Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
Starting this thread after reading through the "Austin is Hot" thread. After reading that thread, the Austin atmosphere looks similar to California. I'm a California investor and certainly a dearth of deals out there due to high prices and influx of investor competition. So my question is if this is any different from Texas? I'm referring to the metro cities: Dallas, Austin, Houston
Texas and California share many similarities from an investor profile:
- Growing populations and good demographics
- Nice metropolitan cities with strong industries
My general observation is that the cost of entry (i.e. price per square feet) is much lower in Texas, so it would make sense if you have less capital to go there, but does it make sense from an ROI point of view?
I've seen both sides of the argument. I have friends exchanging buildings in CA and buying apartments for nicer cap rates in Houston but then also friends who have comment that TX doesn't have the appreciation that CA does.
Anyone have experience in both states and care to comment? I'm referring mainly towards the larger Metro areas (i.e. Austin and SF or Dallas and LA)
Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
11y
I know nothing about Texas cap rates, Texas property taxes, Texas property insurance etc., but I can tell you what my CA experience has been in San Bernardino County.(92354. Lower middle class zip code that would be dirt poor if not for Loma Linda University, Loma Linda Medical Center and a VA hospital. 92354 is literally surrounded by poverty.)
I Paid $200k for a foreclosure 4 plex in 2000 (got 10% down payment back at close of escrow by artificially inflating purchase price to $224k)
current value per zillow is $488k. (a duplicate building next door to mine is currently for sale at $515k.)
rents $850x4= $3,400
mortgage 30 year fixed @5.1% = $1,070
taxes and insurance= $410
utilities,water,trash= $200
Laundry income = (unknown. 11 year old daughter collects the quarters and refuses to disclose earnings. I think that I may partially own the clothing store "Forever 21"...)
Thats positive cash flow of $1,720 per month plus principle paydown of $400 per month for a total of $2,120 per month.
And assuming the true value of the building is $450k (zillow says $488k), then thats $250k in appreciation over fifteen years.
We self manage and do all rehabs and most maintenance ourselves...
Had we purchased in San Antonio 15 years ago, what would our numbers be???
Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
11y
Looks like an exercise in pure futility. He said, she said...and in the end who really cares.
Californian's love investing in California and believe it holds the best atmosphere for such. Texans feel the same about Texas. Both right? Both wrong?
You can tell someone there baby is ugly but it doesn't mean they'll agree or that they'll like you afterwards.
I hope the one thing we can all agree on is that both states have their pros and cons.
to answer your question if you were positive cash flow at all you are the big winner
@Jay Hinrichs (<--- @ didn't work)
The three SFR's that I have had as rentals (each purchased with zero down as owner occupied residences in Riverside County), were pretty much "break even" situations for the first two or three years (I made them work by self managing and doing the maintenance myself). But after I "moved up" and moved out of each one, after just a few years, the rents increased, making them cash flow nicely. And every single one of them had significant run ups in appreciation.
CA is probably the best place to Buy and Hold and to Flip, if you can afford the high cost of entry. For YEARS I have watched and envied the guys in North Orange County who have bought small, outdated but solid, SFR's in Yorba Linda, Anaheim Hills, Brea etc. for $550k-$600k, done nice, one month cosmetic rehabs and then quickly sold them for $700k-$750k. I wish that I had had the guts to do that... I could sit back now and use the excuse of "too risky" or "I had a full time job" or "I value my family time", but the reality is that I was just too big of a wuss. I had the time, I had the access to money, I had the ability, I just didn't have the heart. Pure and Simple.
The upside is that my wife and I did GC ourselves a 5,018 sq foot custom home. Dealing with the CA Fees was not pleasant ($54,000 in fees for building, planning, utilities, school, city parks, regional parks, traffic mitigation, KANGAROO RAT and on and on...). We did it in 11 months, from lot compaction to occupancy permit. We learned a lot.
Yes once you get on the CA treadmill and ride through a trough nothing finer than the CA appreciation... I like forced appreciation in TX though some good money being made in the fix and flip business there right now... And of course buying your primary in CA then turning it into a rental and rinse repeat is an excellent way to long term wealth.. Much better in my mind then many other options.
Real Estate Broker · Conroe, TX · Member since 2012 · 165 posts · 46 votes
11y
I think Texas' lower property values offset the property taxes paid. What are you paying in Cali, around 1%? @Account Closed is probably paying somewhere around 2-2.5% on his $50,000 houses that you are buying in Cali for $100k-150k. The real question is rental rates. What is your buy and hold ROI for similar properties? Thousands of Californians are flooding into Texas everyday. Do you guys even have any renters left? I personally think that California barely has the advantage in regards to property taxes, if any. Unless your rental rates are just astronomical I see Texas as the winner if for no other reason than the stability of the market. Once you factor the income tax, vehicle tax, soda tax, obesity tax, smoking tax, and all other ridiculous taxes you guys pay, Texas is the real winner. You could always live in Texas and invest in Cali, but I would imagine being that far away from your investments would add to your expense anyway...
Well you guys in Texas have tornado's monster heat and humidity... CA just has the occasional Earth quake beautiful weather in much of the state...
I know when I connect through Dallas and on a nice clear day flying into Portland.. I often over hear Texas folks ohh ing and Ah ing and stating if they could get a job in Oregon they would move right away...
Real Estate Broker · Conroe, TX · Member since 2012 · 165 posts · 46 votes
11y
And I'm not sure what you guys are getting in terms of appreciation, but my last flip I paid $160k (5% down), $12k rehab, around $3k in closing costs (I'm an agent) sold for $235k. I'm fairly happy with a 260% ROI from an MLS property.
Real Estate Broker · Conroe, TX · Member since 2012 · 165 posts · 46 votes
11y
@Jay Hinrichs - Actually today Texans are complaining about the 50 degree weather. But by tomorrow they'll be complaining about the heat again. But no, I understand this is more of a buy and hold conversation. And I would really be interested in figuring out dollar for dollar which had the best ROI. If a house in California could fetch anywhere close to the same monthly rent as a similarly priced home in Texas then Cali is the winner. And that could very well be the case, but I just don't see it. You may be able to find a $50,000 house in Cali but I don't see it only needing $5k in rent-ready renovations. And even then how does the rent on that compare to here?
CA like Texas is a very big place.. I googled one small county I use to work in. and there were over 50 homes on the MLS for less than 100k... and would hit the 1 to 1/3% rule
might snag a 2 but that would have to be off market
Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
11y
California: in theory, yes. But Big Brother is constantly (including more gun regs in 2014) throwing up roadblocks. And you better donate to the Sheriff's re-election campaign or you may be denied a permit to carry. Very political.
Oregon: More so than Cali. But try carrying an AR-15 on the steps of the Capitol in Oregon and watch the Po Po unleash.
Investor · Brea, CA · Member since 2015 · 64 posts · 11 votes
11y
@DL Martin You mentioned "Brea", my home town, and that triggered a notification to me. I fall in that category of NOC. My primary residence of 5 years is close to doubling in value, and sfr investment (less than a year) has increased $50k.
My next endeavor is a 4plex here, but they're knocking on a million dollar price tag, not to mention thin income margins.
I just wonder if appreciation may be better elsewhere -- for the moment.
Back to your original question on where to invest. Comparing properties in different locations is not as simple as simply comparing ROI. You need to compare return (including the major location specific costs) plus the significant risks specific to each area. For example, the major location specific costs and risks might be as follows (not ranked):
Location Specific Costs:
State income tax
Property taxes
Landlord insurance
Location Specific Risks:
Eviction
Population
Job
Maintenance
Costs
To show the impact of differing state income tax, property taxes and landlord insurance costs I will compute cash flow for an identical property in three different locations. The formula I will use is below. Note that I find cash flow much more informative than ROI. I can't deposit "ROI", but I can spend the net cash (cash flow) I receive from the property. However, if you include all the costs in an ROI calculation (ROI = (Rent - RecurringExpenses)/(AcquisitionCost)), ROI will work as well.
Calculating property cash flow for each of the three cities:
Austin: Cash Flow = $1000 - ($600 + 8% x $1,000 + 1.88% x $150,000 / 12 + $1,625 / 12 + $0) x (1 - 0%) or –52/Mo.
Indianapolis: Cash Flow = $1000 - ($600 + 8% x $1,000 + 1.07% x $150,000 / 12 + $802 / 12 + $0) x (1 - 3.4%) or = 119/Mo.
Las Vegas: Cash Flow = $1000 - ($600 + 8% x $1,000 + .086% x $150,000 / 12 + $710 / 12 + $0) x (1 - 0%) or = $152/Mo.
Summarizing the above:
The lesson here is that you must consider all the major cost drivers when you are comparing properties in different locations.
Location Specific Risks
I listed typical location specific risks earlier and repeated the list below for convenience.
Location Specific Risks:
Eviction
Population
Employment
Maintenance
Risks are hard to put into numbers and some risks concern the rental market changing over time. Below is a brief description of each risk item.
Eviction
One of the largest unplanned expenses you may face is evicting a non-paying tenant. I have clients from many states and have heard a lot of horror stories. For example, I understand that in California, if a tenant knows what they are doing, it can take up to a year to evict them. In other areas, if the tenant is over 65 or has a medical condition, evicting them can be almost impossible. In comparison, typical time to evict a tenant in Las Vegas is less than 30 days and typically costs less than $500.
Population
If people are moving out of the area (urban sprawl or moving to another city), housing prices and rental rates tend to fall. If people are moving into an area, housing prices and rental rates tend to rise. Here is a website that shows population shift by county. This level of data is great for metro areas but might not provide sufficiently accurate data for a specific location within a metro area.
A metric you can use for a specific location is historical home sales prices. Renters and home owner come from essentially the same pool of people so if property prices are falling it is usually because there is less demand for properties in that area. If there is less demand to purchase homes there will be less demand to rent homes so rental rates will also decline.
Another factor to consider is median age of the population. As people reach retirement age they tend to have less disposable income and desire smaller and easier to care for homes. So, if you buy a property targeted at families in an area where the “family aged” population is decreasing due to aging (even if the total population is stable), you are going have a serious problem in a few years.
Employment
In many parts of the US, manufacturing and similar high paying jobs are vanishing and what remains are service sector type jobs. These jobs tend to pay less so the families of these workers have less disposable income. Less disposable income means they cannot afford to pay the same level of rent as they did in the past. If this is wide spread then property prices and rental rates will decline.
A metric you can use is inflation adjusted per capita income. If you see a falling inflation adjusted per capita income, you need to carefully consider the long term risk associated with buying a property in that location property.
Maintenance
Some of the major factors for maintenance are:
Age of the property - the older the property, the more maintenance it will require.
Climate - Moisture and temperature are both major factors. Properties in areas with significant hard freezes and rain will tend to have more maintenance than in milder and dryer areas.
Construction - Construction plays a big part in maintenance costs. For example, if the home has a brick or stucco exterior, it will have less maintenance than conventional siding. A composition will require more maintenance than a tile roof.
I hope that the above provides some insight into comparing properties in different locations.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Eric Fernwood and no sales tax... on all the things you buy to rehab or maintain your home.. great weather ,,, world famous destination... One flight from darn near any airport in the country ....
I think Texas' lower property values offset the property taxes paid. What are you paying in Cali, around 1%? @Account Closed is probably paying somewhere around 2-2.5% on his $50,000 houses that you are buying in Cali for $100k-150k. The real question is rental rates. What is your buy and hold ROI for similar properties? Thousands of Californians are flooding into Texas everyday. Do you guys even have any renters left? I personally think that California barely has the advantage in regards to property taxes, if any. Unless your rental rates are just astronomical I see Texas as the winner if for no other reason than the stability of the market. Once you factor the income tax, vehicle tax, soda tax, obesity tax, smoking tax, and all other ridiculous taxes you guys pay, Texas is the real winner. You could always live in Texas and invest in Cali, but I would imagine being that far away from your investments would add to your expense anyway...
CA annual property values are limited to a 1% annual increase. So on a 4plex purchased in 2000 for $200k, that now has a fair market value of $500k, I paid $3,297 in 2014, $3,246 in 2013 and $3,154 in 2012. In Texas, how quickly can property taxes rise? If a property (in Austin) jumps from $200k value to $300k value in one year, do the property taxes increase by 1/3? In CA, that can't happen. (Yet).
Who are "the thousands of Californians flooding into Texas everyday"? I would guess that they are skilled or semi-skilled people who will very likely have the wherewithal to buy a house in Texas after being "locked out" of home ownership in CA by high home prices.
I can tell you right now that the typical, middle class-lower middle class Native Californian will NEVER leave California. Arrogance, Myopia, a complete aversion to the concept of self-sufficiency and a total disregard for the future are intrinsic values of these people. It's all about "today", "tomorrow" and maybe "next week." Next month and next year do not register in their minds. A native Californian's love for California borderlines on a "Cult-Like" loyalty. And the weather. You cannot have a conversation lasting more than one minute with a native Californian about another state without the native Californian immediately pontificating ad nauseam about the weather in that other state, despite the fact that the middle class-lower middle class native Californian has never been further east than Nevada (Las Vegas) or Arizona (Phoenix). And Native Californian Hispanics are "off the scale" when it comes to allegiance to all things California...
I have lived 28 of my 50 years in California, and 28 of my 32 "adult" years in California. I see plenty to "not like" about California, if one is so inclined, but for goodness' sake, Real Estate is not one of them.
As a matter of fact Real Estate, in all of it's forms, is THE ONE GOOD THING about California!
