Why invest in Dallas TX?

Question

Hi, I am new to real estate investment. I learned a lot from reading all the postings on the forum. I have been looking for a SFH in DFW as my first investment property for the past couple of months. We just put an offer in yesterday on a SFH in Cross Roads, Denton County. Now I am doubting if I made a right decision to invest in Texas. The house is listed for $169K, but there are multiple offers already two days after it's been listed. We offered $175K, but the average rent for that area is only $1450-$1550. After subtracting all the expenses, there will only be about $60 cash flow each month. With the high property tax and high insurance in Texas, it's very difficult to find a property that generates cash flow. Is this still a good deal to move forward? It doesn't seem like one based on the calculation.

Mike H. · Answer

There are a lot of details I think you're leaving out to determine if this is a good deal. You mentioned the offer was 175k. Does the house need any rehab? How are you buying your deals? Conventional purchase loans plus paying rehab out of pocket? Hard money?

I don't know if anybody could say how good a deal it really is without knowing some of the numbers.

$60 a month doesn't seem very good at all if you're putting down 25% of 175k (almost 44k) and paying 20k out of pocket for rehab to boot.

But if you're buying with hard money and rolling the rehab into the loan so maybe you're only out of pocket 15k or 20k, then maybe it isn't so bad.

Me personally, I won't do a deal unless I can buy with hard money (my HML does 100% of the purchase plus rehab) at 70% ARV and my gross profit (i.e. Rent minus PITI) is 400/mo or more. Now if its a near new construction home (which I've picked a couple of those up this year), I might give a little on the gross profit or the ARV.

But I figure that if my gross profit on a deal is 400/mo, I'm going to make money. Maybe not a killing. But I'm going to make money. And given the fact that I'm doing it with very little out of pocket (5k to 8k per deal), I'm tickled pink when I add one like that.

I just don't see taking on a deal and coming out of pocket 25% of 175k plus rehab for a return of only $60/mo.

You may be in too high a price point right there to make the numbers work.

I find, down by me, I need to be in the 90k to 115k price range in order to make the numbers work for rentals and to still be in nicer areas with good opportunities for long term appreciation.  Doesn't mean I don't have a couple of houses that fall outside of that. But thats a majority of the houses I own and, in my mind, the sweet spot for investing.

Have you looked at houses/areas where the price points are a little lower? I'm thinking something where the houses are worth 140k to 160k and you can buy them for at least a 20% discount (including rehab). 30% is more likely what it takes to make the numbers work well. But I think its awfully competitive in those areas so maybe 20% discounts are all that can be had.....

Terry Beall · Answer

Wow, you got a lot of good advice.  That inner voice of yours you need to listen too, if you feel it is bad after doing your due diligence, then back away.

Since you are a new investor, I would stay close to my own home, until you get more confident in what you are doing, not that you aren't.  It makes life easier when you first start out.

But, with that said, Texas is a good investment in some areas.

Good luck,

Amber Huang · Answer

Thank you for all your advice! The seller accepted our offer, but we decided to walk away from this deal. I have a lot more to learn about real estate investing. I'll keep on reading and  learning more about the market. Now I understand the importance to have a strategy and goal and stick to it whenever possible. Thanks for your help!

Michael Lee · Answer

Hello and welcome!  My name I Michael Lee and I was born and raised in the city of Dallas.  I still live in Dallas County. I would rather see you stay within a couple hours of where you live.  Not that there is anything wrong with Dallas I think you would be happier up there.  You should be able to make a good living anywhere that you are sold on.  Just do your research and Allways run your numbers before you make an offer.  Your market has got to be good for you and your investments.  Location, as you probably heard is very important.  Just take all necessary action and you will do well.  There is a lot of competition in the Dallas area, so be aware of that . Good luck!  I am 59 years old and have been in the construction business since I was 17.  Even though I have a college education does not mean I am smart but I will try my best to tell you what I think.  I will talk to you later!

George Tak · Answer

Hi Amber, without looking at your specific house and all of your numbers, I couldn't tell you if that is a good deal or not.  However, I have been experiencing that a minimum of $200 cash flow is very possible in Dallas.  Sure, $500 cash flows are also out there.  In addition, I don't know how you derived at $60 cash flow, but if your house has more upgrades and or desirable features, you can demand more rent.  Just before I rent my rentals, (or my clients) I make sure it is the best house that is being leased in that submarket.  Therefore, I can usually demand $50 or $100 more rent per month than nearby rentals.

I work with lots of investors.  In my first meeting, I usually spend about 3 hours just to learn what they are thinking.  You should also spend lots of time with your Dallas agent/broker/partner before making offers.  I don't mean to be offensive here but with all due respect, if you made an offer and then ask us to give you input, then you weren't confident about that house in the first.  If you weren't confident then you may not be a good idea about Dallas' market yet.  I suggest you get more info about Dallas' market before making offers.

Also, many investors put an emphasis on quantitative analysis (numbers crunching) but I also think about qualitative analysis as well.  It means that I also think about how easy or hard it is to rent a certain house.  For less cash flow, you might settle for a property that will have no problem renting.  If this is true, you will also save money in vacancy and perhaps using a realtor to lease the property.  For example, I know an investor who has a townhouse in walking distance to a hospital and the word got around to the interns about this townhouse.  As long as the hospital is operating, the interns are lined up to rent this townhouse.  The investor has no vacancy and do not need a realtor to rent it.

As most BP members will tell you, formulate your own strategy.  Then ask around if that strategy makes sense.  Then figure out how to execute your strategy.  I see most inexperienced investors looking at properties without having a strategy and therefore, they get confused if those properties are good deals or not.  A specific property may be a good for you but not for me.  That depends on your strategy and mine.

Amber Huang · Answer

Thank you so much for all your feedback! I did use the rental calculator to analyze the deal. There are two reasons we are considering Dallas TX area: 1. We live in Montgomery County in Maryland. The properties around us don't meet the 1% rule at all. The housing price is already high. 2. I read a lot on the forum that Dallas TX is a good place for investment, until I realized how much property tax they pay and the houses are flying off the market there.

-- Justin Ericsson, I did check maverick investment's Website. They don't have Dallas TX on their market list.

-- Eric Wesley, it would be interesting to hear what kind of deals are available in Maryland. In general, I am looking for properties in a safe neighborhood and easy to rent.

Eric Wesley · Answer

I am curious also about why not MD, there are a plethora of deals in the DC area.  Are you attracted to the low housing prices of TX?

David Rambadt · Answer

@Amber Huang

As others said your margins are way too tight.  Have you tried out the rental calculator.  As someone just starting out why the interest in the Dallas market vs. closer to Maryland?  I would not want to try investing at a distance if new to rentals.  Too much will go wrong plus you'll need a great property manager which will be hard to find with only a single property.  It's better to wait for a better deal especially on your first deal as you don't want to be one and done.

Alberto Camacho · Answer

Does this deal meet your investment criteria?

I personally don't think its good but there are some people out there that might see it differently.

My advice is figure out what you want from a deal and do your best to get as close to that as possible. Ditch everything else.

I see a steady flow of buy and holds with 300 to 500 a month  before capex and management fees.  Bad deals are in abundance, good deals are hard to find and great deals take perseverance.

Chance Housos · Answer

@Amber Huang

I am going to piggy back some of the others and tell you this is not a good deal. You will have to hunt for a deal and will possible have to put some work in it. Try using the calculator in the Analyze tab to put your numbers in and see if you will REALLY cash flow.

Chance