Out-of-state investing in Dallas-Fort Worth (DFW)
I’ve seen a lot written on this, so I thought I would make a list of pointers for those looking to invest in single family rentals from out of state in DFW. (This is in no way a commentary on multifamily or other asset classes.) I base these observations on both my experience as a landlord, my familiarity with eviction records (which I marketed to for years), and my general familiarity with the market. The bottom line is that I think too many investors look at our market from the outside and think they can just buy into the market at retail, and it will bail them out. Unfortunately, like any other market, you still need to buy right out here. Here are some observations/pointers.
- The 1% rule does not work here. Cap ex and taxes are simply too high. You cannot pay $120,000 for a house, rent it for $1200, pay for property management, and still do well. The returns, if any, will not justify the risk. (If your exit plan 3-5 years, then this may not apply.)
- Foundations. They are a real issue, and there are a lot of houses with foundation issues (this ranges from slight shifting resulting in sheetrock cracks to heaving and worse). Older houses that are well-suited for rentals are going to have more of these issues.
- A repaired foundation is in no way a guarantee that you have fixed the problem. 9/10 foundation repair contractors are bottom feeding contractors who do crummy work and whose work generally fails within a few years. Many, many investors skimp in this area, and then dump the home on unsuspecting buyers. Lifetime warranties are a joke and almost never honored as there are always weasel clauses.
- Side note: Overall, I have had very good experience with foundations as you can get good discounts and end up with a very solid home. I prefer to fix foundations myself, though, and I pay a lot for the work.
- Sometimes, no matter what you do, a foundation is going to keep moving. Doesn’t mean the house needs to be bull dozed or anything, but it does affect your exit costs.
- Many out-of-state investors buy way too much house, particularly newer construction. I see out-of-state investors buying 2500 square foot houses all the time. Rents will not cover the increased maintenance and cap ex. (Again if your exit is 3-5 years, maybe this isn’t the case.) The truth is that we build them bigger out here in Texas, but that does not mean they are good for rentals. (Kind of like the notion that just because the bank offers to lend you a ton for a house doesn’t mean you should take it.) Keep your square footage low to minimize expenses.
- New construction is not necessarily the answer. New construction, while obviously safer on the cap ex side, generally comes with its own issues. Specifically, you are entering at a much higher price point, rents will be relatively low compared to price, you will have a lot of rental competition from other out-of-state investors, and these new developments are generally in less convenient locations. Also, for some reason, my property taxes are lower in older areas. I think this probably has to do with there being a wider range of comps.
- The better properties, in my opinion, are the older properties in the better locations that have been thoroughly rehabbed. This is probably a debatable topic, but I still subscribe to the old adage, location, location, location.
- Do not buy from large wholesalers. You will get robbed.
This is not meant to be doom and gloom scenario. I’m still buying in DFW (thought at a slower pace given the run up in prices). It’s just that with recent hype many investors are piling in without any regard for the realities of investing here.