Is Texas too hot to make sense for investors?

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Is Texas too hot to make sense for investors?

Zhitao Cao
Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes

Recently I am looking into Texas SFH market. It was as hot as bay area several years ago, no, actually even hotter. A new listing came up during Xmas day, and today there are more than dozens waiting in line for open house.

I have been watching listing for a while, and did quite a few deal analysis. From cash flow point of view, it doesn't really make sense. The best I can do is barely breakeven (CoC ROI is slightly negative). But buyers are crazy and each house that catch my eyes will likely have multiple offer within a few hours... I do understand there is big potential for appreciation if there is nothing to disrupt this steadily growing market trend.

Question: should I join those crazy crowd, or be rational and sit back to wait the right time to come (maybe foreclosure time will come in 6-12 months?). 

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Bruce Lynn
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
5y

When will the right time be?   What does it cost you to wait?  Just think if interest rates go up 1% or 2%, how does that change your monthly payment or overall payback?

Don't fight the FED.

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  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    5y

    When will the right time be?   What does it cost you to wait?  Just think if interest rates go up 1% or 2%, how does that change your monthly payment or overall payback?

    Don't fight the FED.

    4Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    This is true, in terms of interest rate story.  I did a quick check: from 3% to 4% for a 250k loan, monthly payment is $150 difference.  And $300 difference for 5% rate.  This is a huge change in terms of rental change.

    However, Texas is not more like an appreciation market instead of a rental market.  This is what makes me wanting to wait.  I have to outbid at least 10-15% more on listing price to get a deal which I think is good.  10% of 300k price is 30k...  This is what is is puzzling me because it will deplete cash inventory faster...

    0Reply
  • Jenning Y.
    Investor · USA · Member since 2015 · 168 posts · 243 votes
    5y

    @Zhitao Cao

    I am living in Houston Texas for more than 20 years, also an OOS investor myself. I advise against OOS investors investing in Texas.  If you must invest in Texas, Austin is the only city worth to invest.  But it is an appreciation play, pretty much like bay area. The property tax here is just too high,  will kill cash flow and appreciation potential. Think about it,  a $400k property's property  tax about $12k, let's assume the price will be doubled tomorrow,  how many people can afford the $24k property tax?

    Look like you are from North Cal. If I were you, I will try to look at the area out of bay area, such as cities along highway 80 from Vallejo to Sacramento, or cities in Central Valley, or Inland Empire. If SFR does not work, try 2~4 units. If you can make the cash flow break even at the start, you will win in the long term.

     Lots of newbies made the mistake focusing  too much on cash flow. They underestimated the PM fees and repair costs, did not get the cash flow they anticipated while giving up the real wealth creator - appreciation. Especially if you want to be a passive investor.   Of course,  if you want to be a full time investor, that's different. 


    3Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    @Jenning.  Thanks for the advise.  I agree that 400k properties are out of the question for cash flow for sure.  There is a bit hope to make barely breakeven cash flow for 200-250k properties, but again those deals are gone within 1-4 hours and house is old...  This is what I have been watching lately in Austin and vicinity.

    I am a bit surprised you still suggest California, but as I heard, TX is much more friendly to landlord compared to CA. 

    0Reply
  • Josue Vargas
    Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
    5y

    Welcome to Texas.  

    The longer you wait the more you will pay.  On the other hand there is the all-time low loan rates.  Not sure how long they will hold up.  Typically market in Texas, as many other states, starts to get hot and OK for buyers around April.  Now, yes you take a ticket and get in line, depending on what you are buying, or wait longer where there is more properties to choose and better market.  I had to pay full price for a very good property, and there were other three offers in it.  I win the "bet" because some of them were cash offering lower than full price, the other offer didn't win because of the unique individual situation.  So, I was lucky.  

    2Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    Thanks Josue.  Would you mind to share some of the stats in your recent deal?  Which area would you recommend?  I learned something quite true in your practice: it is probably better to win a bid with a bit higher price (20% down) vs a bit lower price (all cash).  As investor, clearly the 1st is a better strategy.  

    0Reply
  • Josue Vargas
    Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
    5y

    @Zhitao Cao

    The numbers I can give will not make sense to you if is not the same market.  You need to have a strategy, what you can buy, what you can get from it, and how much work and time you can give to them.  For example, I don't buy less than class B, so my properties are expensive, most likely in good neighborhoods, and single family.  Vs other people that opt to buy 3-4 doors for the same price and either not in a good areas or the property needs a lot of repairs.  Often these people pay a management company to take care of business, unless they have just that property and the time to deal with it.  

    So in short, it really depends. San Antonio is awesome.  Is a big city with plenty of history and fun, yet out in the country with easy access to the coast. 

    0Reply
  • Matthew McNeil
    Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
    5y

    I learned a log time ago to never be influenced by the "crazy crowd."
    Set aside the craziness and stay the course for the strategy you've laid out in order to accomplish your long term goals.

    1Reply
  • Pete Harper
    Rental Property Investor · Streetman, TX · Member since 2018 · 528 posts · 495 votes
    5y

    @Zhitao Cao It is really hard to time the market. Two years ago we were actively looking for multi family properties. We faced a similar issue with multiple offers on the better properties. Everything was going for more than asking price with many all cash offers. There is a lot of California money running to TX driving prices up. ;-)

    We found you have to be patient. Be prepared to make multiple offers on different properties. Run your numbers and determine your last best offer on an individual property. Negotiation up to that number and be prepared to walk away. Don’t get caught in a bidding war. I’m sure I’ve offered on 3X the number of properties I’ve purchased.

    3Reply
  • Cole Britting
    Investor · NH · Member since 2020 · 175 posts · 75 votes
    5y

    I am wondering a similar thing. Right now, I'm looking at Austin, DFW, and San Antonio. They all seem crazy competitive, but I don't know if it will slow down anytime soon. Seems like a lot of people/companies are moving there right now. I'm interested to see how the markets are in 2021!

    1Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    @Matthew McNeil

    Thanks for the advice. Yes, stay in the long term goal course. :) My bottom line is break even on CF in Austin.

    0Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    @Cole Britting

    Can you share some of your observations and comparisons on these 3 area pros and cons? I am looking into 2 of them as well. Dallas seems to have lots of new constructions in north.

    0Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    @Pete Harper. Thanks, yes I agree patience is key. I have put up my cash flow google sheet and run a deal analysis on anything that catches my eyes. It indeed helps a lot!

    0Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    @Josue Vargas

    Thanks for the advise. When you have time, I will look into San Otonia to do some mockup deal analysis. How is the appreciation potential based on what you see?

    0Reply
  • Joe Bertolino
    Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    5y

    I don't see Texas being a great play right now with the sudden "hot" label bringing on the rookies combined with oil prices turning negative for the first time in history as Covid hit... small time investors could be leading with their chin.  The new reality of people working from home will sting the Bay Area but 40%+ of Texas' economy is tied to oil.  There is much more potential for an ugly situation there than in SF in my opinion.   Invest in Sacramento for cash flow and appreciation.   Sadly... the state government isn't going anywhere.  The major employers (hospitals, medical billing, Eye Insurance, grocery stores, etc).  You look at the list of largest private employers and there isn't anybody who could leave that would make a dent. 

    3Reply
  • Jenning Y.
    Investor · USA · Member since 2015 · 168 posts · 243 votes
    5y

    I probably should not hijack this thread  because this thread is about Texas.

    But I basically agree with @Joe Bertolino . If you look at the housing price history of the past 20~30 years, almost all California's neighboring Mountain States are benefiting from  California exodus.  This will benefit inland California cities too. Two of the most promising area/city are Sacramento and Inland Empire.

    I am not suggesting anyone to buy now. If there's bidding wars, we can just watch from sideline...  





    1Reply
  • Jeremy Blevins
    Folsom, CA · Member since 2018 · 134 posts · 100 votes
    5y
    Originally posted by @Zhitao Cao:

    @Matthew McNeil

    Thanks for the advice. Yes, stay in the long term goal course. :) My bottom line is break even on CF in Austin.

     Don't buy to break even, and don't buy for appreciation. Appreciation is nice but it is not something you can guarantee. If your numbers aren't working in the areas your looking at then perhaps you should try another market or figure out a way to find an off market deal so that the numbers look better. 

    1Reply
  • Bryan MitchellPro Member
    Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
    5y

    Im with @Jeremy Blevins on this one. I really would not buy and wait for appreciation. There are markets with both CF and some appreciation. If it doesn't work for both, keep looking. Now, if your buying raw land in the path of progress, you could sit on it and wait. Or you could fix and flip older houses in nicer areas with great schools. Or BRRR it to make CF as part of your buy and hold strategy.

    0Reply
  • Joe Bertolino
    Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    5y

    CA as a state has appreciated by roughly 5% a year for 50+ years... can you really just discount that?  I understand being conservative but you are missing out on a ton of money with that philosophy.  Cash flow is important but wealth is built with appreciation and leverage.  

    0Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y

    Thanks for all the great feedback. I just test drove an offer in Austin yesterday. Adding ~7% more than listing price didn't get me anywhere and the SFR was in closing within almost 24 hours. DoM is extremely low right now. Seems like many suggested there are lots of places with both CF and appreciation now. I really hope to hear more details on those.

    0Reply
  • Bryan Noth
    Realtor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Zhitao Cao I would strongly second the words of @Pete Harper about submitting offers.  The housing inventory is at all time low for the Austin MSA and people are moving here at all time highs.  The competition is fierce.  I would evaluate your contract terms to see if you can offer more competitive terms.  This is often overlooked when submitting offers but clean contracts and terms make it easier for a seller to accept your offer over others.  That said, sometimes the offer pool you are up against is just strong and at that point it may not be worth it to have the winning offer.  

    0Reply
  • Antonio CuccinielloPro Member
    Investor · Austin, TX · Member since 2016 · 531 posts · 310 votes
    5y

    @Zhitao Cao I have run into the same issue. I just moved to Austin from NYC.

    Hear me out. If your goal is to get cash flow, I would first pick a place that allows you to cash flow more. Because in the end, the property does not cash flow if it does not cash flow. You can't change that.

    If you are already coming from out of state, I would simply just find a new market. How does that sound?

    732-402-6988
    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    5y

    Just buy an air conditioner. 

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    2Reply
  • Enrico Angella
    Rental Property Investor · Rome Italy · Member since 2020 · 42 posts · 19 votes
    5y

    The inventory in Austin as many others pointed out, right now is non-existent. I would look at other MSAs where SFH rental investment makes more sense!

    Good luck with your search

    0Reply
  • Zhitao Cao
    OP
    Rental Property Investor · Northern California · Member since 2020 · 14 posts · 5 votes
    5y
    Originally posted by @Bryan Noth:

    @Zhitao Cao I would strongly second the words of @Pete Harper about submitting offers.  The housing inventory is at all time low for the Austin MSA and people are moving here at all time highs.  The competition is fierce.  I would evaluate your contract terms to see if you can offer more competitive terms.  This is often overlooked when submitting offers but clean contracts and terms make it easier for a seller to accept your offer over others.  

    Thanks Bryan.  This is a very good point.  But it seems like the Texas offer sheet has limited items to play with (title, survey and home warranty).  Would love to hear more on more creative ways to make the offer cleaner and more competitive (w/o higher price)

    0Reply
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