Investment in Houston, TX

5 Replies

Hello there

I have been posting in BP to seek your expert advice on real estate investment. As my previous post indicates, I have started to be (hopefully) a real estate investor. 

I have read few articles in BP and other website on when/if a real estate investment makes sense or not. Terms like "Cash Flow", "Cash on Cash", etc. I have been looking for a good and affordable SF which is zoned to good schools and stays below 150K. For those who are familiar with Houston, I focused in area north of I-10 and west of I-45. My realtor found a house for 160K with avg rent of 1450/month. House was built 2005 and does not require too much rehab. Property tax is 3% and estimated insurance 1200/year. So with 30 years mortgage/20% down, the cash on cash number came out as 2%. Even if I buy the property in cash 100%, the Cash-on-Cash is around 4%. These numbers are well below recommended 8% limit. 

A quick answer would be to find a 1) cheaper house or 2) house with higher rent. I think ( and I may be wrong) that #1 can be found in lower income neighborhood (lower rent) and #2 can be found in high income area (more expensive house). 

All of a sudden, my driving force in real investment comes to a halt because it seems I can't find a good return on my investment. 

So I would appreciate your comment on

1) where is my mistake? I know my logic is not right somewhere, otherwise there won't be too many investor in Houston. 

2) For those investors in Houston, where do you recommend me to zoom in (neighborhood) and search for an affordable and positive cash flow property?

thanks

Hi Bruce,

First off, welcome to the Forum! I'm not in Houston, but there is one thing that always resonates with me as an investor that's often said on BP. "Okay, the price doesn't give me a good COC, so at what purchase price does it make sense?" This is something my husband and I always ask ourselves when making offers. So, the numbers don't work at 160k, but at what PP do they work? Is it 130k? If so, then offer low. The worst they can say is no. And honestly, if they say no, then, no problem because you were already ready to walk away from the deal at a 160k asking price.

Hope this helps!

Brooke 

160K with avg rent of 1450/month - so it doesn't hit the 1% rule?

Let me understand your P&L - I ran it into my spreadsheet using the following:

  • Purchase price 160,000 (25% down mortgage balance is 120,000 at 5%/30 yrs)
  • 25% down and 5% closing costs (total all in cash = 48,000)
  • Rent is $1450 per month

Income:

  • RENT:  $1450.00

Expenses:

  • Mortgage:  $644.00
  • Insurance:  $100.00
  • Taxes:  $400.00 (3% of purchase price per your note, so $4800 per year)

Net Profit:

  • $306.00 per month

What you are NOT considering:

  • Property Management:  $145.00 (10% of monthly rent)
  • CAPEX: $145.00 (10% of monthly rent)
  • Vacancy:  $116.00 (8% of monthly rent)
  • Maintenance:  $116.00 (8% of monthly rent)
  • Other Expenses: $????? (utilities, HOA, garbage, advertising, etc)

Cash Flow:

  • -$216.00 per month (thats a negative number)

Happy to have other investors weigh in, but this is not a good deal. Using even the 1% rule you can see this probably shouldn't have even made it this far. What are comps in the area like? Can you go to a slightly worse location to stretch your dollars further, and perhaps into a multifamily unit?

Brooke

I like your comments. My realtor believes that this is the BEST deal and wants me to pay cash (160K). But when I do the  math, results do not make sense.

thanks!

Joe

You are correct, there are other fees. Even without those extra fees, I am still below 8% rule let alone adding the extra costs.

thanks!

Originally posted by @Bruce Cash :

Brooke

I like your comments. My realtor believes that this is the BEST deal and wants me to pay cash (160K). But when I do the  math, results do not make sense.

thanks!

Joe

You are correct, there are other fees. Even without those extra fees, I am still below 8% rule let alone adding the extra costs.

thanks!

Ask your realtor to run the numbers and have them tell you why it's a good deal.

Without knowing anything about your realtor, their intentions, your relationship, etc., I'd hesitate to say this -- they are either not working in your best interests, or might be misinformed regarding what a good deal for an investor would be.

I think their response is going to be incredibly telling. They will either realize that they have no idea how to evaluate a property (and it'll become apparent mid conversation), or they're going to continue to push what may be an unrealistic financial analysis on this property.

If you pay all cash, you remove the $644 mortgage payment, so your cash flow becomes $428 per month. Wonderful, right? That's probably where your realtor will hang their hat.

Except your payoff point (when you get your initial investment back) is 32 YEARS. 32 YEARS! Oh my god. Your cash on cash return is 3%.

Look, I think the name of the game for the BRRRR crowd (and more experienced people should stop be dead in my tracks if I'm wrong) should be as follows:

  • As little skin in the game as possible (e.g. none of your money or a small down payment)
  • Buying for cash flow - to reinvest into the rehab part of BRRRR or into the next property
  • Buying undervalued properties to provide value (make your money when you buy the deal)

When the stock market provides 10-15% in a year, and you're making 3%, did you put $160,000 into the right investment? Probably not.

@Bruce Cash If you want good COC returns, you're going to have to buy properties well under market value with either private funding or Hard Money, that way you can roll the very large majority of the purchase price and repairs into the Hard money loan or Private loan. Buying at market value and/or putting 20% down will not generate the COC returns that you're looking for. My last deal was $50,000 purchase price, $32,000 rehab, $122,000 ARV so were out of pocket our closing costs from title and hard money loan fees. After the property is rehabbed, we will do an immediate rate/term refinance and will be cash flowing $447/month, over 100% COC return. Buy that same property with 20% down model and your out of pocket is $10,000 down payment + $32,000 repairs + $5,000 closing costs = $47,000.

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