* The following discussion on the Austin income property market took place several years ago. The suitability of investing in this local market may have changed! Please read this article for educational concepts, which are timeless. Visit www.JasonHartman.com for an extensive list of current real estate recommendations.

On episode #319 of The Creating Wealth Show, Jason Hartman discusses the recent reopening of Austin, Texas, for investment recommendations from his network, Platinum Property Investor Network. In order to understand the nuts and bolts of the area, the Austin Local Market Specialist (LMS), cleverly referenced by his first name only (Kevin), joins Jason to spill his guts.

Venezuela Has a Toilet Paper Problem

Jason opens the show by referencing an article he recently read about the shortcomings of Venezuela’s central planning economic approach that resulted in a massive shortage of – you guessed it – toilet paper. This ubiquitous product flies waaay below the radar until you need it. Then it becomes of utmost importance! So what happens when an entire country gets low on the stuff? You add 39 million rolls into the current spending budget.

When Centrally Planning Goes Wrong…

The article in question brings up the reality that Venezuela typically runs at a 25% annual inflation rate. Compare that to the reported U.S. rate of 5% (regular listeners to Jason’s podcast know that the real rate of inflation in the U.S. is closer to 10%). The bottom line: an economy planned by the government never works as well as the free market.

…Inflation Induced Debt Destruction Goes Right

Those familiar with Jason’s style of income property investing know that the higher the inflation, the better it works, because the value of your mortgage balance drops exponentially in the face of a devaluing currency.

U.S. investors can expect their mortgage balance to erode at a rate of about 10%. Theoretically, owning rental property in a country like Venezuela would offer an even better profit opportunity, causing that same mortgage to shrink even faster. Look at the following scenario on a $1 million dollar mortgage.

  • Beginning balance in real dollars – $1,000,000
  • Year One inflation reduction of $250,000 = $750,000 balance
  • Year Two inflation reduction of $187,500 = $562,500 balance
  • Year Three inflation reduction of $140,625 = $421,875 balance
  • Year Four inflation reduction of $105,468 = $316,407 balance
  • Year Five inflation reduction of $79,101 = $237,306 balance

All other things being equal, buying income property in Venezuela would result in a more than 75% of the value of your mortgage debt being wiped away in five short years, in real dollars! Of course, all other things are NOT equal, so don’t interpret this as a recommendation to buy in Venezuela. Jason has yet to find a single property outside the U.S. that meets all his criterion. The larger point is to understand how powerful an ally inflation is to your real estate investing strategy.

Inflation Plus Commodity Increase is Even Better

To continue with our Venezuelan example, let’s assume that, while inflation cooks along at 25% (reducing the value of what you owe on your mortgage), commodity prices are rising at a similar rate of 25%, which happens to be what is happening in Venezuela. What is your fictional house built from? Commodities, of course! That means that the value of the actual structure of the rental house you own gains value along with the rise in commodities. This might seem like the perfect storm for profit but it happens all the time, even here in the U.S. Better than the perfect storm, it’s the perfect form of investing.

Austin Income Property: It’s Baaack!

For years, Jason recommended buying income property in Austin, Texas. But then prices got a little too high, inventory got tight, and he decided this thriving city no longer made sense as a real estate investment. Times change, however, boom follows bust follows boom again, and the time is right for landlords to consider Austin again.

Jason’s Austin LMS is Kevin. He joined the show at this point to discuss with Jason why he thinks Austin has such great investment potential.

Why Austin?

When you have a steady influx of people, there is an accompanying steady demand for housing. In Austin, you have both the massive home base of the University of Texas system, with 55,000 students, and the seat of the state government. Guess what? Universities and government never go out of business. In addition, business loves the tax-friendly environment of this picturesque city of about a million people.

Global companies like Dell, Samsung, 3M, IBM, and more are either headquartered or have a substantial presence in Austin, with more expressing interest all the time. One reason businesses keep coming to Texas is that it is one of the few states without an income tax. While parts of the rest of the country roil in the face of turbulent economic conditions, Austin boasts a 14% annual appreciation rate for real estate, as well as a 5% (that’s pretty low) unemployment rate.

Evictions Are Easier in Texas

No landlord wants to have to go through the eviction process. It creates hard feelings and takes time away from more productive activities. Still, when the tenant doesn’t pay the bill, what are you gonna do? Make no mistake, Texas might be the most landlord-friendly state around. According to Kevin, unlike evictions in places like California, which might drag on for six months, a tenant gone bad can be forced out of a rental unit in 30 days or less in Texas. He ticked off the process:

  • Post an eviction notice on the door
  • File the eviction notice with the county
  • Court quickly sets a hearing date
  • Three days after the decision, tenants either leave peacefully or with the assistance of local law enforcement

While other states might feel inclined to listen to a wayward tenant’s litany of excuses, Kevin attests to the fact that a Texas judge asks a simple question, “Did you pay your rent?” as many times as it takes for the defendant to get the idea. Despite the easy process, Kevin only recalls five evictions in the ten years he has been in the real estate industry. As long as a landlord does a thorough pre-screening, evictions should be few and far between, especially when focusing your investments on single family homes, which seem to have much fewer problems than apartments.

The Bottom Line

If you’re looking to increase your real estate portfolio, Austin income property might be worth a look. (Image: Flickr | eschipul)

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