   Illustrating the concept of leverage at its simplest:

    Using leverage: Invest $30,000 in a $150,000 property that appreciates at 5%.  The return is $7,500 (5% of $150,000). This is equivalent to a 25% return on the $30,000 investment.

    That's the leverage concept. The actual return is less when considering operational and sales expenses; however, return can be quite a bit more when appreciation is higher.  And holding property for several years can produce astounding results due to compounding appreciation.

    Tax savings are achieved by writing off expenses and depreciation.  For example, say you have a $150,000 property you bought with 20% down and a $120,000 mortgage.  The following figures are a greatly simplified estimates used for illustration purposes only, are subject to change, and are intended only to give you a glimpse of the possibilities.  YOU MUST CONSULT YOUR CPA FOR ACCURATE TAX ADVICE.
 

    What does this mean to you tax wise?  It means that you could afford to lose $1,569 and still have a break even cash flow after taxes.  It also means that although you may have made money, IRS sees it as a loss, reducing your taxes.  So the money you would normally spend to pay taxes actually helps pay for your asset.

    Note that the rental income with one month of vacancy is $369 greater than the expenses, pretty much a break even cash flow before taxes.  A wonderful benefit comes after tax: Because IRS allows you to depreciate the property, your after-tax cash flow is a negative $3,995, a net loss that reduces your income tax.  The example does not take into account repairs, which you need to figure in; the good news is that they can be minimal on new properties.

    Are you in the 30% tax bracket? If so, for every additional dollar or thousand dollars you make, 1/3 goes to IRS.  Every additional $4,000 you make, $1,200 goes to IRS.  But if you have a net loss of $4,000 IRS looks at it as if you have $4,000 less income.  This would mean a tax savings of $1,200.  So if you own more properties, you could save thousands in taxes, the properties could pay for themselves, and you could get appreciation on multiple properties instead of just one.  Is it starting to get fun now?

    Would you like more positive cash flow?  We need to talk.  Call me and I'll show you how.  
 
 
 

Samsung picks Austin for $3.5 billion plant

Construction will begin next week on second plant here

By Kirk Ladendorf

AMERICAN-STATESMAN STAFF

Friday, April 14, 2006

Austin 's wait for Samsung is over.

The South Korean chip maker will start construction of a massive second chip factory in Austin next week.

Samsung's board of directors formally approved the project Thursday night. The vote came six months after a Samsung site selection team recommended Austin, among several potential locations around the world, for the project.

"This is an extraordinary announcement," said Phil Wilson, deputy chief of staff for Gov. Rick Perry, who was heavily involved in the effort to win the plant. "This is really a validation of Texas leading high tech in the United States."

Local and state officials say they believe the plant will be the largest investment ever by a foreign company in a U.S. plant. The price tag is estimated at $3.5 billion to $4 billion. The factory is expected to employ about 900 people, including Samsung personnel and on-site workers from supplier companies.

Samsung didn't provide a total cost of the project, saying only that the building will run about $220 million. But most of the cost of chip plants is tied to the advanced equipment inside.

"We will proceed with the building phase as soon as possible," said H.K.Park, president of Samsung's Austin subsidiary.

Construction is expected to be completed by late 2007, with the production of advanced computer memory chips starting in late 2007 or early 2008. Samsung expects it will take several years to completely outfit the factory.

It will be one of only a handful of advanced technology chip plants in the United States. It's the first new one in Central Texas since Samsung opened its first plant here in 1998.

Samsung is the world's second largest chip maker and plans to spend upwards of $33 billion on new factories and research centers over the next several years in a drive to overtake No. 1 Intel Corp.

"This puts a stamp of approval on Austin, Texas, that will be heard around the world," said Gary Farmer, who played a key role recruiting Samsung as chairman of the economic development initiative of the Greater Austin Chamber of Commerce. "The decision has a validating effect for Austin as a center of excellence in the technology arena.

"This is marquee material, to have one of the leading companies in the world say that Austin is a wonderful place to be. We will use that to recruit all sorts of companies here."

Samsung officials said their positive experience with the first Austin factory ? the company's only chip facility outside of South Korea ? gave them the confidence to proceed with a far larger project here. The company did not say exactly how large the new factory will be, but it's expected to at least triple the size of the existing factory. It will be more advanced, using much larger, 300-millimeter silicon wafers, which lowers the cost of each chip.

"Samsung Austin employees should be congratulated for their efforts in bringing this project to our location," Park said. "Their hard work, efficiency and dedication to making Samsung Austin a profitable, world-class manufacturing facility allowed this positive decision by the board."

The decision was made at a board meeting in Seoul, where Samsung is headquartered.

Samsung took awhile to decide on Austin, in part because of concerns about transportation. Samsung trucks its silicon wafers to Dallas before sending them by plane to South Korea for final processing, so congestion on Interstate 35 can cause costly delays. The company carefully studied Central Texas' planned infrastructure improvements, spokesman Bill Cryer said.

Incentives also played a major role. State and local governments ponied up an estimated $233.4 million in tax abatements and other incentives for the project. The State of New York, which is trying to build up its chip industry, offered more than $500 million in incentives.

Samsung chose Austin because of its existing investment here and because Austin has a large high-tech work force and a network of support companies that New York's proposed site, north of Albany, lacked.

Central Texas has about 15,000 chip industry workers and is home to the main manufacturing center of Applied Materials Inc., the world's leading maker of chip manufacturing equipment. Dell Inc. also is a key Samsung customer.

"If it was just based on actual dollars, we would probably be in New York, no question about it," Cryer said.

The Manor school district is expected to provide about $115 million in property tax incentives over 10 years. The City of Austin will contribute $62.9 million over 20 years, TravisCounty will contribute $44.7 million over 20 years, and the Texas Enterprise Fund will chip in a $10.8 million grant.

Austin helped its cause when a delegation of Central Texas business and political leaders, including Mayor Will Wynn, traveled to South Korea in March 2005 to ask Samsung to consider expanding here.

"The trip by the Austin delegation to Seoul last March caught Samsung's attention," Cryer said. "To have the delegation show up at the right, critical time in their decision-making process, I am sure put Austin up a few notches."

Perry's involvement in recruiting helped, too. The governor worked with local government leaders, including Manor school district officials, to help the project move through the cumbersome approval process on local tax incentives.

Wynn said the Samsung announcement "helps Austin to continue to be a player in the global technology market. We have been a remarkably good first-generation technology center. Which begs the question, are we going to be a next-generation technology hub? This begins to answer that question. We will be in this for the long haul."

Samsung's new plant

Cost estimate: $3.5 billion to $4 billion

Product: DRAM memory chips on 300-millimeter wafers

Size: Three to four times larger than existing plant, which opened in 1998

Employment: 900, including personnel from Samsung and its suppliers, with estimated average annual salaries of $63,000

Incentives: $233 million in cash, in-kind investment, tax abatements

Sources: Samsung, ManorIndependentSchool District, City of Austin

In the chips

Semiconductor jobs are some of the highest-paying positions in high tech. They vary widely, from about $60,000 a year for production workers to more than $100,000 for design engineers. The 900 new jobs at Samsung and its suppliers are expected to pay an average of $63,000.

What tech jobs pay

Average weekly wage in Central Texas, as of Sept. 30:

Computer manufacturing: $2,271

Computer/software wholesalers: $1,683

Semiconductor: $2,005

Software: $1,698

Systems design/services: $1,592

Average Austin job: $839

Source: Texas Workforce Commission

Chip jobs

Central Texas semiconductor employment:

2000: 24,416

2001: 22,938

2002: 17,811

2003: 15,780

2004: 15,163

2005: 15,107

Source: Texas Workforce Commission

kladendorf@statesman.com; 445-3622 

Buying and Renting FAQ

• Why single family homes?
• Why new homes?
• Why single story homes?
• How do I find a good builder?
• What areas make up "Austin?"
• How do I know a neighborhood is good for investment?
• What upgrades should I choose?
• How do I choose a lender?
• Can other investors go in with me to buy the same property?
• What about LLC (limited liability corporation)?
• How do I find a good tenant?
• How long does it take to find a tenant?
• Who  manages the  property?
• Is an inspection really necessary on a new home ?
• Should I use the builder's inspector instead of hiring my own?
• What should I do about insurance?
• What do I get when I work through you?

Q: Why single family homes?
A: A quality single family home is easier to rent and to sell than any other kind of real estate.  As a rule, renters would rather live in a home than in a duplex, triplex, or fourplex.  While multiple rental units sell mainly to investors, single family homes sell to homeowners, who vastly outnumber investors.  With single family homes, your investment portfolio is scalable and your are able to diversify easier within a community or nationwide.

  Back to FAQ Topics

Q: Why new homes?
A:  Value.  The homebuilders we work with are able to sell new homes for less than individual homeowners with similar properties for sale.  Plus, you get the benefit of full term warranties.  There are fewer maintenance costs and headaches.  And, given a choice between new and used, a tenant will choose new every time.  This means higher rents and less vacancy. 

    Of course, as years go by, your property will gradually show wear and you will get gradually lower rents compared to shiny new homes.  Yet your rents should still be higher than if you bought a used home to start with, as an older home would be even more out of date and show even more wear.  If you buy in an area that is appreciating in value, then rents should be appreciating as well, contributing to a more positive cash flow.

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Q: Why single story homes?
A: One story homes have fewer limits than two story homes.  A prospective tenant does not have to choose between "master up" or "master down." One story homes generally have a larger "footprint" on the lot, which means less yard maintenance for the tenant.  Plus they are easier for tenants to move in and out of.

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Q: How do I find a good builder?
A: We can help with this.  We know who has track records of quality and service.  Plus we've actually negotiated discounts with builders strictly for our investors.

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Q: What areas make up "Austin?"
When the media mentions Austin, they usually are referring to the Austin metro area (pop. 1.3 million).  Also known as "greater Austin," or most often simply "Austin," this area includes, but is not limited to the Austin city limits which are known as "Austin proper" ( pop. 656,000).

Greater Austin includes five counties, three of which are in the top 100 fastest growing counties in the nation (http://www.census.gov/popest/counties/CO-EST2004-09.html)

The following popular communities are in these three fastest growing counties:  Leander, CedarPark, Round Rock, Georgetown, Hutto, Pflugerville, Manor, Buda, Kyle, and Dripping Springs.

Interestingly, "Austin proper" is not in one of the top 100 fastest growing counties. 

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Q: How do I know a neighborhood is good for investment?
A: If a neighborhood has good access to shopping, schools, and if it looks nice, it can be a good candidate.  The rents must support the sales price.  We have tools to obtain rental history to help with your selection.  For more information, click here.

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Q: What upgrades should I choose?
A: At a minimum, you should require a fenced yard that has been landscaped and sodded on all four sides; it should include an automatic lawn irrigation sprinkler system.  Interior should include ceramic tile floors and upgraded carpet pad for durability, also ceiling fans for comfort.  Such upgrades will help preserve the quality of your investment and make it easier to rent.  We have negotiated special upgrade packages for our investors so that the home is turnkey ready for rental and move in the day of closing.

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Q: How do I choose a lender?
A: Three basic choices:  Local Austin lender, builder's preferred lender and your existing lender (if you have one.)

     Most homebuilders have a business relationship with a local lender. Larger builders actually own lending institutions that make them money.  Builders sometimes offer incentives for you to use their preferred lender.  If you choose to go this route, you might consider getting a quote from another lender to satisfy yourself that your rate and fees are acceptable.

     Your existing lender:  There may be some overhead here, as an out-of- state lender who does not regularly loan in Texas may have difficulty getting you the best financing.  They also don't know who the best and fastest appraisers are and don't have relationships with the local title companies, which can cost you. If you like your existing lender, I would encourage you at a minimum to compare good faith settlement estimates between them and at least one of the above two lenders to help ensure you are getting the best rate and terms.
 

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Q: Can other investors go in with me to buy the same property?
A: Yes.  You will need to meet your lender's requirements.  You should consider entering into some sort of a partnership agreement.  These can get sticky:  I recommend legal counsel by a Texas lawyer. 

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Q: What about LLC (limited liability corporation)
A: My understanding is that an LLC must have income and assets in order to qualify for a loan.  Some investors have attempted to personally qualify and then put the property into an LLC after closing.  I don't know if anyone has been successful.  One lender told me that title transfer into an LLC requires the named insured to change; when the lender discovers this, it can trigger the due-on-sale clause in the deed of trust, resulting in foreclosure proceedings even if payments are current.  I don't know if this is true, but the point is, there can be pitfalls.  Before entering into a contract, you should consult with your lender and a Texas lawyer. 

     In addition, Texas has specific requirements (such as franchise tax requirements) that I'm not qualified to discuss.  If liability is a concern to you and LLC turns out to be too cumbersome, attorneys can inform you on the nature of liability with respect to Texas law and perhaps suggest alternatives to satisfy your concern.  I recommend legal counsel by a Texas lawyer, such as H a n c o c k - M c G i l l (512-459-6010) or R o d n e y S h e p p a r d (512-472-3966).