Buying an Austin Apartment at 8 Cap vs. 9 Cap

I’ve been studying a property in Austin, Texas lately. It’s an 84-unit apartment that was rehabbed “down to the studs” in 2005. The owner recently installed artificial bermuda grass to reduce maintenance and improve appearances. There is also an outside video surveillance system that is accessible via a password-protected web page.

The asking price is $3.7 million, which given the NOI (see Jargon Explained page) of $295,000 results in a cap rate of 8%. This means that if you had no debt on the property, you would produce an 8% annual return. With a 25% down payment and $185,000 in acquisition and closing costs, the cash-on-cash return would be 10.2%. Giving the investors 75% of the cash flow, they would expect to receive about 7.65% return on their investment. Not bad, but I’m looking to get them at least an 8% return before their 75% share of the back end profits. 

Yesterday I had a long talk with John Dennis, a property manager with over 30 years experience in the Austin market (http://www.jldpropertiesinc.com/). One of his services is every six months taking the NOI of the property and combining it with the current Austin cap rate to give a current value. I asked him what he was quoting as the current cap rate in Austin and he said it was 9%. 

So, if we use that figure to calculate the value, we lower it to $3,275,000. At that price, we could put down 30% and still raise the cash-on-cash return to 12.1%, giving the investors a return of better than 9%. This, combined with a current vacancy of only one unit, and the fact that Austin ranks number 1 in job growth among large cities for last year, makes this a very attractive investment. We’ll have to see if the current owners are interested in selling at this price.

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2 thoughts on “Buying an Austin Apartment at 8 Cap vs. 9 Cap

  1. admin Post author

    Thanks for your thoughts on the Austin market. I, too, am concerned about the 11,000 (?) units coming online in 2009. However, since I’m looking at C properties fairly far removed from these new A properties, I don’t think we’ll be competing for the same tenant pool. If I had a nice A or B property in the north end I’d be pretty worried, though.

  2. REIT Wrecks

    Tread cautiously. I just returned from an exploration of apartment markets in Texas. Those job growth numbers are well known and Dallas is so full of apartments it makes Ohio look like Shangri-la. Rent growth is hard to come by in a market like that.

    I also love Austin, but the MSA is home to only 700,000 people (vs. 5MM in DFW). Scheduled 2009 deliveries will make it one of the most overbuilt markets in Texas. You’ll need supply equilibrium before you can make any money there.

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