Austin TX vs Wichita KS: Residential Real Estate Analysis
I recently spent some time down in Austin TX to evaluate the real estate market. I had read all of the headlines about the tech companies relocating down to Austin. The significant population boom. The historical and projected appreciation. The developments and redevelopments happening in every corner of the city. The value plays to be had in the popular suburbs. The problems and challenges brought with a city going through gentrification.
I had four days to take everything in. I met with residential and commercial Realtors and investment experts and explored most corners of the city. It was definitely a case of drinking from a firehose. I’m excited to share my insights of Austin TX and compare them to the real estate market of my hometown, Wichita KS. Based on the headlines one assumes the return on these two markets would be significantly different.
Although they are vastly different, if you clearly know your strategy and make the correct bets, you can be very successful in either market.
This article will primarily focus on residential rental investments. The differences in flip opportunities and the commercial market warrant their own articles.
Appreciation versus Cash Flow
For good reason, most investors jump right to the chase and start discussing cash flow versus appreciation.
Austin TX – 2020 appreciation of 20%, five year projected appreciation of 40%
Current population of 1MM in Austin proper, and 2.3MM in Austin MSA
Wichita KS – 2020 appreciation of 8%, five year projected appreciation of 17%
Current population of 400K in Wichita proper, and 630K in Wichita MSA
The main difference here is the relocation and growth of tech companies to Austin TX. If you think of a major tech company it’s extremely likely they are moving or growing in Austin. While the techies from California grab most of the headlines the consensus around town is that 40% of the new residents are coming from California. This means that there is a lot of traffic from elsewhere including New York, Washington state, and Ohio. There is apparently a lot of demand for warm weather, eating tacos at a picnic table, and 0% state income tax.
Wichita has been growing, but barely. The recent appreciation in Wichita is due to the easy money policy pursued by the Fed. While Wichita is working on economic development, up to this point they have been unable to attract any material traction in any new industry.
Austin TX – Single family home monthly rent equal to 0.5% of asset value; Commercial properties pricing at 4 CAPS
Wichita KS – Single family home monthly rent equal to 1.0% of asset value; Commercial properties pricing at 8 CAPS
If the appreciation forecast makes Austin look like the sure bet then cash flow is where everything will balance out. Most people agree with the basic rule of real estate investing which is to never make an investment that yields negative cash flow. In order to accomplish this in Austin, a significant down payment of 35-50% will be required. Sometimes it is eye opening for an investor to learn that $175K towards a residential investment is required to break even in the early years of the investment. Since financial leverage is critical to improving your return, this capital requirement is a significant detriment.
Wichita investments worth making will provide positive cash flow with 25-30% down. If you could take a basic house in Wichita, lets go with a 3bd 2ba ranch with 1,600 ft2, and magically replicate it in Austin the minimum capital required would be a startling difference. In this example the minimum capital in Wichita would be ~$35K whereas the minimum capital in Austin would be ~$190K.
Lets Run Some Residential Numbers
The below analysis represents a 10 year hold value when purchasing the same house in both locations at normal market prices. The variables were updated to reflect the reality in each market but kept the same wherever realistic. The down payment required is the result of requiring each property to provide $100/m in free cash flow when levered with debt. The forecasted asset appreciation for Austin is 40% over first five years and then 5% per year thereafter. The forecasted asset appreciation for Wichita is 5% in the first year and then 3% per year thereafter.
The main output that I would like to focus on is the levered and unlevered internal rate of return (IRR).
Unlevered Pre Tax IRR:
Austin 10% vs Wichita 9%
Levered Pre Tax IRR:
Austin 13% vs Wichita 16%
The unlevered IRR for both investments is nearly identical (this makes sense if the most universally accepted variables were used for both markets). The levered IRR is similar but you can really see the benefit of investing in the stronger cash flow market of Wichita since the leveraged return jumps up a bit more.
Investors can be successful in either city but in order to pick the best market for your investment, you should consider your unique investing strategy and what bets you are willing to make.
Attributes of a Successful Strategy in Each Market
Austin TX Requirements
· Significant cash and a healthy personal balance sheet
· Economic modeling and analysis around housing supply and demand
· More of a “set it and forget it” mindset
Wichita KS Requirements
· Detailed analysis of the expected maintenance and capex of each property
· High quality operational excellence
· Longer-term hold timelines
Key Bets in Each Market
Bets in Austin revolve around appreciation. Some investors put significant value on forecasted appreciation while others aren’t comfortable making that bet. A second key bet in Austin is your ability to purchase properties. Austin is extremely competitive, as reflected in their price/sq ft values and number of offers on available properties. In general, downtown Austin properties can sell for as much as $800/sq ft and then values filter down to $300/sq ft as you near the outskirts of Austin city limits. Investors are being encouraged to move into the suburbs to find cheaper properties, but those locations will probably not participate in the same appreciation as properties in the Austin city limits.
Bets in Wichita are centered around cash flow. Therefore, the first bet in Wichita is based on purchasing a quality property. Excessive or unexpected expenses five years into your investment will quickly deteriorate your return. It’s also important to have quality management in place in order to avoid expensive vacancies and tenant turnover. In Wichita, limiting expenses is key to getting monthly cash flow and ultimately the best return.
If you’d like to discuss this article, reach out to us at info@chooseSNC.com.