Strategy to start in Houston

9 Replies

Hello everyone,

I currently live in Houston, my lease is up in february 2016 and my wife and I plan on making a move before then.

We do not have 20% down for a place that we would like to live in (2 bedrooms) which would cost around 200k. So I thought about the following strategy :

Buy something around 100k for a one bedroom using a FHA loan, maybe improve it and keep saving towards our 20% down. Follow opportunities closely until we find something we'd like. Get the second place using traditional financing and rent the first one. Hopefully staying less than a year in the first place.

The other possibility would be to rent for another year and keep saving but I don't like the fact that the lease would get us stuck and most likely make us miss deals.

What do you guys think ? Is FHA financing a smart idea for the situation ? Should traditional financing be used for the second place or FHA as well ?

The long term plan would be to keep acquiring other renting properties.

Thanks for your help.

Originally posted by @Tristan S. :

Hello everyone,

I currently live in Houston, my lease is up in february 2016 and my wife and I plan on making a move before then.

We do not have 20% down for a place that we would like to live in (2 bedrooms) which would cost around 200k. So I thought about the following strategy :

Buy something around 100k for a one bedroom using a FHA loan, maybe improve it and keep saving towards our 20% down. Follow opportunities closely until we find something we'd like. Get the second place using traditional financing and rent the first one. Hopefully staying less than a year in the first place.

The other possibility would be to rent for another year and keep saving but I don't like the fact that the lease would get us stuck and most likely make us miss deals.

What do you guys think ? Is FHA financing a smart idea for the situation ? Should traditional financing be used for the second place or FHA as well ?

The long term plan would be to keep acquiring other renting properties.

Thanks for your help.

 Someone correct me if I'm wrong, but to get the lower down payment (owner financing), you are required to live in the house for OVER a year. Moving out before your year is up would be loan fraud. 

It's a good plan, but I think you should get involved with an investor realtor. One bedroom, in my opinion, isn't really desirable as a rental house. If you're not willing to live in the unit for a full unit, why would your tenant be willing to?

As far as loans go, talk to a mortgage broker or a few lenders. The type of financing you want really depends on how much you want to put down, what your goals are (refinance after 2 years?), etc. Fees are different for each of the loans. In my situation, FHA has always been the best option.

Thanks @Brianna H. for the answer. I was not aware of the one year limit for the use of a FHA loan, that shouldn't be an issue.

I was talking about one bedrooms because we are looking at townhomes/apartments in the galleria area or even in the loop and that is what we could get for a budget around 100k. That is where we want to be because it is close to work. So even in the galleria, one bedroom units does not receive much interest from future tenants ?

Do you know any good realtor investor you could recommend ?

Are you personally using FHA loans to acquire properties ? Do you ever refinance ? (why would you ? it would mean locking more of your own money into the property, wouldn't it? )

Thank you.

Originally posted by @Tristan S. :

Thanks @Brianna H. for the answer. I was not aware of the one year limit for the use of a FHA loan, that shouldn't be an issue.

I was talking about one bedrooms because we are looking at townhomes/apartments in the galleria area or even in the loop and that is what we could get for a budget around 100k. That is where we want to be because it is close to work. So even in the galleria, one bedroom units does not receive much interest from future tenants ?

Do you know any good realtor investor you could recommend ?

Are you personally using FHA loans to acquire properties ? Do you ever refinance ? (why would you ? it would mean locking more of your own money into the property, wouldn't it? )

Thank you.

 I am not very familiar with inside the loop, so that would be a good question for a realtor. How long have you been looking at townhomes in this area? Are there a lot of rentals listed? Have you done a market analysis? A realtor will be able to get you the sales comps/rental comps for the area to assist in your research. One thing that really turns me away from townhomes/condos is the mandatory maintenance fees attached to it. You will easily spend $250/mo in maintenance fees. Have you thought about this?

I just did a quick search for the galleria area and analyzed one place. (2121 Fountain View Dr)

LP: $85k (5% DP, 4.5% interest - $400/mo)

Taxes: 2.5% on $45k ($1125 - $100/mo)

Insurance: assume $100/mo (I have no idea what townhome insurance rates are, but you can get quotes before you buy)

Mandatory maintenance: $300

Vacancy: $100/mo (based on monthly rent of $1200)

Repairs/capex: $100/mo (Built in 1968, I would expect to make some repairs)

Management: $120/mo (10% of $1200)

Total monthly expenses: $1220

In the same area, I saw a place listed for rent for $1200 (824 sqft), which is $1.45/sqft. The house I analyzed is 660 sqft, which would mean you could rent it for $960 which all things being similar (I didn’t check this too detailed).

This is just a super quick calculation that doesn’t really have a lot of basis behind it, but this is exactly the reason why I avoid inside the loop and why I avoid townhomes/condos. The mandatory maintenance fee is a killer! I’m not sure what all the maintenance fee consists of so you might be able to get away with not setting money aside for repairs, but it still looks like a horrible deal.

I can send you my realtor information if you are interested. He is an investor himself and he deals with a lot of investors.

Both my home loans are FHA. They offered the best terms in both situations. Refinancing has many different purposes. Most people refinance to take advantage of a lower interest rate and reduce their payment. You can refinance and get cash out from your home if you have enough equity. My primary mortgage was originally at 5.125%, 30 year. I refinanced into a 15 year at 2.9%. I'm only paying $100 extra per month and I reduced my loan in half (I refinanced after 6 months). I bought a foreclosure and they would only let me get this particular loan with the house and I knew right away I didn't want those terms.

Just keep in mind that it is a lot harder to refinance a home if it is not owner occupied. You will need more equity in the home and the interest rate will probably increase, that is if they agree to refinance in the first place. I hope that helps a little! 

Hi @Tristan S. , @Brianna H. is correct that the FHA requires owner occupancy. I also agree about the one bedroom. I'm sure you can rent it out but think of type of tenants you'll get in there. They'll likely be young and single, which means they won't likely be long term renters. So you have more churn from just that standpoint. Additionally, by default, you're filtering young professionals who might want an office, roommates, a young family, etc. This will make it harder for you to rent because your pool of renters is limited. Just some things to consider.

"Owner Occupant Rules

The FHA property ownership guidelines require a home buyer financing with an FHA loan to occupy the home within 60 days of signing the loan documents. The home must be the borrower's principal residence, which the FHA guidelines define as the owner living in the home for the majority of the year. The home must remain the borrower's primary residence for at least one year after an FHA loan is funded. After the one-year period, an FHA-financed home could be rented out instead of used as a primary residence."

@Brianna H. , thanks for your input. I have been looking at townhome in the area for maybe a couple of months. But only changed my strategy recently when we realized that we could not afford what we wanted. What do you mean exactly by market analysis ? I just assumed that due to the location (galleria), there would be some demand for rentals because a lot of people work in the area and it's close to the loop. I am aware of the fees and do not like the idea as much as you, but it seems like a townhome is the only affordable option for the location (if there are any other option, please let me know). I do not think that I am ready to rock the suburb being in my mid 20's without any kids. Is there any other area I should be looking into?

@Michael Le , You make a really good point about the one bedroom which I definitely did not think about. Let me know what is your opinion on townhomes and HOA fees ? Is there any way to have them being profitable ?

@Justin Long , thanks for confirming, it really heps.

@Tristan S. , suburbian HOAs are generally accepted facts of Houston life now. But they're not as bad as the monthly condo/townhome fees. I don't like those properties because it's hard to cash flow due to those maintenance fees. In addition, they can also charge you one time fees if their pool of money is not enough to cover certain CapEx replacements. Say the roof across the 8 unit building needs to be replaced and it will cost $10k and they only have $7k. They'll now charge each unit $375 to make up the difference. That might eat up your profit for half the year.

Have you considered looking at houses on the east side of town, near BBVA Compass stadium? The houses on that side of town are still relatively cheap but I see a lot of renos etc as gentrification is happening.

Originally posted by @Tristan S. :

@Brianna H., thanks for your input. I have been looking at townhome in the area for maybe a couple of months. But only changed my strategy recently when we realized that we could not afford what we wanted. What do you mean exactly by market analysis ? I just assumed that due to the location (galleria), there would be some demand for rentals because a lot of people work in the area and it's close to the loop. I am aware of the fees and do not like the idea as much as you, but it seems like a townhome is the only affordable option for the location (if there are any other option, please let me know). I do not think that I am ready to rock the suburb being in my mid 20's without any kids. Is there any other area I should be looking into?

@Michael Le , You make a really good point about the one bedroom which I definitely did not think about. Let me know what is your opinion on townhomes and HOA fees ? Is there any way to have them being profitable ?

@Justin Long , thanks for confirming, it really heps.

 Market analysis as in make sure you are buying the property for less than similar homes in the area (per square foot). Make sure that your property can be rented out for at least enough to break even. Just because it's in the galleria area doesn't mean it's going to be profitable. The demand might be there, but only at the right price...that's the same for any area. If you buy a house like mentioned above and have to rent it for $1400 to make a profit, then you risk it sitting vacant because no one will pay that much for a one bedroom. 

Read this article for some expenses to consider: http://www.biggerpockets.com/renewsblog/2014/09/28...

I'm not sure what you are paying in rent, but I would recommend renting another year and saving up for the 2 bedroom, or even a 3 bedroom. A lot of people are turned off by anything less than 3 bedrooms (I won't even look at homes that are not 3/2/2 with 1500 sqft). Talk to an investor realtor and see what they recommend for that area, as I am not really familiar with it...maybe they will have a different perspective. Maybe you could get in contact with a few of the townhome owners and see what the pros/cons are. I just don't see you making a profit on a townhome with the astronomical maintenance fees...it's almost like a time share...gross..

One of the things that I would reconsider is investing in a one bedroom and in a townhome. In my opinion this type of residential property has its limitations. You pretty much narrow your market down to being able to only rent to singles or a couple with no kids.