Property Types – What Should I Buy?

"But I Want a NEW Construction Property!"

This is one of our most common requests, and it´s sometimes the most difficult to explain to our clients why this isn´t as vital to their investments´ success than they think it is!

Some local Realtors have made millions off of this simple request and have sold investors new construction in every corner of our region – we believe much to the disservice of the investor. Why disservice, you ask?

The reason that we feel this is a disservice, is because new construction is almost always out in the suburbs around the edge of town. The simple fact is that the most desirable areas in Austin, and those that are closest to the most established job creation, are also those that were developed decades ago. That means the housing stock is as old as the development.

Investors must recognize that Austin –and for that matter all of Texas and most of the Southwestern U.S. is not geographically isolated between a mountain range and an ocean <cough: California´s coastal cities>. Therefore, land is cheap as far as the eye can see, and the minute that one new construction single family home development gets built, there are three farmers in every direction who are planning the sale of their property to KB Homes.

As soon as the prices of the homes justify it, KB Homes and their ilk will buy that land from the farmers, and as long as they are doing so, there is zero economic rationale behind the equity appreciation of the new construction single family homes that were built just a few years ago.

Over the years, numerous homeowners in areas such as Buda, Kyle, and even Round Rock have called us wanting to "get into the investment game". Countless times we´ve had to tell them that their homes – some of which were purchased 10 years ago – have seen precious little equity appreciation, and they´re sometimes even upside down on their mortgages.

Most of the Realtors who sold new construction either aren´t in business any more or have shifted to other niches as the vacancy rates out in the suburbs have climbed, and the rents are less than promised. Meanwhile investors who have invested close to the epicenter of jobs, almost always with 70´s and 80´s construction properties, have seen very healthy returns.

If you haven´t yet read it, read the section on this page about "Supply and Demand". People want and need to live close to the cultural epicenter of Austin – the University of Texas. People want and need to live close to Dell Computer, Samsung, Motorola, and other major employers.

People do not, however, need to live in a bedroom community that requires spending $3 per gallon gasoline to sit in traffic for 30 minutes to get to and from work every day. And even if they did, the values will take decades to go up when every single developer and their brothers is in the game of building them a slightly nicer home.

If your sole criteria is new construction, you almost certainly will miss out on the unique market dynamic of Austin real estate investment – limited supply in the areas where people want and need to live.

But, you ask, isn´t an older property likely to have higher maintenance reserves and requirements, and cost me more money to maintain? Yes! It almost certainly will. However, a 3% adjustment in annual maintenance is nothing compared to possibly earning a sliver of the equity appreciation that you´ll likely miss out on by buying new construction outside of the core. And with the right agent helping you inspect the property before you buy, and the right property manager maintaining it to high standards during the life of the ownership, you should feel quite comfortable skipping the shiny new buildings.

Next Page: Owning Investment Property Is More Expensive Than You Think