Investing in Midtown Houston - with a Cash on Cash of 6%

4 Replies

I have an offer I'm set to close on for a studio in the Midtown Houston area.

I'm looking for feedback and maybe a sanity check.  I'm trying to avoid paralysis by analysis. 

Let me know what you think of the deal? 

I'm a first time real estate investor so I'm skeptical and being cautious of not investing with emotions. 

I'm calculating a 6% cos with a 31% ROI. I'm going with a 15 yr mortgage as I'm hoping to have it be a pure cash flow during retirement. I'm putting 10 down by the way.

The studio is off Main Street with a sq footage of 466. I'm getting it for $75k. I've estimated from realtors and contractors that it'll take $8.5k plus a Murphy bed to command rents in around $1.3k.

I'm looking to fix it in mode of the Houston micro condos in that area. 

 The cash flow isn't great but I understand that it's a by product of the 15yr mortgage and what feels like a B class property. 

What do you think of the deal? 

Hi @Rema W.

Even with 15 yr mortgage is it still cash flow positive? Are you accounting for repairs, vacancies, property management? If it still cash flows after taking those into count it's not a bad deal! 6% COC is not the best but it works. How much forced equity are you putting in if any? Realtors and Contractors are great but don't always trust what they say. I'd be more than happy to help with your numbers!

@Shayan Malayeri

Thanks for the feedback. 

Yes, it's still cash flow positive even with a 15 yr mtg. @ $133.24 per month. I've accounted for a 6% vacancy rate and maint. reserve estimates. 

I plan on doing the property management activities, with the rationale that it's a small condo where my responsibilities are limited.  

 The condo in its current state wouldn't cash flow. e.g. White Laminate countertops, all carpet. I plan to put in around $10k to modernize it and bring to comps renting for $1,300 per month, which includes all bills (water, internet, etc. )

With the improvements to the area, I can see it being a long buy and hold play. I think it'll always be one of the lower tier midtown studios, with its market being midtown millennials, who can't afford $1,500 per month not including utilities.

By the way units in the same bldg. w/ same sq. footage sold for $99k in Jan. 

So worse case scenario, I could sell it after a holding period. 

6% means you will be almost fully rented (to me that's too low for a single unit. If you had 10 units that would be reasonable). 

Even if you are managing I would still count it as an expense. This is a mistake a lot of people make which costs them in the end. If you want to manage yourself then pay yourself 10% of rent and when you decide to hire a property manager just pay that money to them. Always separate your investment analysis from yourself.

With the numbers that you mentioned. Seems like the cash flow is close to 0 which is not bad if your goal is to hold until it's free and clear. from the rent/purchase-price ratio it seems like a decent rental and cash flows positive if you do 30 yr which is something to think about. What if you do a 30 yr mortgage, outsource the management which frees up a lot of time, and a few years down the road, buy another rental with the equity built plus the cash you got every month. Just a thought!

Is this deal on MLS? if so, how long has it been on market?

Good point.. About reserving future property management fees. 

I considered the 30 yr. But as family we didn't necessarily need the cash flow now. I'm 40, and wanted to have it paid for before I'm elderly. 

The condo isn't on the MLS. It's being sold by a family member.

I'm half way thinking of walking away from it but I'm considering the natural appreciation that the Midtown area should have in 10 yrs. 

Would you walk away?