Do I continue with this deal...

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Do I continue with this deal...

Auryana Faramarzi
Member since 2021 · 29 posts · 34 votes

Hi all - first time investor here (well, almost). My offer was accepted for a SFR in Houston (zip code 77007, near Houston Heights). I wanted to share the details with my fellow BP investors and get your opinion on whether I should move forward with the deal or not. This will been my first property purchased. I currently live in CA and this will be out of state investment property. So here are the details...


Details: 3 bedroom, 3 bath SFR listed at $365K - I got it for below asking at $355K. The seller's have also given me credit towards closing of about $5K. Property tax rate is about 2.29% (so I will be double wammied with state and property taxes).

Homeowners insurance is $183/month (includes also Flood Insurance)
Taxes $680/month 
HOA $75/month
Monthly rent ~$2600

I have run the #'s through BP "rental property calculator" and would be cash flowing $75/month (after expenses, vacancy, etc.). This is only a 1-2% CoC situation and obviously not ideal. But in this market, I'm having a hard time finding much that does cashflow.

I'm a young working professional who has been paying rent for years now and my purpose in buying this property is to build equity and get those tax breaks. But a cash flowing property is also a goal of mine. I know HTX has slow appreciation YoY so I am not counting on massive jumps like we're seeing on the West Coast. 

In addition, in this particular zip code, I'm seeing home drop in price which seems like a red flag....

Please let me know what you think of this particular situation, I appreciate all of the wealth of knowledge this community has to offer. (If I left any information out, please let me know!) 

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Lee HamptonPro Member
Developer · Houston, TX · Member since 2020 · 94 posts · 105 votes
5y

@Auryana Faramarzi  

Superb question! Concise, yet sufficiently detailed combined with thoughtful and accurate analysis (says a lot). Given your thoroughness, I believe you’ve answered your own question, but I’ll add some insight.

$75/unit/mos is an extremely low bar for a "cash flow" play. You have zero room for error. You are an HOA assessment, a minor repair, or a flood insurance increase (FEMA redraws flood map) away from being cash flow negative There are legitimate reasons for investing in a property with no cash flow, but none of those reasons apply here.

77007 is fine, however, IMHO, townhomes in the area are not wise appreciation plays. There is shift in preference to properties with a yard even if it is a small one, the shift is partially due to Covid. And when the market cycle turns, townhomes will get hit 1st and get hit the hardest. Real estate is forgiving over time, so I’m not suggesting that you would lose money, just that this deal does not align with a cash flow strategy. I hear someone saying “good cash flow deals are hard to find in this market”; Hard, yes! Impossible, no! I own double digit units in Houston, and while I still peruse Houston, I have turned my attention and am targeting two OOS markets that I believe have value and where I can meet my cash flow criteria. Finally, I'll leave you with this;

“The hardest test in life is having the patience to wait for the right moment”

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  • Thomas Brett Gilbert
    Member since 2019 · 11 posts · 4 votes
    5y

    I live just to the west of 77007 (in 77057), and that is a nice, popular area for young professionals.  TX does not have a state income tax, so you might be able to avoid paying taxes on it if you form and entity, and keep it, and all rent, in TX.  I'm not a lawyer or a CPA though, just something to look into if you don't need the monthly rent.  

    $75/mo is not much though.  Just getting an unlicensed handyman out to fix a dripping faucet or a broken towel rack will probably set you back at least that much, and a property manager is going to take 100% of the first months rent (so run your numbers at (11/12)x($2600) for actual income).   

    However, it is a nice area, and I have 2 friends that live over there (DINCs in their 20's).  It should appreciate better than outside the loop. 

    Hope this helps!

    1Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    @Auryana Faramarzi I do not get a sense from your post of what your long term plan is with this investment.  Do you have a plan to add value here?  Is there reason to believe there will be substantial appreciation (it seems not from your post)?  Can oyu substantially raise rents?  At best, you will be earning $900 per year in cash (if everything goes smoothly and, after 25 years in this business, I can safely say it almost never does)  on your $90,000 investment.  You can earn $4,500 year putting this money in something a lot safer like Verizon or AT&T stock and pay only 15% federal tax on those qualified dividends.     

    5Reply
  • NA NA
    Member since 2021 · 1 post · 0 votes
    5y

    The Heights is very good Houston area. Ideal for young professionals and established families that want to live in the city. The tax rate is fantastic at 2.29%. We live in Katy and taxes are 3.4% here. I'd definitely see if there's any room in the numbers to squeeze some more cash flow though. Perhaps it could be a good flip in a year or two. 

    0Reply
  • Auryana Faramarzi
    OP
    Member since 2021 · 29 posts · 34 votes
    5y

    @Thomas Brett Gilbert Definitely agree that the area is great, would probably get a good tenant pool of working professionals. Unfortunately, I don't think I can claim residency in TX since my paystubs originate from CA so I wont be getting those tax breaks. Have your friends lived in the area long? Have they seen rent prices increase in the past couple years? Thanks for your help! 

    0Reply
  • Auryana Faramarzi
    OP
    Member since 2021 · 29 posts · 34 votes
    5y

    @Darius Ogloza My long term vision to hold this property 15+ years. From what I see on Zillow, rents increase a couple hundred every 3-4 years. And I agree with you in terms of better return on investment, I think I'm only considering it bc I would be building equity. I appreciate your input! 

    0Reply
  • Auryana Faramarzi
    OP
    Member since 2021 · 29 posts · 34 votes
    5y

    @NA NA Agreed, definitely see better tax rates in this area. I also looked at homes in Katy/Cypress where avg was 2.9%...

    I'm not sure I can squeeze more cash flow currently, unless rents were to go up in a couple years.

    0Reply
  • Lee HamptonPro Member
    Developer · Houston, TX · Member since 2020 · 94 posts · 105 votes
    5y

    @Auryana Faramarzi  

    Superb question! Concise, yet sufficiently detailed combined with thoughtful and accurate analysis (says a lot). Given your thoroughness, I believe you’ve answered your own question, but I’ll add some insight.

    $75/unit/mos is an extremely low bar for a "cash flow" play. You have zero room for error. You are an HOA assessment, a minor repair, or a flood insurance increase (FEMA redraws flood map) away from being cash flow negative There are legitimate reasons for investing in a property with no cash flow, but none of those reasons apply here.

    77007 is fine, however, IMHO, townhomes in the area are not wise appreciation plays. There is shift in preference to properties with a yard even if it is a small one, the shift is partially due to Covid. And when the market cycle turns, townhomes will get hit 1st and get hit the hardest. Real estate is forgiving over time, so I’m not suggesting that you would lose money, just that this deal does not align with a cash flow strategy. I hear someone saying “good cash flow deals are hard to find in this market”; Hard, yes! Impossible, no! I own double digit units in Houston, and while I still peruse Houston, I have turned my attention and am targeting two OOS markets that I believe have value and where I can meet my cash flow criteria. Finally, I'll leave you with this;

    “The hardest test in life is having the patience to wait for the right moment”

    10Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    @Auryana Faramarzi

    I would stick with it. Rent will go up a few hundred/month within a few years which will make this cash flow better. I’m in Texas too and it seems like half of California is moving here for obvious reasons. As long as we have a major population increase from out of state residents, I’m bullish on RE out here.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    The answer to your question is NO.

    6Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    5y

    @Auryana Faramarzi how much are you putting down and how are you financing?  It seems like this will tie up a lot of your cash without cash flowing.

    1Reply
  • Brendan Miller
    Rental Property Investor · Gilbert, AZ · Member since 2020 · 210 posts · 163 votes
    5y

    @Auryana Faramarzi I personally wouldn’t do the deal based on the cash flow, there are better deals out there still even in this market. I also didn’t see Property Management detailed in your costs although you mentioned you lived out of state, so that may be another cost to consider. Since there isn’t much cash flow, you’d just need to be prepared to fund any unforeseen issues out of your own personal income cash flow. Normally when you’re having to do that it means it’s not a great investment unless you’re expecting large appreciation (which isn’t a guarantee).

    3Reply
  • Quinn OlivarezBusiness Member
    Real Estate Agent · Houston, TX · Member since 2021 · 115 posts · 131 votes
    5y

    Your cash flow is so low and therefore a pretty risky proposition like others have said. The best zips for the heights are 008 and 009. If you want to continue investing in the heights, I’d look harder at those areas. That being said, heights is still a great area to hold property in. It’s universally recognized in the region as one of the best neighborhoods to live or visit. HAR data shows it’s one of the fastest growing areas in the central part of the city. 

    My .02 - if we’re talking about a townhouse, you could consider turning your rental into corporate housing. It’s more work to set up and maintain this kind of business, but, it will also come with more consistent cash flow and more reliable tenants

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  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    Awesome you are looking to get started in real estate! But I would kill this deal, as mentioned various repairs over time will put you in the red. Unless you are self managing single families are tough to make work well, I would look into class A/B 2-4 units. Maybe a nice side by side duplex with 3br units will be easy out of state deal and cashflow you can find these within the same budget in various class B areas. 

    P.S. I have had a few higher end single family house rental listings. The tenants tend to be people with bankrupticies, divorces and various problems preventing them from buying or college kids who cause a lot of damage and have many people living in the house together. The vacancy has also been much higher and the turnover costs (painting wall knicks, etc.) has been WAY higher then comparable higher end apartment rentals. With higher end apartments we typically have new tenant move in the same evening that old tenants lease ends but with houses you really can't do this and end up with a month of vacancy to turn over the unit. 

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y

    just for comparison look at Vegas at 350k taxs will be about 150 a month with maybe no HOA.. rents close to the same

    newer stock  NO FLOOD insurance .. no state income tax .. although if your in CA your going to pay tax were you live. 

    plus you can drive to your investment in 5 to 6 hours compared to having to spend money to fly there.

    Just sayin..  with Nevada uber low prop tax's and the gamblers subsidizing your rental properties its worth it to run all the numbers plus the homes are really easy to maintain where as in most of the deep south there is a ton of upkeep .. not only heavy rains but Hail wind and the like .. on top of that very nasty soils in many areas leading to extra maintenance over time..

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    4Reply
  • Account Closed
    Flipper/Rehabber · New York, NY · Member since 2019 · 340 posts · 122 votes
    5y

    @Auryana Faramarzi I personally think buying a property “because you can’t find anything else” is a recipe for over paying specially in a hot market like Houston. I am in New York and buy and flip homes here but have been looking at rentals in Houston. Your best bet is to wait and find a good wholesale deal or maybe an all cash offer if possible. 75 a month isn’t high. It doesn’t even leave you room for a broken ac or any other repairs you might need to account for, not to mention at 355 is most likely an recently inflated number based on 2020 housing prices which we know are high.

    3Reply
  • Chris Sabanos
    Rental Property Investor · Brenham, TX · Member since 2021 · 8 posts · 0 votes
    5y

    @Auryana Faramarzi

    I’ve spent quite a bit of time in that area and it’s super desirable, especially as a tourist. And based on the number of companies that are moving to the big cities in Texas and the new expansions to the medical center in Houston, they are expecting quite a bit of growth in the area.

    Have you looked into/considered using the property as an Airbnb? It may make you more money now and then when rental prices go up in a few years you could switch to a regular SFR?

    0Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    5y

    Things that increase over time: HOA fee, fire/flood insurance, expenses for repairs. Value is not increasing per your statement that home prices are dropping. I would not move ahead. Let go of sunk costs and let it teach you to dig into the cost details before you offer. You will pay California taxes, even though TX has no income taxes that doesn't help you as CA resident. My prediction is you will have losses to write off against any w-2 income you have, which is not a reason to make an investment. What happens when there is a flood and you have no rental income? Can you carry the costs and make repairs?

    2Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    unless that $90k is really burning your pocket, i don't see why you can't find a better use for it (i.e., something producing > $75/mo). 

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    Your goal shouldn't be to buy properties.  Your goal should be to use your money to make a profit.  How many properties you have is immaterial.  Focusing on the property instead of the deal, or just as bad, rationalizing a bad deal into a good one, is a recipe for disaster.  See above @Account Closed

    5Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    5y

    @Auryana Faramarzi are you going to be more upset if you buy this deal and don't make a lot of cash flow in the first few years OR are you going to be more upset if you don't buy it and then kick yourself in a few years when you could have bought it at this price? I'm not predicting the future, but that's how I would approach the decision. You can control properties you own, but you can't control ones you don't own.

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  • Auryana Faramarzi
    OP
    Member since 2021 · 29 posts · 34 votes
    5y

    @Thomas Brett Gilbert @Darius Ogloza @NA NA @Lee Hampton @John Morgan @Joe Villeneuve @Nicholas L. @Brendan Miller @Quinn Olivarez @Henry Lazerow @Jay Hinrichs @Account Closed

    I wanted to thank each and every one of you who gave me your input in this situation. I've decided NOT to move forward as I think that this is an "okay" deal and not the best I could find. Some other factors such as changes in my loan have also contributed to this my decision. But your opinions also played a large role in my decision as well. Thank you all again for your help. This is an amazing community!

    10Reply
  • Sarita ScherpereelBusiness Member
    Real Estate Agent · Chicago, IL · Member since 2018 · 659 posts · 376 votes
    5y

    @Auryana Faramarzi I would also kill this deal. For many of the reasons people are mentioning. I’m a native Houstonian and Still have family there. My concern is also appreciation. I’d like to see you invest in an area that appreciates more consistently.

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  • Luciano A.
    Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
    5y

    @Auryana Faramarzi

    I see you decided not to go with the deal which is a good move but something to also consider when and if you buy in Houston. If you are paying a higher price than what the current property is appraised for on tax records then be prepared to have that adjusted the following year. They will move it at or close to your purchase price thus making your property taxes higher. Make sure to take that under consideration when you are looking. Heights is a good place but in my opinion, it's best to find areas that are coming up versus established. 

    Best of luck 

    3Reply
  • Eddie Torres
    Rental Property Investor · Member since 2021 · 76 posts · 36 votes
    5y

    @Auryana Faramarzi with so little cash flow you have no margin for error and HOA is risky. 1 special assessment will have you in a hole. I just sold my personal condo in CA and I had to pay a special assessment for $33k. That probably isn't likely to happen to most but the fact that it can makes me skeptical.

    1Reply
  • Brandon SturgillBusiness Member
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    5y
    Originally posted by @Joe Villeneuve:

    Your goal shouldn't be to buy properties.  Your goal should be to use your money to make a profit.  How many properties you have is immaterial.  Focusing on the property instead of the deal, or just as bad, rationalizing a bad deal into a good one, is a recipe for disaster.  See above @Account Closed

    This may be the best thing I have read on BP this year.

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