Am I Crazy? The 1% Rule seems impossible in Dallas. Am I wrong??
Most Popular Reply
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
10yIt's time to sell in Dallas. Not buy...
http://augustafreepress.com/texas-real-estate-undergoing-hottest-season-date/
32 Replies
- Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes10y
Cedar Hill 130K value $ 1,300 a month rent
Rowlett 140K value $ 1,400 a month rent
Lewisville 145K value $ 1,490 a month rentEast mesquite 130 K Value $ 1,295 a month rent
Probably not markets that you are looking for. However these are markets that I at least one and the rent has been keeping up with the value of the home. Homes were purchased between 2010 and 2014 in a distressed state with the need for $20-$40,000 in renovation. Via a hard money loan used as bridge financing the property is where purchase and Repaired and then refinanced with Fannie Mae loans, I was able to minimize the money out of my pocket.
In my opinion these days you will probably need to look East of Interstate 635 and south of interstate 20 in the south east corner Dallas County. There are a pretty good number of decent suburban neighborhoods throughout this area.
That being said it is getting harder and harder to find decent deal.
- 10ySean RayReal Estate Agent · Dallas, TX · Member since 2016 · 25 posts · 10 votesOP
Thank you for your informed response @David Veeder. I have been searching for some time now. Would prefer to do a duplex or more but just numbers aren't adding up. You are right these are not the markets that I was looking in due to low appreciation and job growth but do you think I should focus more on the 1% cash flow in a stagnant market like these areas or invest with at least $1 in cash flow in areas that are almost guaranteed to have huge population booms?
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes10y
@Sean Ray You need to determine what your goals are with investing. Often the cash flow areas and the appreciation areas are going to be in different locations. If you are someone looking for income replacement...then a 1% cash flow area might be right for you. However if you have a high income that is sustainable then perhaps appreciation plays are more right for you.
District Invest Group545 Reviews - Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes10y
Yes, you're right. Dallas prices have passed the point where you'll located deals in decent neighborhoods that meet or exceed that ratio. You're about 3-5 years late. That said, there are areas where you can located properties meeting or exceeding these ratios, but many are tertiary markers, which involve more risk.
- 10ySean RayReal Estate Agent · Dallas, TX · Member since 2016 · 25 posts · 10 votesOP
Thank you @Russell Brazil, yes I feel that making an extra $100+ dollars a month per door wouldn't really effective my life much. I am 31 with income ranging from $150k-$200k a year. I have a good amount saved up but want to make an investment that will lead to many more. I don't want to lose money each month but as long as I have some positive ROI then I would be happy with that.
I know people want to retire through investing but as a real estate agent I don't see myself ever quitting real estate instead just adjusting my focus.
My parents are supposed to retire this year. They have no savings and are struggling to pay bills. I just don't want to be them one day.
- 10ySean RayReal Estate Agent · Dallas, TX · Member since 2016 · 25 posts · 10 votesOP
So @Jon Q., seeing that you are from Berkeley I think you feel my pain. As someone that is looking to buy their first investment and doesn't need supplemental income (also doesn't want a negative ROR) should I just bite the bullet and just shoot for a $1 cash flow and bank on appreciation? All the books I have read said that last sentence is the worst thing you can do.
- 10ySean RayReal Estate Agent · Dallas, TX · Member since 2016 · 25 posts · 10 votesOP
This is a great sheet @Jon Q.
The only issue is that I live here and see the market. There are 45,000 jobs already being opened in the next 6 months. Then the jobs that come from that influx will trickle in shortly after all in the North Dallas area.
Then there will be the infrastructure that will be built to entertain and feed these new people. Then bc of that new jobs. So I don't see a dip in the market coming anytime soon or for any reason. Am I wrong in that assumption?
- Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes10y
Sean,
I have experienced growth of about 30% over the last 3 to 4 years in these markets. I invest for cash flow any appreciation is frosting on the cake. The entire DFW metroplex is doing pretty, well rising tide lifting all boats. The blue collar workers need to live somewhere. There's one other small thing no one is building homes under $300,000 dollars any more. So there is a very limited pool of homes under $200,000 which keeps pushing the prices up.
When you talk about huge population booms I think speculation. I look for stable growing markets that will pay me now and appreciate overtime. I guess I don't need immediate gratification.
I am already retired and seeing good stable appreciation in my net worth. So much so that I am doing cash out refinancing so I can wait for a good deal to come along to pick it up. I have almost tripled my net worth in 5 years.
I think the slow steady cash flow homes build wealth as well as a stream of income. There are others that agree with me, like Jason Hartman, Del Walmsley, Tim Herriage, Warren Buffet and attendees of the IMN Single Family Rental Conference.
My advice is, purchase for cash flow (DON'T LOOSE MONEY, is rule one). You should aim for over a 10% cash on cash return including principal, interest, taxes, insurance, vacancy, maintenance and management. You can certainly invest in sub 1% rent to value ratio properties but I would want to make sure there is cash flow at least $200 a month, with all expenses.
On an average month you will see much more than that because you don't have vacancy and maintenance of every month. And you don't have to have the property managed. It is nice to see that you can cover all of these expenses and have some leftover. Just make sure to set it aside big chunk of money so when a roof or air conditioner needs to be replaced you have the $5,000 to $10,000 to do that.
- Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes10y
Good deals are scarce in DFW but they are out there and they go fast.
A couple of days ago I saw a fresh listing on MLS. $115K asking price in a $220K neighborhood. Rents were about $1700. Even at $40K rehab this was a terrific deal.
Too bad I was not the first one who saw this listing. By the time a listing agent picked up her phone the house was under contract. She said she received hundreds of emails, texts, and voice messages.
- 10ySean RayReal Estate Agent · Dallas, TX · Member since 2016 · 25 posts · 10 votesOP
Wow @Nick B. that is nuts!
I love your story @David Veeder. I am focusing more on 2-4 unit places. It seems in your comment that you are a supporter of a SFHR over a duplex+?
Also, when you say a 10% COC, do you mean in the first year?
- Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes10y
Originally posted by @Sean Ray:
This is a great sheet @Jon Q.
The only issue is that I live here and see the market. There are 45,000 jobs already being opened in the next 6 months. Then the jobs that come from that influx will trickle in shortly after all in the North Dallas area.
Then there will be the infrastructure that will be built to entertain and feed these new people. Then bc of that new jobs. So I don't see a dip in the market coming anytime soon or for any reason. Am I wrong in that assumption?
Who knows? No one can predict market bottoms, but I can tell you that prices do not and will not continue going up forever. Regardless of that, all that matters is that you cannot cash flow if you cannot locate SFRs that meet your requirement...So unless you're comfortable investing solely for appreciation, I'd look elsewhere to identify properties meeting your investment criteria.
I can tell you from experience that most markets are now peaking and in most of the good markets prices continue to rise...But if you've been through a few cycles, you'll have noticed that it always feels that way when you're nearing a peak in the market.
It's nearly impossible to identify the peak or bottom in the real estate cycle, but it's significantly easier to answer the following questions: do I feel we are closer to a peak or a bottom? Is it a sellers market or a buyers market? I think it's obvious to everything that in most markets nationally.... with regard to residential we are passed the peak (late last year) and it is still a sellers market. So, unless I clearly find a deal at a good price that will cash-flow with good long-term potential, I'm not buying.
In most markets, development project starts are slowing, and days on market are increasing. If you give it another 12-18 months, I'm confident that these things will become increasingly obvious.
The middle class migration to cheaper markets (Dallas, Austin, San Antonio, Charlotte, Phoenix, etc.) and tech center growth (San Francisco, San Jose, Oakland, Seattle, Austin etc.) has impacted the cycle a bit, so the drops may be less severe in these high population/job growth forecast markets, but nonetheless there will eventually be a flattening and price drop.
The more interesting question is: in markets with an increasing trend line, will the next bottom have prices so high and rents not high enough that I cannot buy and cash flow?
If the answer is yes, I think you're going to have to develop a new strategy to add value. Good markets are only good for so long until people learn about them, invest, and drive up prices so you can no longer locate properties that cash flow. So, as with multifamily, our future return expectations may have to be lowered. Right now, we are seeing a cap rate (expected return) in Oakland of just 3-4% and people are still investing. Low interest rates, the institutionalization of the SFR investment market, middle class migration, differences in state tax rates and incentives, foreign buyers, particularly the Chinese, and people renting in expensive markets but investing in cheaper markets are all impacting the markets and driving up prices...This too shall pass.
- Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes10y
Originally posted by @Sean Ray:
Wow @Nick B. that is nuts!
I love your story @David Veeder. I am focusing more on 2-4 unit places. It seems in your comment that you are a supporter of a SFHR over a duplex+?
Also, when you say a 10% COC, do you mean in the first year?
For various reasons (problematic management, etc.) I'd stay away from fourplexes and duplexes unless they are located in single family neighborhoods where most are owner-occupiers. Most fourplexes in both Austin and Dallas were built by developers building "fourplex neighbhorhoods" most of which end up looking like ghettos.
- Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes10y
You might get lucky and locate a duplex in a single family owner location at a decent price, but that unlikely. When buying Duplexes versus SFRs, you are now competing strictly with other investors who are bidding prices up, versus SFRs where you're competing with mostly homebuyers who aren't as savvy.
Think about the average American and structures they live in as they age, generally...
dorm or large apartment (college) --> fourplex or duplex (first job/20s-30s) --> town home (30s) --> single family home (30s/40s)
The ideal most attractive housing for most people is the single family home. This has to do with privacy consideration, size of family, etc. I bring this up to illustrate that generally, you will be able to attract the best quality and longest tenure tenants with a single family rental....though exceptions exists (ex. maybe luxory high rises).
Personally I'd stay out of properties unit size 2-30 units. They are not big enough for you to benefit from economies of scale and obtaining professional management and not small enough to be the ideal residence for a family (single family house). This is also the reason that developers build relatively very few properties that are in the 5-30 unit range (that also has to do with difficulty obtaining financing).
- Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes10y
Originally posted by @Sean Ray:
This is a great sheet @Jon Q.
The only issue is that I live here and see the market. There are 45,000 jobs already being opened in the next 6 months. Then the jobs that come from that influx will trickle in shortly after all in the North Dallas area.
Then there will be the infrastructure that will be built to entertain and feed these new people. Then bc of that new jobs. So I don't see a dip in the market coming anytime soon or for any reason. Am I wrong in that assumption?
I wouldn't, but our goals may differ. I'm living on cash flow, so that is my primary concern. That said, I invest only in markets that also have high population and job growth forecasts so likely will provide some good appreciation. Cash flow is my food, appreciation is my icing. I focus on generating 12-15% from cash flow alone, so I can living without my icing if I have to.
- Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes10yI bought a home in The Colony at a large discount for $102k and rent for $1300 (rents are $1500-$1700 in neighborhood and I'm selling to tenants this month for $170k) and just sold one in Arlington for $107k and rents were $1200-$1300. Time to sell in DFW, agreed; however, relating to the thread topic, you can find 1% in DFW in the b-/c class areas.
- Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes10yAnd I just bought that Home in The Colony 3 months ago in peak season.
- Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes10y
Originally posted by @Sean Ray:
Wow @Nick B. that is nuts!
I love your story @David Veeder. I am focusing more on 2-4 unit places. It seems in your comment that you are a supporter of a SFHR over a duplex+?
Also, when you say a 10% COC, do you mean in the first year?
i do have 2 Duplexes and two 4 units. I the duplexes cash flow well but they are not appreciating much. I like them but don't provide much opportunity to grow your equity or net worth. On one of them I am staring to have some issues with a neighbor in a sea of duplex's. They are on a court and have wedge shaped property lines. So every one is very close together on the front of there property.
The two four units that I have are in a single family neighborhood. It is nice and quite. But the value has not changed since I purchased them. Also after you get over 3 units in a property tenants have a multifamily mindset that you need to fix everything, and they tent not so stay as long in general. So making decent money on the 4 unit but not appreciation.
So my preference is single family rentals. I still like duplexes for the cash flow but but If you want any equity growth I would suggest not going into three or four unit properties. I would certainly think about a five unit or more because they are financed differently, As a business. Seeing that the five unit and above are financed as a business if you can operate the property better. More income and for less expenses you can force the value of the property. Where as 1,2,3 and 4 units are sold and financed according to comparative market analysis. So you need to find comparable sales and you are limited by those. A lot of times they're almost no cops floor three and four unit properties.
- 10ySean RayReal Estate Agent · Dallas, TX · Member since 2016 · 25 posts · 10 votesOP
This is all great feedback guys. Thank you @Jon Q., @Nick B., @Mark Allen and @David Veeder. This all helps a lot.
If I ever see you guys out then lunch or drinks on me. Now it is time to refocus and start looking for SFH for rent that can cash flow... *Deep Breaths
- Real Estate Broker · Miami, FL · Member since 2016 · 32 posts · 8 votes10y
Sean,
Just would like to add my 2 cents.
If we take as abstract a view as possible on the industry that we are all so passionate about it basically boils down to this. Real estate in all forms is to support local population. Supply and demand apply to any economic situation so it's not quite as simple as saying more jobs means more demand, its likely that developers have taken notice and began to build as well. So its important to understand (when considering investment) what type of jobs are being created? executive jobs will lead demand into the high value areas, minimum wage jobs will lead demand into the lower value areas.
I live in Miami (most of the time) and this market is a great example of that, we have alot of people moving here, decent (good paying) job growth, but there are 25,000+ condo units in the greater downtown area in some stage of development (proposed, pre-sale, under construction, etc.) to put that in perspective theres is currently a total of ~24,000 condo units online.
Now while all these are true and markets act crazy sometimes dont let the macro picture discourage you from investing. Know your numbers, understand your values, wait for the right deals, then go for it!
JR
- Real Estate Investor · Sachse, TX · Member since 2016 · 69 posts · 60 votes10y
@Sean Ray I'll give you my perspective as a newbie, which is possibly less wise than some of the other advice you have been given, but possibly from a vantage point closer to your own.
I've been actively looking in DFW for the past 6 months or so, and am finally under contract on a home. It is a >1% deal on purchase price, but including all the rehab needed it will be a ~0.9-0.95% home. The reason I am okay with it is that it is in a B+/A- neighborhood, not the best ISD, but feeds the best schools in that ISD. It is on the small to average side for square footage, so fits in the neighborhood well. It needs enough work that retail buyers want no part, but not so much it's overwhelming. It isn't directly in the path of growth, so I don't feel the neighborhood has been run up as much as many in the Plano/Allen/Frisco areas, but is only a ~15-25 minute drive from much of the new corporate developments in the Plano area. In the end, I feel safer with my likely tenant pool in this neighborhood than in the neighborhoods I could actually find a 1% deal in.
In my (very conservative) analysis, this is a slightly negative cash flow property (like $10-50/mo) - but my costs estimates are usually way higher than just about everyone else I see on BP (I leave room for 65-70% of gross rents in expenses).
I, like you and some other posters, am somewhat nervous that we are closer to the peak of a cycle than the trough. However, I am better at predicting myself than markets, and I know that if I always worry about market cycles, contractions, or apocalyptic events I'll end up going home and just reading forums instead of actually getting in the game. If your plan is to slowly acquire properties over a long time horizon, go ahead and get started - just do it conservatively. At the end of the day, I can be afraid of the cycle - or I can get started and see how things pan out.
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes10y
Originally posted by @Russell Brazil:
@Sean Ray You need to determine what your goals are with investing. Often the cash flow areas and the appreciation areas are going to be in different locations. If you are someone looking for income replacement...then a 1% cash flow area might be right for you. However if you have a high income that is sustainable then perhaps appreciation plays are more right for you.
I agree with Russell. You get cashflow in C areas and appreciation in A areas. Here's a chart I developed about the impact of area/location on appreciation, cap rates, etc. and how you can identify each area (crime rate, school district, number of board ups):
- Chicago, IL · Member since 2015 · 1 post · 0 votes10y
Hi Sean Ray,
Adding my two cents... Depending solely on appreciation is called speculation, not investing. That's what a lot of newbie wannabe investors think like. Going for a negative cash flowing property, only hoping for appreciation is not advisable. You being a successful Real estate agent, should be able to find one with 1% rule. Just look very hard.
All the Best...
- Rental Property Investor · TX · Member since 2016 · 15 posts · 0 votes10y
Wow,
What a good read all this is. As a new entry into wanting to buy and hold some property I am wondering if I should wait a little bit for the sellers market to cool off.
However I find myself in a unique situation in that I have my principle residence in DFW (Little Elm/Frisco) but work in Houston every other week. I borrow a friends RV and pay $550 a month for the RV spot in Houston.
I want to downsize my living space, and maintain a presence in DFW although I work in Houston.
In DFW, I am debating on 1) selling my home and buying something smaller or 2) keeping my home(good location) and turn it into a rental, and buy something smaller with less upkeep. Maybe even a duplex and house-hack.
I am also considering buying a duplex in Houston and house-hack, and put the money I am throwing away on RV lot rental toward a duplex with a tenant paying rent toward the mortgage as well.
Much of what I hear from our BiggerPockets host is to not wait and start now. However I am a bit hesitant as it appears much of the input here seems to indicate property might be a bit overvalued due to supply and demand.
Thoughts?
Vic
Join the conversationCreate a free account to reply, vote on answers and follow this thread.