Houston, TX 2-4 Unit Multi-Family

33 Replies

Hello All. I'm an avid listener of the BiggerPockets podcast and figure I've been missing chances for good insight on the forums too, so here goes one of my first posts!

My partner and I are getting pre-approved for a 203(k) rehab loan here in Houston, TX this week and are interested in a small multi-family that needs a bit of TLC as a BRRRR investment. I'm hoping we get approved for anywhere from $250K-$400k, so we are looking at 2-4 units. I have a some questions about three separate areas:

1. Did we miss the opportunity to invest in EaDo, as I see posts from even a year or more ago saying prices were rising quickly? This seems to be the case from the searching I've done.

2. I just drove around third ward, in between Southmore and Blodgett perpendicular to Scott St., and it honestly looks kinda rough in certain parts. Talked to a couple people in front of their homes, and they called it the next Heights. I hope this is the case.

3. I'm thinking so far that my best bet might be Fifth Ward near Old Spanish Trail, only a few minutes drive from Third Ward. I like the idea of student rentals in Third and Fifth Ward, but UH and Texas Southern University are both predominantly commuter schools, so I'd hate to have units sitting for months.

I hope these questions are specific enough, and I look forward to any insight. Thanks in advance!

I've looked at a few deals in 3rd Ward and it is rough. Security costs and stolen materials rough. People are disappointing, that said, the small pockets of townhomes going up are leading gentrification near downtown, so proceed with caution!

I've sold a few multi-families in third ward and at the very back of the museum district near 59 inside 288 and just before you get to midtown.  Both of those leased well for the new owners.

I would say to pick an area and do some homework on who your target renter would be, run some properties through the calculator, understand rent rates in that area and get to know the inventory on/off market for a 2-4 units in that specific area.  

With your potential budget of $250-$400k you may look in other areas.  At $400k you may be able to get into a better area with an off-market property closer to midtown or medical center. I think you would still have a good tenant pool for people going to school or working for the medical center/UH, TSU.

@Stefan Stankovic one thing of note here: if you and your partner are being preapproved for a 203(k) loan that would mean that you would both have to live in the property. A FHA 203(k) loan is specifically designed for owner-occupied properties. You might have already known this and planned on living in it but sometimes people don't realize that rule. Let me know if you have any other questions. Thanks!

@Ronald Rohde - I did see a vandalized house on one block, and a nice neighborhood walking distance away. I think i'll need to keep looking in Third Ward. You've actually reminded me when I drove around EaDo last. Multiple blocks of beautiful townhomes. I'll keep that in mind and put that area last on my list. 

@Matthew Gullo Awesome feedback, thanks so much. I am now even more excited to see what amount they'll lend. I actually would love to rent to nurses, as they can pick up extra shifts to make payments.  I'll start running some numbers in the Museum Dinow. 

@Andrew Postell Thanks for the heads up Andrew. It will actually be my name on the loan with my partner cosigning, so according to our lender only I would be required to live there. I see this as a benefit, since I've never dealt with GC's and can keep a close watch on him. 

Thank you all again!

@Andrew Postell No, just the standard 3.5% with our meeting all the requirements for FHA. We may put down 5% if that will allow us to refinance out of the PMI. I hear that right now this isn't an option, but that it could become one again in the near future. Have you heard of this?

@Stefan Stankovic what someone described to you with the 5% down item is not accurate. When you refinance out of a 2-4 unit property into a conventional loan you would need 20% equity and not 5% equity. 5% equity is what you would need for a SFR conventional loan...and that's just to refinance. You would still be paying a pretty hefty fine to not have PMI...and then you would need to pay closing costs again. All loans with less than 20% equity will have either PMI or the "upfront" PMI charge to you where you pay about 60% of the total PMI payments in full at closing. FHA loans have PMI for the life of the loan.

I'm still concerned about the FHA loan you are getting right now. Maybe everything is fine....but "partner" might mean different things here. Your investment "partner" or your life "partner". If it is your life partner, they will need to validate that your partner has lived with you for the past 12 months and they will require a Letter of Explanation on why your partner will not continue to live with you. These FHA loans are very strict. There is a lot to them. Below is the actual rule from the FHA guide that applies to what you are describing. 25% down might be the correct item to expect. This is not a rule that the bank can change or modify. They have to abide by this rule.

(2) Maximum LTV for Non-Occupying Borrower Transaction

For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve:

 a Family Member selling to a Family Member who will be a non-occupying co-Borrower; or

 a transaction on a two- to four-unit Property.

@Andrew Postell So to clarify what I meant, I am single with no children, so it is an investment partner. What I was thinking with the 5% down was that if you pay 5% down payment at first, you later have the option to refinance out of the PMI, when you hit 20% as opposed to 3.5% down payment and no option to refinance the PMI. I know this was an option on podcast 128 but am not sure if this is still possible. I also didn't know that there was a fine to drop the PMI. I'll need to specify all of this with my lender. I hope these details help explain my question better

I just reread your question and see that you answered mine - that fha has PMI for the life of the loan. So if I reach 20% equity in the fha loan, would I be fined to refinance into a conventional loan?

No question a lot of investors are sniffing around the Third Ward and with it's proximity to downtown, EADO, the Medical Center and the universities, it's poised to turn around.

What I don't like about the Third Ward is that the sellers have bought into the hype. The prices I see over there for even junky duplexes and fourplexes are just crazy. I've seen duplexes listed at over $300,000 that bring in maybe $1800-$2000 in rent and have window unit ACs. 

@Stefan Stankovic Those are rough areas that you are looking in and there are both some inflated prices and a few opportunities remaining there as well. You are looking at a higher risk/possible reward because these are areas of the city that experiencing "gentrification". As other posters have pointed out, that is not a process for the faint of heart or those who lack experience. It is hard to tell how long it will take but i think those areas will improve a great deal. I applaud your initiative and that you're willing to look in those areas.

Have you considered areas along the Grand Parkway? Totally different scenario than investing in the City to be in the burbs. I think both areas have big potential, I think the grand parkway strategy will not be as rough as it develops.   

@Fred Heller I saw some of those duplexes going for $300,000 w/ window units on my drive. Thought the prices seemed a bit ambitious for what I was getting at face value. I think I'll keep driving around when I'm in the area and keep a lookout for potential off-market properties for now. 

@Brian Foster Thanks for the advice and kind words. I was tipped off to the area by someone a bit more knowledgeable than I, and perhaps he's more confident with such a strong appreciation play. It does make me a bit nervous as a first-time investor, unless I partnered with someone a lot more experienced than myself. 

I actually haven't looked into Grand Parkway yet but definitely will now. Are you considering it/ searching now yourself? It's probably less dangerous which is good, since I'll be living in the property for a year at least. 

Yes, buying properties near Grand Parkway and also lots. It is a much different play than the city but I think you will see that as soon as you drive on it

Have u considered seller carry the loan.

@Aku Thomas I actually have considered this. There is a neighbor across the street who must have moved to another state, because his house is clearly vacant given the grass, trash can, mailbox, etc. that I was considering asking. I think he owns the house outright, but if not I'd like to do subject to instead. 

We're considering saving for direct mail to find off-market properties and I'm going to bring up seller financing with each of the owners. Have you had success using it? How do you go personally go about finding these deals and explaining to the seller?  

Welcome to BP @Stefan Stankovic !

You Texans are friendly with each other. If someone posted this in the SD forum, they wouldn't have gotten the really fantastic responses on the specific areas like you have gotten, and also the tax/legal advice to keep you outta trouble :)

If you decide to go the direct mail route, I can hook you up with a free checklist of things to do to get ready for your campaign, scripts on how to talk to sellers, and that kinda stuff.

I hope your $203k rehab loan works out well with you and your partner!

Good luck!

@Ray Lai I'll say Ray, I thought about moving from Texas a few times at my ripe age of 24, but every friend I talk to who's moved says they miss it. Why would I make that same mistake? ;)

And thanks! I will absolutely take you up on that offer. Shooting you an email now. 

Originally posted by @Stefan Stankovic :

@Ray Lai I'll say Ray, I thought about moving from Texas a few times at my ripe age of 24, but every friend I talk to who's moved says they miss it. Why would I make that same mistake? ;)

And thanks! I will absolutely take you up on that offer. Shooting you an email now. 

 Great thread thanks for asking your questions here Stefan!  I will be relocating to Texas (Houston/Galveston area) within the next few months I'll be sure to reach out to you and maybe we can connect.


@Chris Ortega No problem Chris. I do appreciate all the responses here so far and would definitely like to connect. Feel free to message me anytime. 

FYI, FHA does in fact require a 25% downpayment on an FHA loan if you have a cosigner who doesn't live in the property. That throws us off a bit, but I will likely save for a longer period of time to do the FHA loan on my own while we flip houses (using hard money) for future investing capital.

A ton of the podcasts talk about this method of flipping your way to rentals, but my favorite is #248 with Todd Dexheimer. I've listened to it three times, so I'd love to emulate him!

Hello everybody. Does anyone have an opinion on East End/ Second Ward? I am looking out there and see a few options in the 77011 zipcode, none of which are in the 100 year floodplain. Demographics look to have about a $30k median income with lots of blue collar workers. If the area seems too risky for a new investor, I'll look elsewhere. Each of the properties needs a bit of work. 

Second Ward has a really distinct character. It has arguably some of the best Mexican food in the US, an urban farm, and a makerspace. If you are operating in 2nd Ward, you will need a bilingual property manager. The structures over there do need a lot of work. Most were built between 1920 and 1940. They have old pier and beam foundations which will need to be leveled, they will need new wiring, new plumbing, probably new siding with insulation. They may not have central air. I looked at a triplex in 77011 (probably the one you're eyeing) and it had month-to-month tenants with a bazillion pets. I strongly suspect that the tenant in the largest unit is into fighting dogs and roosters. My realtor estimated it would need about 100k in repairs to pull solid B tenants, and I trust his judgement on the subject. I do like the area. The old buildings have wood floors, fireplaces, big porches, and I like the proximity to downtown.....but 100k up front is pretty steep, and I really think the ARV for residential properties in that areas tops out around $300K.

Here is a brief history of 2nd Ward:


Hey Chris I would like to connect when you get back to houston, both in real estate and construction, on the safety side if your interested!
I currently work that market in my day job !

I was reading the grand parkway part of this and have thought about the areas above 99 and 10 in KATY, the school districts keep getting better and bigger and I heard about another stadium being built even though they just built legacy?

I currently am in houston 2-3 a week with my current job as outside sales for a safety company. Would love to meet for coffee and discuss markets in houston. Looking for partners myself or just like minded individuals in this area!

@Stefan Stankovic we just picked up two apartment complexes just south of UH (Telephone Road Area). It's a bit rough now, but will improve in the next 3 years in my opinion. There is a ton of development going on in the area. With new investment in UH there is going to be stronger student demand imo. We've been offering incentives to students in order to get them into our units and have already gotten a few in the last couple of months.

@Elizabeth A Johnson I didn't get a notification of any replies in this thread like I normally do, but wow, thank you for such a detailed reply. What is most critical for me right now is getting better at estimating rehab costs, because I wasn't even close to $100k in my first run through it. But I also didn't take into consideration the foundation, plumbing and electrical all needing to be redone. I still need to drive through the area this weekend and see if there looks to be anything off market... One question - Do you think that these B class tenants would feel comfortable living in a neighborhood of C class tenants? That's something I'd never considered. I assumed with Brandon Turner's criteria alone I could solve that issue, but maybe not. 

@Tanner Carson Would love to meet! Just sent you a request and message. 

@Kevin Wood Thanks for the heads up Kevin. I'll need to check that area out as well since I heard that more students are interested in living closer to campus thanks to all that investment. How much rehab do yours need, or were they rent ready? FHA allows for over $50k in rehab costs which helps me a lot.

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