Situated in almost the geographical center of Texas and with easy access to all the other major metropolises in the state, Austin has become a hub for activity, especially in the tech sector. Austin is the capital of Texas and is home to the University of Texas at Austin, which provide solid employment in the public sector and education on a continual basis.
But what has helped Austin explode on the international scene is the growing tech-based economy that is fueling the city’s population growth and the demand for housing across the metro region. Home to 931,820 people as of 2015, Austin is the fourth most populous city in Texas and the second most populous state capital, behind only Phoenix, Arizona. The metro population is estimated to be 2.056 million people, which ranks 31st in the nation.
Austin’s robust economy, favorable business conditions and a large pool of working millennials are what is attracting high-tech companies to the city. In fact, many Silicon Valley powerhouses maintain a significant presence in Austin because of this, including Apple, IBM, Samsung Austin Semiconductor and Dell. Texas’ low taxes and no state income tax are very attractive features to newly-graduated young professionals who want to get their feet wet in exciting high-tech careers without having the government take away a large chunk of their money.
Industry continues to invest in Austin. Yearly employment growth has hovered around 4% for 45 consecutive months, one of the longest stretches among comparable cities. Even better is that a lot of these jobs are well-paying positions, especially for younger cohorts, making it a city of the future.
With the continued projected boom of the region’s population, especially with millennials and younger professionals, Austin is a prime market for real estate investors looking to enter the rental market. Millennials often prefer to rent instead of buy as they are beginning to build their lives. In addition, rising home prices and interest rates have kept renters from shifting over to buyers for longer now than it would have in the past.
Austin Has a Solid Economy
Austin was founded in the 1830s by pioneers because of its location along the Colorado River. The location was advantageous then, and it has continued to be so as modern development began to take form across the country. Only nine years after its founding, Austin replaced Houston as the capital of the Republic of Texas.
Following the Civil War, the opening of the Houston and Texas Central Railway turned Austin into a major trading center in the region, with the Missouri, Kansas & Texas rail line developed not long after. In the early 1900s, the city began civic development and beautification projects that created much of Austin’s infrastructure and made it a peaceful and attractive city in which to live.
By the 1990s, Austin began to establish itself as a hub for business and technology. With a large population of students and recent graduates from the University of Texas at Austin and other institutions of higher learning, tech companies began to flock to the region to take advantage of this highly educated and skilled workforce. Now, in addition to solid employment numbers in education and in the public sector working for the state government, Austin began to take on its modern nickname of Silicon Hills.
Today, a number of Fortune 500 companies have either headquarters or regional offices located in Austin, including:
- General Motors
- Oracle Corporation
- Texas Instruments
- Whole Foods Market
All this business has resulted in a robust economy. From 2013 to 2017, the economy expanded by nearly 5% annually. Austin’s unemployment rate of 2.9% in April 2016 was the lowest among large metropolitan areas. CNN ranked Austin as the fourth best city to get a job, and the Kaufman Foundation named Austin as the #1 tech startup town in the U.S.
Other upcoming employment and development market highlights include:
- An African-themed waterpark and convention center recently broke ground in nearby Round Rock. The $550 million project will include 1,000 guest rooms, 200,000 feet of convention center space and 10,000 square feet of retail space.
- Internet job search firm Indeed recently signed a lease for more than 600,000 square feet of office space in Austin. The company anticipates adding as many as 3,000 new positions to its current total of 1,600.
- HomeAway.com is relocating its global headquarters to Downtown Austin in the first quarter of 2019. This will create hundreds of new positions in its 315,000-square-foot building.
- Progressive Insurance will end up hiring 7,500 workers nationwide by the end of 2018, with nearly 10% of that at the company’s southeast Austin call center.
With an unemployment rate as low as it is already, there may not be much room for significant growth in terms of the number of jobs in Austin. Where the growth will come most likely, instead, will be in payrolls. Payrolls increased by 3.2% in 2017 and are expected to continue that upward rise in the future.
Austin’s Population Is Great for the Rental Market
All this boom in the employment sector would not happen if there weren’t an already strong presence of qualified workers and a projected continued boom in population. That’s exactly was is happening in Austin, but it’s not just because of the great job market. Austin is also home to many parks (more than 200) and places of public entertainment as well as many lakes, rivers and other outdoor activities.
In 2016, Austin was ranked as the third fastest-growing city in the country, while Georgetown, a suburb about 28 miles south, was ranked as the fifth fastest-growing city in 2017. The city of Austin is also predicted to grow by 10.3% by 2020, the largest growth out of all metros in the U.S., which would push the city over 1 million people.
The biggest cohort in this population growth is the 20- to 34-year-old age range. Between 2011 and 2016, this cohort increased by 12.4% in Austin, which is almost triple the national rate. This is a segment of the population, no matter what the location, that is most attracted to the rental market. These young professionals are just getting their adult lives started and often don’t jump right into the home-buying market. Instead, they opt for rentals as they get themselves established in the working world before or as they start their own families.
In addition, more people today are remaining in rentals rather than transitioning to home ownership because of the rising interest rates across the country and, specifically in Austin, the continued increafse in home prices. The median single-family investment price increased a substantial 11% year over year to $275,000 at the end of 2017. This follows a trend over the last five years, a time when investment home price gains have averaged more than 10%.
As a result, the single-family rental vacancy rate has dropped below 5% and is forecast to remain there through the end of 2018. Short-term competition is predicted to eventually yield to long-term fundamental improvement in the market as new residents absorb the influx of new apartment construction. In the fourth quarter of 2017 alone, the annualized single-family permitting activities was 14,100 homes, which was relatively on par with the previous quarter. Multifamily developers pulled 4,300 permits in that time, a large 26% decrease from the previous year.
This makes for a very competitive rental housing market. The competition from single-family homes and new apartments is expected to increase vacancy up 40 basis points to a 4.9% increase. Average rents for single-family rentals are expected to finish out 2018 at $1,705 per month, which would be 2.1% higher than last year.
Savvy investors are becoming more selective when they’re looking for areas to invest in Austin’s single-family sector, since home prices are increasing so much and the return on investment may be a little trickier than before. Average cap rates currently sit in the low-4% range, but older, C neighborhood properties have the potential to change hands at first-year returns of closer to 6%. An overall slowdown in apartment development is expected to facilitate stronger gains in the single-family rental market in 2019.
Where to Invest in Austin
With all the factors above, it’s clear that now is a great time to invest in the Austin housing market. There are plenty of options to invest inside the city limits and in the suburbs as well. The real estate market in the city could be a little more difficult with all the new development and high-rise construction, though. So many investors are looking more toward the Austin suburbs for opportunities.
Here are a few prime investment opportunities in single-family homes in the Austin metro region.
Lago Vista is a suburb of Austin located about 35 miles northwest of downtown. This home has three bedrooms and two bathrooms with 1,556 square feet of living space. With a purchase price of $211,211 and an investment of $61,639, an owner could expect a projected rent of about $1,750 per month. That would result in a 9.94% gross yield and $10,093 in net operating income.
Round Rock is a suburb located about 19 miles north of the Austin city center. This four-bedroom, four-bathroom home has 1,628 square feet of living space across two units. The purchase price of $259,000 and an investment of $84,020 could result in a projected monthly rent of $2,100. That would give an investor a 9.73% gross yield and $9,642 in net operating income.
This property is located within the city limits, only about nine miles from Downtown Austin. It has 1,632 square feet of living space with four bedrooms and two bathrooms over two units. A purchase price of $274,900 and an investment of $88,472 could result in a projected monthly rent of $2,150. That would give an investor a 9.63% gross yield and $12,386 in net operating income.