SF evaluation - What am I doing wrong?

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SF evaluation - What am I doing wrong?

Jesal Shah
Richmond, TX · Member since 2017 · 16 posts · 5 votes

Hello Everyone,

I am new to BP and looking to make my 1st investment in Houston area. I evaluated few properties but numbers don't work out. Not sure if I am doing something wrong or it's just hard to find good deals in Houston market. I have posted an example of typical deals that I have been evaluating. I will really appreciate any feedback you can provide. Please help.

Thanks in advance.

1) Purchase price: $120,000

2) Expected Rent: $1100/mo 

3) Property Taxes: $300/mo 

4) Mortgage with 25% down @ 5% interest: $483.14/mo

5) Other expenses (insurance, HOA, Vacancy, CapEx, Maint etc.): $100+$25+$100+$100+$50 = $ 375

6) Total expenses with mortgage, tax, others = $1158 (vs. total income of $1100).

7) Above yields negative cash flow. All the properties I evaluated (northwest houston) so far result in -ve cash flow.  :-(

I thought above numbers are very realistic (actually i am thinking my expenses are underestimated). I am sure people are finding deals in Houston area and making investments. So what am I doing wrong? Is my evaluation method flawed? Should I be looking elsewhere?

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Kevin Coggins
Spring, TX · Member since 2016 · 243 posts · 203 votes
9y

@Jesal Shah From the analysis I've done, in order to get anywhere near a decent cash flow, you need to be getting at least 1.5% of the ARV. The 1% rule just doesn't work here, especially when property taxes range between 2.6-3.7% depending on the area. And 1.5% is basically the minimum, if you want any sort of cushion you really need to be looking for 2%.

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  • Kevin Coggins
    Spring, TX · Member since 2016 · 243 posts · 203 votes
    9y

    @Jesal Shah From the analysis I've done, in order to get anywhere near a decent cash flow, you need to be getting at least 1.5% of the ARV. The 1% rule just doesn't work here, especially when property taxes range between 2.6-3.7% depending on the area. And 1.5% is basically the minimum, if you want any sort of cushion you really need to be looking for 2%.

    2Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    @Kevin Coggins, Thank you for your reply.

    You are absolutely right about the property taxes. If I understand your comment correctly then you mean to say that I should be looking for min. rent around 1.5% of ARV? In this case, it would be $1800 which seems unrealistic. I typically check rental listing in the same neighborhood and use mid point or lower end value for similar houses in my analysis.

    0Reply
  • Kevin Coggins
    Spring, TX · Member since 2016 · 243 posts · 203 votes
    9y

    @Jesal Shah Finding that number isn't unrealistic - it's just not very easy to come by. I'm just starting out, but in my limited analysis nothing has made sense from a cash flow perspective unless I was getting 1.5-2%.

    Just to go off your original post, one of the properties I'm looking at is about $30k less and should rent around the $1,100. Would you need to put any money into the house to get it rent ready? 

    Personally, I would be patient, because eventually you will find something where your numbers work. Are you targeting a particular part of Northwest Houston? The Woodlands is priced fairly high, Spring prices are lower, but I doubt you'll find a property that cash flows that doesn't need major work done. Then if you get down to the 1960 area, which isn't as expensive (or nice), you could probably get those numbers.

    1Reply
  • Craig Bell
    Cypress, TX · Member since 2017 · 24 posts · 6 votes
    9y

    @Kevin Coggins Thanks for that analysis, Kevin. I'm getting started out in Houston as well so it is helpful to read your opinions about Woodlands/Spring/1960.

    0Reply
  • Kevin Coggins
    Spring, TX · Member since 2016 · 243 posts · 203 votes
    9y

    @Craig Bell I'm far from an expert on the area, but we looked at about 30 houses before buying in Spring (west side of 45). There are exceptions to everything, so I wouldn't exclude any areas while searching for properties, but that is what I noticed in general looking at houses in this area. 

    0Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    Thanks @Kevin Coggins

    I am mainly looking at north of I-10 Katy and Cypress area. 

    0Reply
  • Craig Bell
    Cypress, TX · Member since 2017 · 24 posts · 6 votes
    9y

    @Kevin Coggins No worries! There's always more to learn about something in life, and RE is no exception. I was just happy to see your overall feel/perception of that area so far from your experience. I haven't personally settled on an area yet, but I'll try to avoid the shotgun approach.

    0Reply
  • Account Closed
    Houston, TX · Member since 2016 · 11 posts · 5 votes
    9y

    @Jesal Shah I played around with some of your numbers, for instance, keeping everything the same and having rent at 1200 (1% rule, check) but also reducing annual expenses to 4000 (333/mo) you can achieve positive cash flow, roughly 3% COCR. I dont think these are unrealistic numbers, perhaps not for this property but I'm sure you'll find a deal that makes sense.

    1Reply
  • Steven Anderson
    Investor · Spring, TX · Member since 2015 · 126 posts · 38 votes
    9y

    the two biggest issues I see in north Harris county are insurance and taxes. You've mentioned the tax rates already but insurance is pricey. In Montgomery County there are pockets with 2% rates, good rents and the added benefit of lower insurance rates. That doesn't mean there are screaming deals. In my view, the best approach up here is brrr. You will still have a marginal rental, but you can get most of your cash back and thus your returns are higher. 

    1Reply
  • Kevin Coggins
    Spring, TX · Member since 2016 · 243 posts · 203 votes
    9y

    @Steven Anderson What makes the insurance pricey? Just the areas that fall into the floodplain? I got insurance for $80/mo (on primary home), which seemed very reasonable.

    0Reply
  • John Vo
    Investor · Houston, TX · Member since 2015 · 99 posts · 56 votes
    9y
    Jesal Shah Your number is good for your assumptions. This just means you need to buy it at a lower price or for better terms. If anything your assumptions is pretty liberal. For instance the rate for 30 year mortgage for primary residence borrower is at 4.6% ish...last time I check, as investors you would probably be at 5.5% unless you have killer credit or higher down like you're doing.
    1Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    Thank you all for your responses.  Very much appreciated.

    Couple of good points made in above discussion:

    - There are areas with tax rates around 2% which helps. I will certainly look into it. 

    - Look for such properties at a lower price however it is difficult to find them through MLS.

    I haven't looked into wholesalers yet. Is it beneficial to buy properties through wholesalers? 

    0Reply
  • Sam Alomari
    Rental Property Investor · Alexandria, VA · Member since 2016 · 75 posts · 58 votes
    9y

    @Jesal Shah You can still find properties on the MLS, but you have better chance working with wholesalers. They'll send you off market deals, so you'll have less competition. Just make sure your wholesaler is legit and sends good deals, because unfortunately it's kind of a trend that newbies starts as wholesalers and in my opinion you should work with experience ones. I don't mind giving a newbie a chance, but I've seen some of them try to push deals on me thinking that they can trick me because I'm out of state investor.

    Good luck my friend 

    1Reply
  • Tony Castronovo
    Rental Property Investor · Park City, UT · Member since 2016 · 678 posts · 531 votes
    9y

    Hi @Jesal Shah.  I work with wholesalers a lot.  Bought all but one of my properties from them.  Your numbers/analysis seem accurate.  You need to buy your properties lower.  $120k and $1100 rent will not work.  You also didn't mention whether you have a rehab cost.  Are these properties rent ready?

    0Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    Thank you @Sam Alomari , @Tony Castronovo@Tony Castronovo

    The properties I am looking at are mostly rent ready but I still budget $1000-$2000 for improvements as part of the cash needed to close the deal. 

    If you guys don't mind - can you please share some of the reliable wholesalers you deal with? 

    Thank you. 

    @Tony Castronovo

    @Tony Castronovo

    0Reply
  • Sam Alomari
    Rental Property Investor · Alexandria, VA · Member since 2016 · 75 posts · 58 votes
    9y

    I invest in Indianapolis, so my wholesalers won't benefit you :)

    1Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    9y

    @Jesal Shah the problem is that you're starting with a rent/price ratio of less than 1% and then you're dealing with the fact that TX is among the top 3 highest in the nation for taxes and insurance. It just doesn't cash flow well. You can either accept the low returns or go to a market that cash flows better. You can do very well in the Midwest. Personally, I like Indianapolis and Kansas City.

    1Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    Thank you @Mike D'Arrigo for your input. 

    0Reply
  • Bill Kennedy
    Rental Property Investor · Greenwood, MO · Member since 2013 · 34 posts · 10 votes
    9y
    Jesal Shah working with wholesalers can work if you have cash and can make a quick decision. My wholesalers here in Kansas City usually move their properties in days and they need work.
    0Reply
  • William E.
    Investor · Pearland, TX · Member since 2016 · 246 posts · 136 votes
    9y

    keep looking Houston has a lot of demand and not as much supply, therefore you're either you have the connections to make the deals quick, market like crazy to find the sellers first, creatively turn a bad deal into a good one, or you wait until you get lucky.

    I've connected with any wholesaler i could find in the houston area hoping to get to the deals first from their lists. unfortunately they're not giving me any real deals either. 

    my next path is drive the neighborhoods and start knocking on doors asking people to sell me their rundown houses. 

    good luck, and don't give up. Find a niche.

    1Reply
  • Charles Fletcher
    Houston, TX · Member since 2016 · 71 posts · 23 votes
    9y
    You aren't doing anything wrong. Just keep doing it! Houston is a healthy market, if good deals were easy to find that would probably mean that the city was in trouble. If you are expecting to find a rent ready place that cash flows on MLS, you need to accept 2 things: 1) You have to analyze a lot of numbers and make a lot of offers. 2) You may have to accept Section 8 vouchers. I found a house on MLS that cash flows $466 a month, but I had to put an offer in within an hour of it being listed and rent to a section 8 tenant.
    1Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    Thanks @William E. and @Charles Fletcher

    1Reply
  • Tony Castronovo
    Rental Property Investor · Park City, UT · Member since 2016 · 678 posts · 531 votes
    9y

    Hi @Jesal Shah.  Please PM me and I can share some recommendations.

    1Reply
  • Jesal Shah
    OP
    Richmond, TX · Member since 2017 · 16 posts · 5 votes
    9y

    @Tony Castronovo Thank you. I have sent PM. 

    0Reply
  • Ryan Terwilliger
    Real Estate Agent · Houston, TX · Member since 2015 · 93 posts · 46 votes
    9y

    Realtor here, just wanted to say that you guys are good. Most of this is exactly right, taxes can be a killer. In addition to all of that is the competition is rough, any mls deal under 120k that has minimal rehab is scooped up quick. The percentages to seem to better in a nicer neighborhood and higher price, 150K ish. I see those everyday if you don't mind doing a few updates.

    0Reply
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