Are you still picking the Dallas area for purchasing properties?

21 Replies

Hello BP, looking for an out-of-state area to invest in and have done some research in the surrounding areas of Dallas. Wanted to see if you are still choosing this area to invest in, why or why not?  Thanks!

Yes yes yes, though it depends on the area and what your goals are. IMHO, if you're going for the long game in the nicer areas, don't expect a lot of cash flow on rentals. The math just isn't there in the nicer neighborhoods. It's appreciation that will be where it's really at. I live in a fairly typical middle class neighborhood. I've seen several houses sit there with for rent signs literally for up to 4 months! These are houses that likely rent for $1,700 - $2,000 per month. That's not our target market. And seeing how long these houses sit empty, I'm glad it's not. 

Now.... as always, it depends on what kind of neighborhoods you invest in. We are very pleased with the cash flow in our working class neighborhood rentals.  I am certainly no expert, but DFW right now reminds me of Orange County and other parts of SoCal during the 80s. The economy is booming. There is a labor shortage for new construction. Plenty of businesses are moving into the area. I think there is plenty of room for a lot more appreciation.

An anecdote on this: I spoke to a gentleman who works for Toyota. He sold his old, beat up, 1,300 s.f. house in Whittier CA for around $440,000 to a contractor. He moved to Prosper where about the same amount of money got him a beautiful 2,800 s.f. home. And the reason I met him? He was buying a car elevator because his fourth car wouldn't fit in the 3-car garage.

I believe we will absolutely see a bubble form in the DFW area. Right now, it's good, healthy economic growth. I think the signs will be there when the silly season starts.

We have properties in three DFW counties. I am constantly watching property values and waiting to hit the SELL button. I don't think we're close to being there. But of course, that's the million dollar question as always. Is it too late to get in? When should I sell? I can tell you this. I'm not selling anything now, nor do I plan to in the foreseeable future. If anything, I'd like to squeeze one more small project out on an empty lot we have.

All this said, I say this from my little bubble of properties we own, haven't bought anything in a year and half, though do searches and have alerts on properties that meet our parameters. I am anxious to hear the input of other DFWers.

@Travis Howser What are your goals? Are you looking for cash flow? Appreciation? Turnkey? Set up a team and find/rehab off market deals?

In my opinion, if you are looking for a turnkey investment there are much better places to go than Dallas for cash flow and minimal headache. If you are looking for a stable market with some upside potential for appreciation and you are willing to break even on cash flow (even if you are buying off market at 75-80% of value you are not going to see much cash flow in an area that has any chance of appreciation), then Dallas is still a good place to buy.

@Stan Hill @Andrew Herrig , I greatly appreciate your replies and information in the area. Since I am out of the area I would like to look into some turnkey properties and others that would need some rehab (build a small team) but enough that is manageable from a distance. #1 priority/goal for me is if that the property cash flows. @Andrew Herrig What other turnkey areas do you think are better suited than Dallas, would love to hear your opinion on that? @Stan Hill looks like you have made some good investments in the area in the past and hope that they continue to do well for you. Thanks again for the information guys!

My husband and I have done two “House hacks” in the past 18 months that have been profitable in cash flow and appreciation! I don’t know if that’s the route you’re looking for but I know we are going to continue investing in this DFW market!

We have bought 3 houses in the past 2 years and we're seeing about a 15% ROI. We stick with houses under $170k.

@Travis Howser You can still get cash flow in Dallas if you are willing to go into a C neighborhood, which is where a lot of the turnkey operators are working these days. Be careful of relying on pro formas from the turnkeys, they generally understate repairs and capex, and as soon as you buy the house the taxes are more than likely going to rise significantly. As a general rule of thumb, 1% rule is breakeven in DFW (e.g. $100k house that rents for $1000 per month).

As far as other markets, I have not done a ton of research, but I like some of the midwest markets for cash flow. There are some turnkey operations in Alabama and Florida that I believe are still pretty good cash flowing markets as well. My personal preference is for areas where rents are at least $1000+ per month. On paper you can get a lot of cash flow with a $30k house that rents for $600 per month, but capex and maintenance costs are generally going to be the same whether your rent is $600 or $2000 per month, and they eat up an enormous percentage of your rent in cheaper markets.

Originally posted by @Alan Pederson :

We have bought 3 houses in the past 2 years and we're seeing about a 15% ROI. We stick with houses under $170k.

 Hi Alan, 

Do you deal with any wholesalers in DFW you would recommend? 

@Travis Howser sorry to pipe in - Dallas isn't my market, though I know plenty of people have had success there. Actually, I stumbled onto this thread because @Andrew Herrig mentioned 'Alabama'. And, while I am naturally biased toward Birmingham, I actually just wanted to comment to agree with his assessment of C properties, regardless of market. 

His comments that cash flow on paper looks amazing, but costs are almost always higher than anticipated is spot on. When we first started Spartan, we dabbled in C props and Section 8 and abandoned them in favor of solid B/B+ properties because the expenses and headaches was just not worth it. Unfortunately, the hard truth is that lower-income tenants are often just one sick kid away from missing rent (unexpected time off work/expenses tend to snowball faster for people with limited income, sadly) which makes them less reliable tenants as a group, through no real fault of their own (generally speaking, of course, we've all had a nightmare tenant or two, regardless of their income). Add in Section 8 red tape and bureaucracy and things can turn messy really quickly. In addition, if you're going the turnkey route, a lot of the lower tier TK companies are working on razor thin margins and doing whatever they can to keep costs as low as possible, which may mean CAPEX items aren't updated, maintenance gets deferred, 'rehab' just means a coat of paint and new lightbulbs, etc. Most of the horror stories you see on BP about bad turnkey experiences are about companies that work in C/D rentals. Not all are like that, of course, but things tend to get trickier when you're working with rock bottom rents, housing authority red tape, and neighborhoods populated by tenants who simply can't afford to live anywhere better.

Long and short: Especially for new investors or those who aren't investing in the market where they live, C/D/Section 8 rentals are just not worth it. People definitely do make money in those markets, but they usually have plenty of experience, live in the same market, and self-manage to cut costs. Lower tier rentals (especially OOS) are not for the faint of heart.

If you're looking out of state (OOS), there are plenty of great markets, but I would stick to B or above. If you're going for appreciation, try to get into an A prop. If you're going for cash flow, B/B+ is the sweet spot.

Best of luck!

Clayton Mobley, Property Manager
(205) 202-4118

what a great point from @Andrew Herrig   "On paper you can get a lot of cash flow with a $30k house that rents for $600 per month, but capex and maintenance costs are generally going to be the same whether your rent is $600 or $2000 per month, and they eat up an enormous percentage of your rent in cheaper markets."  as my goal is similar to @Travis Howser   it lighten up the hidden part  and @Clayton Mobley   as well great clarification !! Thanks guys !!

However,  @Andrew Herrig & @Clayton Mobley most TK company do not include Cap Ex on their proforma, but only maintenance cost about 3% to 5% is it normal or ..  that something we need to negotiate at the deal making to consider expenses (about 5%)  for Captial Ex  ? 

Thanks again ... 

@Homa Teramu There are a few good articles on BP about estimating capex. In my opinion, if you plan to hold a normal 3/2 rental property for the long term, I would expect capex to be in the $150-250 per month range.

Wow, very good information in here! I will continue my search and take some of the advice from you guys in this thread! Greatly appreciated :)

@Travis Howser   It is the new multi family I am concerned about.  So many are coming on market all at the same time they are starting to cause rents to drop.

I do not see it as a long term issue but some local cities might have to put on the zoning breaks for a while.

Originally posted by @Travis Howser :

Hello BP, looking for an out-of-state area to invest in and have done some research in the surrounding areas of Dallas. Wanted to see if you are still choosing this area to invest in, why or why not?  Thanks!

 I think deals can be found in every city and every timeframe.  Having said that, DFW has just gone thru an amazing run.  We wont see another run  in the next few years like it unless Amazon moves here.

I think values have gotten to the high side of things.  IF your time horizon is 2-3 years, I wouldn't buy in Dallas, if your time horizon is 10 years,  Its a great time to buy.

IMO its tough enough to find anything here in Dallas let alone trying to find it from a distance.

@Homa Teramu Sorry for the delay in my response. Capex is sometimes tricky to estimate because it can be so different from property to property, depending on what was updated and when. It's also a retrospective cost - you don't know how much it will be until after you've paid - some houses have zero capex costs, some need a new roof three years in. In some ways its luck of the draw, but diligent research and advance planning can make those potential big expense much less anxiety-producing.

In terms of accounting for capex in your numbers, many people use a general rule of 10% to ensure they set aside enough from rent to cover things when they do come up. Best case scenario, nothing ever breaks and you get to pocket that cash when you sell, or keep it as a reserve for the next one. Worst case scenario, 10% isn't enough and you have to come up with extra cash, or the capex expense comes up early in the investment and you haven't saved up enough to cover it yet. The primary issue with this method is that it eats into your monthly income and the amount that you can sock away will be adversely impacted by vacancy. We tackle it from the front end, and recommend that investors have a cash reserve in place before they make the investment. Frankly, no investor should ever be putting down their last penny - you should always have a buffer. Betting everything you have on one investment is a great way to end up making fear or desperation-motivated decisions, which is almost always the road to disaster. (I'm sure there are many people here who are more high-risk-high-reward investors who may disagree, but I'll always be on the more conservative side ;)

Typically, we recommend that investors have about $5-7k in reserves for their first property, and then an additional $3-5k for each subsequent property. It helps to know, for sure - without worrying about unexpected vacancy - that you have the cash on hand for an capex items that come up. We're pretty diligent about making sure our investors aren't pulling on cash they can't afford to spend, because that always results in more stress and a less enjoyable investment process for everyone. By strongly encouraging our investors to have a capex buffer in place, we're trying to ensure that our investors are truly financially able to dive into the REI game without risking everything - if you can get $25k for a downpayment, why not save just a bit longer so you can also have a $5k cash buffer? The peace of mind payoff is huge.

Now that being said, we also work hard to ensure our capex costs are as low as possible by installing new items during our rehab (new 20-year like-wood vinyl floors, new roofs, new HVAC etc). While it's never guaranteed that a brand new item won't just go caput in year two, it's highly unlikely - its all about minimizing risk. 

The point here is that, yes capex is definitely something you need to consider before you invest in a property. But more than just socking away 10% each month (or starting out with a cushion already in place so your cash flow stays as high as possible) you need to be very clear about what was done during rehab, what big ticket items are new or nearly new, which are older, what the expected life is on those items, etc. This is why asking for a detailed breakdown of the rehab process is so crucial - a new coat of paint is great, but a new HVAC is going to keep your long-term costs down in a big way. 

Whichever way you want to account for potential capex costs, the most important thing is a that you do. Vetting your provider thoroughly and asking for a scope of work in writing will also help you determine which investment opportunities are least likely to result in big ticket costs down the road. Every investment has inherent risk, but you can mitigate some of that risk by doing your homework.

Best of luck!

Clayton Mobley, Property Manager
(205) 202-4118

Erin,

I have been contacted by 3 different wholesalers so far and I'm on their mailing lists. We don't have the money to buy our next property yet but we should have enough in another 8-12 months depending on how life treats us. I know Arlington and Kennedale very well and I continue to see deals on a regular basis that I would jump on if I had the money. I just saw 2 last week on Realtor.com that looked pretty good. I look every couple of days just to see what is out there and what the prices are. Values keep going up and it just kills me that I don't have the means to keep buying. We kind of got beat up on the last house we bought. We bought it in August this year for $135k and I knew it needed some work. Fixed up it's worth around $155k. It wasn't until we started doing the work that we found lots of problems. There was mold in the kitchen behind the cabinets ($1,000), broken drain pipe in front yard ($1,700), electrical was not up to code ($700), carpet ($1,500), etc... The previous owner didn't have a clue how to do home repair and everything he did I had to completely redo. We are in for around $14k and all of the big stuff is done. I did most of the work. The tenants are really happy with the house but it sure was a lot of work. What I thought was a really good deal turned out to be tons of work. With the way houses are going in this price range it was nice not to have to get into a bidding war with dozens of other people. We knew the people that were selling this house so it was never on the market.

@Travis Howser - we bought three new rentals in three different cities around DFW this year that were all great deals. Granted all were off-market, we negotiated directly with the sellers, and we did not go through wholesalers - those guys are eating up the profits big time these days. We followed the BRRRR model and saw significant equity capture through forced appreciation and added $1700 in cash flow (measuring as rent minus PITI). We are looking to do another handful in the near term and will stick to the DFW area.

Andy

Andy Webb, Real Estate Agent in Texas (#692589)
214-263-0021

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