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Market News and Trends

How about investment properties?


Most discussion of residential real estate focuses on single family homes, or at least traditionally owner-occupied property types — houses, condos, and townhouses. Multifamily properties (2 to 4 unit structures) are also very important. So how has that market performed in 2012?

As a proxy for that entire class of investment-oriented real estate, I have focused on duplexes in the Austin metropolitan area. I have pointed out that averages obscure details, but I believe this overview will be useful. Of course, I will be pleased to discuss specific properties and specific areas in the context of specific investment objectives, but that is beyond the scope of this discussion now.

Between January 1, 2012 and November 30,2012, there were 449 duplexes sold in the Austin metro area.  There are 107 duplexes for sale in our MLS today, representing 2.6 months’ supply at the year-to-date sale pace — even lower inventory than the single family market.  Here’s a quick look at the range of sale prices:

Duplex Sales SP-LP 010112-113012

As you can see, the range of sale prices is extreme:  from $35,000 to $785,000!  The “meat and potatoes” segment of this market, however, is more tame.  The average duplex sold for just over $204,000 this year.  The median price was lower at $177,500.

The average sale price was 96.6% of the average list price — very near the same comparison as the single family market.  Also much like the single family market, properties that were priced right sold more quickly and for a higher percentage of list price.  Using the average list price as a starting point, 98.73% (0 to 30 days) of $211,386 was $208,701.  Properties that were on the market for 91 to 120 days sold for 91.32% of list price, or $193,038.  Again, we’re working with averages here, so those figures probably don’t match any specific property, but the penalty for overpricing is real.

In an attempt to judge investment value, let’s compare average gross rents to average sale prices:

Duplex Leases SP-LP 010112-113012

Again, the range of successful leases is huge — from $475/month to $4,600/month!  The bulk of the market is more “reasonable,” however:  average rent $1,077.40; median rent $975.  Annualizing those figures and comparing them to average and median sale prices yields Gross Rent Multipliers (GRM) of 15.8 and 15.2 respectively.  (If you assume operating expenses amounting to 15%, those ratios translate into a Capitalization Rate of about 5.5.  That’s not stellar, but compare it to the likely return on many alternative investments and you’ll understand why this has been a fast-moving market this year.)

The Days On Market figures in the leasing market are interesting.  Using average list price as a reference point, properties absorbed in 30 days or less were leased for $1,078/month.  Those where the owners held out for more than 120 days leased for $1,110/month.  The difference was $32/month, or $384/year.  Giving up just one average month to vacancy would cost almost 3 times the annual gain in rental income.  Not a good trade!

Now, here’s just one more point about where we are in this market segment in December 2012:  For the first eleven months of the year, the average time on market for sold duplexes was 62 days; median 26 days.  Compare that to the active listings now available:  average 171 days; median 88 days.  The “good ones” sold fast this year, and there are still some in the inventory.  But there is a lot of aging stock due to problems with price, location, and/or condition.  The one thing the market does well is match price and value, and well-informed, rational investors sort out the right properties.  The others will still be available for less discerning buyers.  Let’s talk about your plans and objectives and find the right property for you.

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About Bill Morris, Realtor

More than thirty years of business experience (high tech, client service, business organization and start-up, including many years in real estate) tell me that service is the key to success and I look forward to serving you. I represent both buyers and sellers throughout the Austin metropolitan area, which means first-hand market knowledge is brought to bear on serving your needs: -- Seller Representation is a comprehensive process that begins with thorough market analysis and consultation, continues with properly staging the home to achieve the highest price possible in a reasonable time on market, a complete program of marketing and promotion, ongoing updates and communication, closing coordination, and follow-up throughout (and after) the sale. -- Buyer Representation is also full service: shopping, previewing, price and market consultation, contracting, negotiating, coordination of inspections, appraisals, repairs, and closing details, and follow-up beyond the closing of your purchase to ensure your lasting satisfaction. Because the real estate industry is becoming more sophisticated and challenging every day, you need a professional that understands the industry and is positioned to stay ahead of the game. I go the extra mile to help you achieve your goals. That's why I constantly research the market and property values so your home is priced effectively from day one. I also make sure the public knows your home is for sale by using innovative advertising and marketing techniques to attract potential buyers.

Discussion

2 thoughts on “How about investment properties?

  1. Great article.

    Austin and the other Texas Metros are woefully under built on duplexes. ( small investment properties.)

    In the 80’s we built most (85%+)of the duplex communities in Austin, SA and Houston. We could never build enough. Demand always outstripped supply.

    MS
    [cid:image002.png@01CCC6D9.EE1C80B0]
    Office: 512/454-4500 ∙ Mobile: 512/563-4764 ∙ Fax: 512/454-4559
    Mark Sprague, State Director of Information Capital for Independence Title, is a respected analyst of the real estate and financial industries, and the Austin market in particular. For specific questions about market issues, contact Mark at msprague@independencetitle.com
    CONFIDENTIALITY NOTICE: This email transmission is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510 et seq., and the information contained in this message and documents accompanying same are legally privileged and confidential information intended only for the use of the individual or entity named above. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution or copy of this message is strictly prohibited. If you received this message in error, please immediately notify us by telephone and purge all copies of this message from your system. Thank you.

    Posted by Mark Sprague | December 4, 2012, 2:00 PM
    • Thanks, Mark. You’re right … there have been a few duplexes built around town over the past few years, but not enough. In the mid-2000s investors (mostly out of state) pushed sale prices up faster than rents could follow. That led to one of the most distressed market segments in our area. There has been some recovery, but there are still some good opportunities in the segment now. With occupancies as high as they are, very few permits for 2-4 family construction have been approved. The vast majority of construction will be 5+ unit projects — about 6,600 units permitted vs. 120 units in 2-4 family (through August, the last update I researched).

      Posted by BillMorrisRealtor | December 5, 2012, 8:51 AM

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