Deal analysis in SE Houston (Clear Lake and surrounding)

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Deal analysis in SE Houston (Clear Lake and surrounding)

Nick S.
Denver, CO · Member since 2016 · 70 posts · 41 votes

I've been analyzing hypothetical deals to try to set my buying criteria and wanted to get some feedback on my numbers and assumptions. I'm a new investor looking at buy and hold rentals in the SE Houston market. Areas like Clear Lake, Webster, League City, Friendswood are my current area of focus due to reasonable price to rent ratios and good school districts.

My target property is a 3/3/2 home in the B/B+ range, with rent in the $1500-1600 range. This rental price estimate is based on current and past HAR listings.

Here's the type of deal I think I need to make the numbers work:

Purchase price: $105,000

Rehab cost: $20,000

(ARV: ~$150,000+ range, though I don't plan to sell)

Down payment: $25,000 (20% of purchase + rehab)

Closing cost: ~$2,500 (does this seem right?)

Monthly mortgage payment: $460 (assumes 20% down, 3.7% rate)

Insurance: $94/month (assumes 0.9%)

Property tax: $281/month (assumes 2.7%)

Vacancy: $133/month (assumes 1 month out of 12, or 8.3% vacancy)

Maintenance/repair: $104/month (assumes 1% of purchase price)

Cap Ex budget: $112/month (assumes 7% of rent, somewhat arbitrary)

Property management: $144/month (assumes 9% - I will probably self manage, but want to budget this into the cash flow)

Association fee: $25/month (many neighborhoods have a small yearly fee)

Total Operating costs: $893 (excludes debt)

Rent: $1600/month

NOI: $707/month

Cash flow after debt: $247/month

Cash on cash return: 11.6% (for $25,000 down payment)

I based my target purchase above to aim for > $200/month in cash flow with what I think are reasonably conservative assumptions. 

This works out for deals in this range to require rents in the 1.25-1.3% of the purchase + rehab cost. ($1,600/$125,000 = 1.28%)

Any feedback on the assumptions and numbers above are greatly appreciated as I continue to refine my target properties.

Assuming the numbers above aren't too far off the mark, then the question becomes: how is the wholesale market looking out there these days for 3/3/2 houses in these neighborhoods in the $100k-110k range? Properties in this range on the MLS are certainly few and far between.

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Randall Jacobs
Investor · Friendswood, TX · Member since 2016 · 88 posts · 51 votes
10y

One word of caution.  If you want to rent your property quickly and keep it rented, you need to price your property @$100 below HAR rents. 

Randy

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  • Valli Smith
    Rosenberg, TX · Member since 2016 · 29 posts · 9 votes
    10y
    I'm new and don't have much experience. However, in neighborhoods in the $100k purchase and $150k ARV range, I'm seeing rents that are more in the $1200-$1400 range. When running numbers, it pays to be a bit of a pessimist to account for worst case. I know a lot more about north and NE than SE so I may be way off base. Still, check those rent numbers with an agent or your mentor. Better safe than sorry.
    0Reply
  • Jeremy Kersten
    Cypress, TX · Member since 2015 · 16 posts · 3 votes
    10y

    I agree with Valli. $1600 seems a little steep. Just last year I was paying $1200/per month on a home in NW Houston in a great school district and home values slightly higher than $100K.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    Thanks for the feedback. That's exactly what I'm looking for here, trying to identify where my numbers and assumptions are valid and where I might be too optimistic. I based the $1600 number on some current leases available on HAR, but $1400-1500 might be more appropriate for the type of deal I'm looking at. 

    My impression is that a similar home in some of the SE neighborhoods rents for a little bit more (~$100/month) than the NE/NW neighborhoods, but that's based on my own informal survey of the market. Anyone else have a good feel for the differences in rent between the two areas?

    0Reply
  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    You can pull rental comps off of MLS or you can use a site like rentometer.com. But overall it does look like you have a lot of things covered properly. Interest rate of 4+% might be better to work off of too.

    0Reply
  • Sue Roddy
    Real Estate Agent · Houston, TX · Member since 2016 · 2 posts · 0 votes
    10y

    Hi Nick,

    I'm a REALTOR® on north Houston side. I've just looked on HAR.com around the Friendswood, Webster and League City areas. A quick look at the closed rental properties shows a monthly rent of around $1500 is possible on properties with ARV $150k+. Of course, that's just a basic assessment, the age and size of the property will influence the rental income.

    0Reply
  • Kevin Tran
    Real Estate Agent · Richmond, TX · Member since 2016 · 43 posts · 19 votes
    10y

    Hi everyone. I ran comps on the MLS of SOLD rentals for the last 6 months. If you truly get 3 bed/3 bath homes rehabbed and rentable, $1600 is the minimum you're getting in the Friendswood/League City/Clear Lake area. A home with a 1:1 ration of baths to beds is not too common so that's worth a premium. Of the 11 SFH and TH/Condo with those attributes in my search result, the rent range is from $1600 - $3,100. If I had a smaller geographical area to search, the stats would be more relevant.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    @Kevin Tran Thats great info thanks! And I just realized that "3/3/2" in my original post was a typo. I meant 3/2/2. Oops...

    But still, a very interesting thought. Does a 3rd bathroom really drive the rent price up a significant amount? I would think the cost of adding a 3rd bathroom would not be justified by the increase in rent. I can definitely see 2 bathrooms being a huge plus over 1, but 3 vs. 2 seems like it wouldn't make as much of a difference to a potential renter.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    @Michael Le I would be getting a standard mortgage in my name and I have good credit which is why I assumed 3.7%. Why do you say assume 4+%?

    0Reply
  • Kevin Tran
    Real Estate Agent · Richmond, TX · Member since 2016 · 43 posts · 19 votes
    10y

    Now we're rockin'. Yea 3 baths make a huge difference. Simply changing that from 3 to 2 baths and filtering by SFH only, we get 256 rentals since 6/1/16. You're now between $1195 - $2375. Average is $1700. Median is $1650. A good parameter to add would be a square footage range. Then when you have a specific neighborhood where the property is, the search can use a much smaller geographical radius.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    @Kevin Tran Awesome, thanks for that, so $1600 isn't too bad of a ballpark estimate for starting purposes, assuming the property is nicely redone and in a decent neighborhood. 

    0Reply
  • Kevin Tran
    Real Estate Agent · Richmond, TX · Member since 2016 · 43 posts · 19 votes
    10y

    I would say you're on the right track. It hinges a lot on the quality of the neighborhood as you already mentioned.  Good luck, Nick.

    0Reply
  • Randall Jacobs
    Investor · Friendswood, TX · Member since 2016 · 88 posts · 51 votes
    10y

    One word of caution.  If you want to rent your property quickly and keep it rented, you need to price your property @$100 below HAR rents. 

    Randy

    3Reply
  • Wade G.
    Houston, TX · Member since 2010 · 150 posts · 159 votes
    10y

    If it was me I would not base rents off $1600 month, seems like around $1400 - $1500 may be a good average.  I think your insurance should be based on about $150 month and taxes about $300 or more (HCAD is very aggressive right now).  Rates for investment properties are probably going to be more around the mid to high 4% range.

    Also, you may want to consider using hard money rather than putting 20% down.  Some people are not comfortable with hard money but it really conserves your funds.  The last deal I did last May would have had me out of pocket around 39k but since I used hard money I was only out of pocket around 9k.  

    One more thing is flood insurance.  I would not sleep well at night without it in this area.  That will be about $500 per year for minimal coverage.

    0Reply
  • Tony Castronovo
    Rental Property Investor · Park City, UT · Member since 2016 · 678 posts · 531 votes
    10y

    Some comments and adustments I would make:

    -- Mortgage rate 4.5% (rates are higher on investment properties)

    -- Property management: varies but $100/mo should be appropriate

    -- Your cash on cash return needs to include ALL out of pocket costs (down payment, closing costs ($2500 seems quite low), and rehab. Anything you pull out of your pocket to get the deal done. Now of course if any of these items are leveraged (e.g. rehab) then it's not cash and can be excluded. I aim for 10%+.

    -- Annual insurance: rough rule of thumb 0.9-1% of ARV

    -- 3 baths in a 3 BR house may be hard to come by. Suggest you target 3/2's as they are much more common.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    @Tony Castronovo Thanks for the feedback. I actually did mean to say 2 bathrooms instead of 3. I wasn't able to edit the post, but appended a correction to that initial post. Is property management more of a fixed cost (~$100/month for a SFR) rather than a percentage? I was under the impression that it was a percentage of rent, at 9-10%. And you're right, my COCR calculation is probably off, but I'm also not sure if I'll pay rehab costs out of pocket or finance that part so that changes things quite a bit.

    @Wade G. You're probably right on rent assumption; I should be conservative. And good catch, tax should be based on ARV, not purchase price. Do you think hard money is a good idea for a buy and hold? Are you suggesting to consider hard money until it is rehabbed and then refinance with a conventional loan? And oh yes, flood insurance. I should look into that...

    1Reply
  • Tony Castronovo
    Rental Property Investor · Park City, UT · Member since 2016 · 678 posts · 531 votes
    10y

    $100/month or 8% is about right. Like most costs there is some variability.

    Btw...I used hard money on my last two buy & holds. 3 months HML then refi to conventional. 70% LTV on the HML and 75% on conventional.

    0Reply
  • Wade G.
    Houston, TX · Member since 2010 · 150 posts · 159 votes
    10y

    Yes, use hard money to purchase property then after repairs refi into conventional loan.  It took me a long time to accept the concept but I'm glad I did.  Also once you get above 4 mortgages, or maybe it's 5, I can't recall, banks will require 25% down instead of 20%.  If your goal is to actually pay off your rental then hard money may not be the route to go but if you plan to keep them financed then it may be an idea to look into.

    0Reply
  • Fred Heller
    Real Estate Agent/Property Management · Houston, TX · Member since 2014 · 1k+ posts · 827 votes
    10y

    @Nick S.   Setting everything else aside, the one thing that concerns me about that area is the need for extra windstorm coverage.

    I'm not an expert on insurance, but I have heard that properties that are close to the bay and the coast require additional windstorm coverage. And I understand that can be pretty pricey.

    That's something you would definitely want to check with your insurance agent before you close on a deal.

    1Reply
  • John Truong
    Real Estate Investor · Houston, TX · Member since 2013 · 110 posts · 23 votes
    10y

    @Nick S. I have not seen any comments on your purchase price -- $105k, $20k rehab, ARV $150k+.

    I have not seen that price on the MLS for a long time. If one does show up, it is gone within hours. You will probably have better luck connecting to wholesalers and you will need hard money.

    1Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    @John Truong That was my takeaway too, based on backing into the purchase price starting from expected rents in these areas. This kind of property is definitely not often found on the MLS, so direct marketing or connecting with a wholesaler looks like the way to go.

    What are your thoughts on hard money vs buying all cash or using private money for a first deal?

    0Reply
  • John Truong
    Real Estate Investor · Houston, TX · Member since 2013 · 110 posts · 23 votes
    10y
    Originally posted by @Nick S.:

    @John Truong That was my takeaway too, based on backing into the purchase price starting from expected rents in these areas. This kind of property is definitely not often found on the MLS, so direct marketing or connecting with a wholesaler looks like the way to go.

    What are your thoughts on hard money vs buying all cash or using private money for a first deal?

     I like HM a lot, but it costs me about $8k more per project. I like that I can refinance as soon as the rehab is complete, and that my out of pocket at the end can be low if I buy right.

    With an all cash purchase, you have two options for financing after the rehab is done:

    • BRRR strategy / cash-out financing -- the good: low or no money out of pocket; the bad: seasoning period of 6 to 12 months.
    • Delayed financing -- the good: you can cash out up to 100% of your purchase cost (or 75% of LTV, whatever is less); the bad: what you put in as rehab is your out-of-pocket.

    The mortgage company I work with only does cash out if I have have less than 5 loans.

    2Reply
  • Mark B.
    Engineer · Allentown, PA · Member since 2014 · 105 posts · 64 votes
    10y

    Not sure if someone mentioned this, but how exactly are you getting 25k as a down payment.  20% would be about 20k + 20k for your rehab.  Were you accounting for something else? (small detail but i was confused)

    0Reply
  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    10y
    Originally posted by @Nick S.:

    I've been analyzing hypothetical deals to try to set my buying criteria and wanted to get some feedback on my numbers and assumptions. I'm a new investor looking at buy and hold rentals in the SE Houston market. Areas like Clear Lake, Webster, League City, Friendswood are my current area of focus due to reasonable price to rent ratios and good school districts.

    My target property is a 3/3/2 home in the B/B+ range, with rent in the $1500-1600 range. This rental price estimate is based on current and past HAR listings.

    Here's the type of deal I think I need to make the numbers work:

    Purchase price: $105,000

    Rehab cost: $20,000

    (ARV: ~$150,000+ range, though I don't plan to sell)

    Down payment: $25,000 (20% of purchase + rehab)

    Closing cost: ~$2,500 (does this seem right?)

    Monthly mortgage payment: $460 (assumes 20% down, 3.7% rate)

    Insurance: $94/month (assumes 0.9%)

    Property tax: $281/month (assumes 2.7%)

    Vacancy: $133/month (assumes 1 month out of 12, or 8.3% vacancy)

    Maintenance/repair: $104/month (assumes 1% of purchase price)

    Cap Ex budget: $112/month (assumes 7% of rent, somewhat arbitrary)

    Property management: $144/month (assumes 9% - I will probably self manage, but want to budget this into the cash flow)

    Association fee: $25/month (many neighborhoods have a small yearly fee)

    Total Operating costs: $893 (excludes debt)

    Rent: $1600/month

    NOI: $707/month

    Cash flow after debt: $247/month

    Cash on cash return: 11.6% (for $25,000 down payment)

    I based my target purchase above to aim for > $200/month in cash flow with what I think are reasonably conservative assumptions. 

    This works out for deals in this range to require rents in the 1.25-1.3% of the purchase + rehab cost. ($1,600/$125,000 = 1.28%)

    Any feedback on the assumptions and numbers above are greatly appreciated as I continue to refine my target properties.

    Assuming the numbers above aren't too far off the mark, then the question becomes: how is the wholesale market looking out there these days for 3/3/2 houses in these neighborhoods in the $100k-110k range? Properties in this range on the MLS are certainly few and far between.

    You are considering purchasing a property where your target is just $200 in cash flow.  Personally, that is too small a target.  If your expenses are off, you could easily be negative on this deal.  I'd aim only for deals that can conservatively generate $400 or more in cash flow monthly.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y
    Originally posted by @Mark B.:

    Not sure if someone mentioned this, but how exactly are you getting 25k as a down payment.  20% would be about 20k + 20k for your rehab.  Were you accounting for something else? (small detail but i was confused)

    I have some cash that I can use for a deal or two. Trying to weigh the options of using that cash (and tying it up) or further leveraging.

    0Reply
  • Nick S.
    OP
    Denver, CO · Member since 2016 · 70 posts · 41 votes
    10y

    @Jon Q. That's good feedback. Ideally I would like to make more cash flow from a single deal. My read of the market is that $400/month in cash flow from a B+ SFR in Houston would be an above average deal requiring a steep purchase price. My thought has been that if I can use conservative assumptions and make $200+/month, I'd be happy, especially to get started. Then I can learn where to target to increase that in the next deals. Maybe I should be targeting a higher return, even right from the start. But I also don't want to sit on the sidelines for forever waiting for a screaming deal that may never come along.

    0Reply
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