Starting out with a 1-4 multifamily property in DFW

Starting out with a 1-4 multifamily property in DFW

Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
Hello BP community members, I'm a long-time BP lurker having browsed the discussion forums numerous times in the past but finally decided to sign up and join the community as a small step towards RE investment action. I relocated from the south Texas McAllen/Rio Grande Valley area, where 4plexes are abundant, back up to DFW within the last year. I have never owned a property so my initial strategy for breaking into the RE investing world was to go the 1-4 multifamily owner-occupied FHA route as my initial investment, using my one FHA "silver bullet". My question is whether that is a viable strategy in the DFW area given how hot the market is here and the seemingly uncommon nature of 1-4 multifamily properties? In the south Texas/ Rio Grande Valley area fourplexes are extremely common with entire subdivisions being comprised solely of fourplexes rather than large apartment complexes and the builders there keep on building them. Here in DFW these properties seem few and far between. The other issue in regards to the viability of the owner occupied 1-4 multifamily strategy are the skyrocketing property prices here in the DFW market which leads me to wonder if the numbers on such a property, if one were to turn up, would even make sense? Would a 1-4 multifamily property with good income metrics be a decently nice one to live in? I appreciate any insights on this or getting started with investing in the DFW market in general. Kind regards, Mike K.
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Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
8y

@Michael K.. I'm certainly not an Expert on the DFW Market - however there are some basic things you can do to enhance your chances of acquiring a 2-4 Multi-Family property. These are:

1. Get PRE-APPROVED for a loan, NOT just Pre-Qualified, so you'll know you can buy a property, and how much money the lender is willing to loan based on your credit, income, etc.  

2. Educate your self on the market. Know where properties similar to what you are interested in acquiring are located. What is the Sales history - typical Selling Price, Days On Market, How many were For Sale over last 6 months, last 12 months.  What are typical rents for these properties. Create an Excel Spreadsheet of these facts. Just the process of documenting these facts will help solidify the info for you.  

3. Find yourself a REALTOR you feel comfortable with. Someone that will assist you with your quest. Notice, I said someone you are comfortable with, that is patient, works on your time frame, and someone you feel is not just out to make a quick commission.  If you don't have an Agent, or need assistance in finding an agent, I can refer you to agents I've worked with before in the DFW area.  

3. Armed with this info, wait for a property to come on the market in your target area. And when it does, DON'T PROCRASTINATE about making an offer. If you are not aware, in Texas, we use an Option Contract. so you have an easy out if you find something during the Due Diligence (Option Period) that might be surprising.  

4. If you want to be more aggressive in your search, find the names and addresses of property owners, and send them a letter asking if they are interested in selling.  

Good luck, Be patient, and happy investing. 

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  • Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    8y

    @Michael K.. I'm certainly not an Expert on the DFW Market - however there are some basic things you can do to enhance your chances of acquiring a 2-4 Multi-Family property. These are:

    1. Get PRE-APPROVED for a loan, NOT just Pre-Qualified, so you'll know you can buy a property, and how much money the lender is willing to loan based on your credit, income, etc.  

    2. Educate your self on the market. Know where properties similar to what you are interested in acquiring are located. What is the Sales history - typical Selling Price, Days On Market, How many were For Sale over last 6 months, last 12 months.  What are typical rents for these properties. Create an Excel Spreadsheet of these facts. Just the process of documenting these facts will help solidify the info for you.  

    3. Find yourself a REALTOR you feel comfortable with. Someone that will assist you with your quest. Notice, I said someone you are comfortable with, that is patient, works on your time frame, and someone you feel is not just out to make a quick commission.  If you don't have an Agent, or need assistance in finding an agent, I can refer you to agents I've worked with before in the DFW area.  

    3. Armed with this info, wait for a property to come on the market in your target area. And when it does, DON'T PROCRASTINATE about making an offer. If you are not aware, in Texas, we use an Option Contract. so you have an easy out if you find something during the Due Diligence (Option Period) that might be surprising.  

    4. If you want to be more aggressive in your search, find the names and addresses of property owners, and send them a letter asking if they are interested in selling.  

    Good luck, Be patient, and happy investing. 

  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    8y
    Originally posted by @Michael K.:
    Hello BP community members,

    I'm a long-time BP lurker having browsed the discussion forums numerous times in the past but finally decided to sign up and join the community as a small step towards RE investment action.

    I relocated from the south Texas McAllen/Rio Grande Valley area, where 4plexes are abundant, back up to DFW within the last year. I have never owned a property so my initial strategy for breaking into the RE investing world was to go the 1-4 multifamily owner-occupied FHA route as my initial investment, using my one FHA "silver bullet".

    My question is whether that is a viable strategy in the DFW area given how hot the market is here and the seemingly uncommon nature of 1-4 multifamily properties? In the south Texas/ Rio Grande Valley area fourplexes are extremely common with entire subdivisions being comprised solely of fourplexes rather than large apartment complexes and the builders there keep on building them. Here in DFW these properties seem few and far between.

    The other issue in regards to the viability of the owner occupied 1-4 multifamily strategy are the skyrocketing property prices here in the DFW market which leads me to wonder if the numbers on such a property, if one were to turn up, would even make sense? Would a 1-4 multifamily property with good income metrics be a decently nice one to live in?

    I appreciate any insights on this or getting started with investing in the DFW market in general.

    Kind regards,

    Mike K.

     Hey Mike

    Remember, you're going to have to live in the property if you use FHA. One strategy I've seen is purchasing a distressed multi family property (the sellers are less likely to have multiple bidders) and use the FHA 203K. If you're going to live in it, you may as well let the lender pay for the renovations and reap the reward of appreciation.

    Stephanie

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    Thank you @Jim Cummings and @Stephanie Potter for the pointers. I haven't given much thought of buying a distressed multifamily with the FHA 203, mainly because when I think distressed property I get the notion it may not be in an area I'd be fond of residing in. I might need to reconsider my comfort zone though. So do you all think worthy investment properties show up on the MLS? I was under the impression that the properties posted by realtors on the MLS were already marked up at retail with no meat left on the bone for an investor. At least that's what I heard mentioned at a local DFW REIA.
  • Rental Property Investor · Brookhaven, MS · Member since 2017 · 186 posts · 108 votes
    8y

    If you get the right deal it would be great. My suggestion, for what it's worth, is to be careful. From my understanding the Dallas market is really hot right now, if so, the good properties are going to be priced like they are great, and the just OK ones are going to be high too and there will be a lot of more experienced competition out there wanting the same properties. Don't get so ready to make a deal that you do a bad one. Stick with the numbers and use some of the tools available on the website to look at every deal.

  • Rental Property Investor · Dallas, TX · Member since 2012 · 502 posts · 263 votes
    8y

    @Michael K. 1-4 unit multifamily is pretty rare in DFW. How flexible are you in where you are willing to locate within the DFW area? There are pockets where they are easier to find and the numbers at least sort of pencil out. You have a little more leeway with the numbers as a house hack rather than pure investment property.

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y

    I'd prefer to stay near the Fort Worth area since I work in downtown. What is this house hack you speak of? Renting out rooms?

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    Originally posted by @Jason Ray Richardson:

    If you get the right deal it would be great. My suggestion, for what it's worth, is to be careful. From my understanding the Dallas market is really hot right now, if so, the good properties are going to be priced like they are great, and the just OK ones are going to be high too and there will be a lot of more experienced competition out there wanting the same properties. Don't get so ready to make a deal that you do a bad one. Stick with the numbers and use some of the tools available on the website to look at every deal.

    Ive been wondering if the market here in DFW is so hot it might be better to wait for the tide to wash out and then buy. I realize the job market and demand is strong here in DFW but I'm concerned things may be overheated considering  property prices have increased by over 60% in the last 5 years or so yet median household wages in the area have pretty much stayed flat...it leads me to wonder how that's a sustainable trend once relocations taper off.

  • Rental Property Investor · Brookhaven, MS · Member since 2017 · 186 posts · 108 votes
    8y
    Originally posted by @Michael K.:

    I'd prefer to stay near the Fort Worth area since I work in downtown. What is this house hack you speak of? Renting out rooms?

     House hacking is where you buy a du, tri, or quad plex and you live in one of them while renting out the others.

  • Rental Property Investor · Brookhaven, MS · Member since 2017 · 186 posts · 108 votes
    8y
    Originally posted by @Michael K.:
    Originally posted by @Jason Ray Richardson:

    If you get the right deal it would be great. My suggestion, for what it's worth, is to be careful. From my understanding the Dallas market is really hot right now, if so, the good properties are going to be priced like they are great, and the just OK ones are going to be high too and there will be a lot of more experienced competition out there wanting the same properties. Don't get so ready to make a deal that you do a bad one. Stick with the numbers and use some of the tools available on the website to look at every deal.

    Ive been wondering if the market here in DFW is so hot it might be better to wait for the tide to wash out and then buy. I realize the job market and demand is strong here in DFW but I'm concerned things may be overheated considering  property prices have increased by over 60% in the last 5 years or so yet median household wages in the area have pretty much stayed flat...it leads me to wonder how that's a sustainable trend once relocations taper off.

      Yeah who knows when the market is going to cool back off. It's wise to be aware that it is a real possibility, but at the same time don't let that stop you from getting started. Do more homework, and maybe hook up with a couple of experienced real estate investors in that area that could mentor you.

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    Originally posted by @Jason Ray Richardson:
    Originally posted by @Michael K.:

    I'd prefer to stay near the Fort Worth area since I work in downtown. What is this house hack you speak of? Renting out rooms?

     House hacking is where you buy a du, tri, or quad plex and you live in one of them while renting out the others.

    Ok, then house hacking was what I meant as my initial strategy when saying I was intending to go the owner-occupied 2-4 multifamily route via FHA.

  • Rental Property Investor · Brookhaven, MS · Member since 2017 · 186 posts · 108 votes
    8y
    Originally posted by @Michael K.:
    Originally posted by @Jason Ray Richardson:
    Originally posted by @Michael K.:

    I'd prefer to stay near the Fort Worth area since I work in downtown. What is this house hack you speak of? Renting out rooms?

     House hacking is where you buy a du, tri, or quad plex and you live in one of them while renting out the others.

    Ok, then house hacking was what I meant as my initial strategy when saying I was intending to go the owner-occupied 2-4 multifamily route via FHA.

     yes.

  • Ryan BlakePro Member
    Lender · TX · Member since 2018 · 936 posts · 713 votes
    8y

    @Michael K. I would suggest you look in the West Byers / Arlington Heights area. You won't find the value you would in South Fort Worth or out West on Las Vegas Trail but then again you won't have to live in either of those areas. West Byers / AH tend to have door costs of around $80k-$100k for 2/1 units if they need just a little work but nothing major.

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    @Ryan Blake thanks for the pointers Ryan! Glad to see someone from FW on the forum, so far everyone in DFW seems to be from the other side of the metroplex in the Big D.
  • Ryan BlakePro Member
    Lender · TX · Member since 2018 · 936 posts · 713 votes
    8y

    There is more money in Dallas. I did my first 2 years out there and it was great. It is very tight in Fort Worth. I like working in that area I told you about. I do fix and flip and it is a good area but I know of at least 4 other flippers actively working the same 40 block area. Don’t get discouraged or emotionally attached to any one property and keep pushing on. If you spend the time, you will find what you are looking for.

  • Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    8y

    @Michael K.

    For your first property - (Live In Hack or whatever the appropriate milleniall term is)  I would suggest you find something fairly complete unless you feel real competent to do extensive repairs. Also, consider you providing a place for your most precious (Family) to reside their as well. 

    With reference to waiting for a "Shakeout" - there may be one coming - is it 2 years from now, 5 years from now - 10 years from now! If you can accurately predict it - let us know as many may want to change strategies.

    What will be more impactful (in terms of waiting) and a more predictable occurrence affecting your decision is rising interest rates. 

    For Example, consider the following factors as to what a 1% rise in interest rates does to you monthly Payment: 5% Interest rate versus 6% Interest rate.

    5.00% Interest Rate:  $175,000 = $940 (P&I)   $185,000 = $993 (P&I)

    6.00% Interest Rate:  $175,000 = $1050 (P&I) $185,000 = 1109 (P&I).

    As you can see, the cost of money (Interest Rate) has a larger impact on affordability than rising prices. 

    Some of you Lender types, feel free to way in on this point!

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    @Jim Cummings you are correct, however I have heard it been said by a former CEO of Wells Fargo (not Stumpf) that housing prices are somewhat inversely related to interest rates, when rates rise prices seem to decline since people are chasing a monthly payment.
  • Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    8y

    @Michael K.. Agree - there will be some adjustment. 

    But interest rates are grossly under-priced currently. 

    I remember (as a Buyer) taking an 12 5/8% Adjustable Rate on a home. As an  Agent I recall anything less than 8.00% was fantastic.   

  • Rental Property Investor · Brookhaven, MS · Member since 2017 · 186 posts · 108 votes
    8y

    You don't want to be unwise. However trying to time the real estate market is a lot like timing the stock market. Many people have tried and most fail.

  • Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    8y
    Originally posted by @Michael K.:
    @Jim Cummings you are correct, however I have heard it been said by a former CEO of Wells Fargo (not Stumpf) that housing prices are somewhat inversely related to interest rates, when rates rise prices seem to decline since people are chasing a monthly payment.

    My first loan was something like 10 3/4% percent for a variable rate.

    What I think you will find is that interest rates have hit an all time low, and that as other posters have mentioned, 1) you dont know when the correction will happen, 2) The driver is the interest rate.

    Take 2 scenarios.

    1) property price is $185,000, interest rate is 5.0% on a 30 year fixed (P&I):  the payment is =$993.12

    2)You wait 2 years and time the housing market perfectly on a 15% correction so the property price is $175, 000, but interest rates are now at 6.5%.  the payment is =$993.12

    So worse comes to worse is that you just buy and hold, and the market goes down and it comes back up and you just bide your time collecting rent payments

    But what is more likely is that as interest rates go up, its due to inflation, and now that house is going to run you $200K, or $220K.

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    @Bart H. thanks for the input Bart and a thought provoking scenario. Just curious, does anyone know/remember roughly what price adjustment percentage the DFW market experienced as a correction during the aftermath of the financial crisis and into the Great Recession?
  • Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    8y
    Originally posted by @Michael K.:
    @Bart H. thanks for the input Bart and a thought provoking scenario.

    Just curious, does anyone know/remember roughly what price adjustment percentage the DFW market experienced as a correction during the aftermath of the financial crisis and into the Great Recession?

     IT wasn't much, I think I bought a condo in 2005 for about $155K, I think its value peaked a little above that or so before the crisis, and then dropped down to maybe $135/$140K at the bottom of the crisis.  And the biggest problem I had with value was that banks stopped lending on condos cold turkey.

    I believe SFH's dropped less in value.

    Dallas proper has added 100K people since the crash, I really don't think there is that much downside in property prices. Maybe a little on the Class A multi family properties, but if you are in the $1,200-1,700 price point on a duplex or SFH, I think you will find a healthy and consistent number of perspective tenants.

    Look, I agree the massive run in Dallas price appreciation is getting late in the tooth, but I don't see it dropping 20%, too many people are moving to the area every year.

    And, don't forget Dallas is a finalist for Amazon, and the city council just had a closed door meeting that some speculate was about Amazon.  Regardless, if they come here to Dallas, especially if they are near downtown, the holy cow I think you will see property prices take off.  Oak Cliff, the Medical District, M streets etc.  you will see significant price increases.

    My point is take your time, find a good solid property in a growing area, and you will do fine, in both the short and long term.

  • Rental Property Investor · Dallas, TX · Member since 2012 · 502 posts · 263 votes
    8y

    @Michael K. To add on to the discussion regarding timing the market - if you are buying for cash flow, trying to time the market adds no value. As mentioned above, if interest rates continue to rise that will do more to impact your cash flow than a drop in price.

    DFW has a strong and growing economy, adding new people and jobs every year. Unless we have some kind of systemic 2008-type event, I don't see prices falling. Certainly we won't continue seeing 10%+ growth every year. The higher interest rates along high property tax rate will have some impact on suppressing continued price increases just due to lack of affordability of the monthly PITI payment.

    The question is really are you buying for cash flow or appreciation? Cash flow should be relatively stable regardless of economic conditions (barring disaster). Appreciation is anyone's guess and can be impacted by economic conditions, interest rates, neighborhood favorability, etc. I would argue that you should never buy something with negative cash flow just for the appreciation potential.

    Given that, if I find a property now that cash flows in a stable neighborhood, I am going to buy it now, not hope prices fall and I can get a "deal" later. Too many variables to make predictions about the future.

    All that said, I find it hard to find properties that meet my cash flow criteria in Dallas these days. I am starting to sell off a few properties that have appreciated a lot over the last few years as it doesn't make sense to hold them anymore. Your criteria will probably be easier to meet as you are also looking at it as a primary residence.

  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    8y
    Originally posted by @Michael K.:
    Thank you @Jim Cummings and @Stephanie Potter for the pointers.

    I haven't given much thought of buying a distressed multifamily with the FHA 203, mainly because when I think distressed property I get the notion it may not be in an area I'd be fond of residing in. I might need to reconsider my comfort zone though.

    So do you all think worthy investment properties show up on the MLS? I was under the impression that the properties posted by realtors on the MLS were already marked up at retail with no meat left on the bone for an investor. At least that's what I heard mentioned at a local DFW REIA.

    Look for the worst house in the best neighborhood. Drive for dollars is what the investors around here say. You may also want to enlist the help of a wholesaler in your area and get active in local REIA's and meetups.

  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    8y
    Originally posted by @Michael K.:
    Originally posted by @Jason Ray Richardson:
    Originally posted by @Michael K.:

    I'd prefer to stay near the Fort Worth area since I work in downtown. What is this house hack you speak of? Renting out rooms?

     House hacking is where you buy a du, tri, or quad plex and you live in one of them while renting out the others.

    Ok, then house hacking was what I meant as my initial strategy when saying I was intending to go the owner-occupied 2-4 multifamily route via FHA.

     Here's one from a quick internet search.  Not sure where you work, but this price point is the max I'd go for a rental.  At 4.5%, principal and interest would be $2913.  Add taxes and insurance to it, and don't forget .85 MI monthly and you're looking around 3K for a monthly payment.  What would the property bring in for rent on one unit while you live in the other?  What would both units bring next year?  What would it cash flow?

      https://www.realtor.com/realestateandhomes-detail/...

  • Fort Worth, TX · Member since 2018 · 20 posts · 7 votes
    8y
    Originally posted by @Stephanie P.:
    Originally posted by @Michael K.:
    Originally posted by @Jason Ray Richardson:
    Originally posted by @Michael K.:

    I'd prefer to stay near the Fort Worth area since I work in downtown. What is this house hack you speak of? Renting out rooms?

     House hacking is where you buy a du, tri, or quad plex and you live in one of them while renting out the others.

    Ok, then house hacking was what I meant as my initial strategy when saying I was intending to go the owner-occupied 2-4 multifamily route via FHA.

     Here's one from a quick internet search.  Not sure where you work, but this price point is the max I'd go for a rental.  At 4.5%, principal and interest would be $2913.  Add taxes and insurance to it, and don't forget .85 MI monthly and you're looking around 3K for a monthly payment.  What would the property bring in for rent on one unit while you live in the other?  What would both units bring next year?  What would it cash flow?

      https://www.realtor.com/realestateandhomes-detail/...

    After doing some number crunching assuming the following:

    5% down payment

    5% interest rate

    0.9% annual PMI payment

    2.6% annual property taxes based on sale value

    $480/month property insurance (1% of sale value ÷ 12)

    Total estimaestimated PITI = $5,123

    Rents assumed at $1750/ month for each unit based on the rental ad they have for 1 unit.

    Monthly Cash flow if BOTH units were leased after only subtracting PITI is estimated at $(1,623). Annualizing everything and assuming just $480 in yard maintenance yields an estimated NOI of $(11,737) which would give a CAP rate of -2%. Based on those assumptions it would take a down payment of 39.5%, or $226K, to have break even NOI.

    Am I missing something major in my estimates/analysis or is this marketed purely as a "buy for appreciation cash flow be damned" investment ? I have to have screwed up with my numbers somewhere...

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