How to buy investment homes in Austin

Things to consider when buying an investment home

What are the things to consider when looking for an investment home? With investment home, you should put your personal preference aside and consider it only as an investment vehicle. With an investment, the only thing that should sit on the top of your mind is return. An investment home is intended for lease when you hold it. Eventually, you might sell it when you are ready to take your chips off the table and book your capital gain. So you make profit in two ways when it comes to an investment home. The first part is your rental income minus all the operating expenses, such as property tax, insurance, HOA fee and loan payments. If after deducting all the expenses you are bringing in money every month, then you have cash flow positive investment. Otherwise, you could just break even or have negative cash flow. On the other hand, your property appreciates every year. When you eventually sell the property or do a cash-out refinance, you can get additional profit due to the appreciation. So the two most important things to consider are: rental income and growth potential.

Rental income directly affects the cash flow of your property. A simple way to evaluate the potential cash flow of your rental property is to look at the ratio of rent over price. With given property tax rate and loan interest rate, there is a certain minimum rent over price ratio which ensure a positive cash flow. For example, at interest rate of 4.5% and tax rate of 2.5%, you need the rent over price ratio to be roughly more than 0.7% to have a positive cash flow. If you have positive cash flow, you will no longer have to pay any more money out of your pocket after paying the initial down payment. If you have to go through a housing recession, good cashflow can help you sit through the tough times without a fire sale. On the other side, if you take a loan when buying your rental, any appreciation on the property price will be amplified by the leverage ratio when reflected on your return since your return is based on your down payment. Usually, people put 25% down payment for an investment property. Whatever growth on the asset price will be amplified by a factor of 4 on your return. For example, if the property appreciates by 3% in a given year, the additional return brought by the appreciation will be 12%. That will handily beat the average return of stock market. Therefore, when we choose an investment property, it'd be reasonable to consider a good balance between the cash flow and potential growth rate. Try to stay cash flow positive or at least break even. On that basis, choose from area with solid long term growth potential.

We have built a tool to help you quickly calculate the return of an investment property based the sales price, estimated rent, estimated growth rate and all the expenses information.

Investment Home ROI Calculator

Good areas of investment homes in Austin