Is it possible to cash flow strong in Houston?

51 Replies | Houston, Texas

Correct!

The safest way to invest is to hold it long term. Houston historically doesn't crash, it will correct but most are predicting not for another 2 years. Hint, keep an eye on Californians flooding (no pun intended) into Houston for work.

@Brandon S. post some numbers. The taxes and insurance are higher then other places. Prices are higher now too. This may lead to reduced cash flow but won’t know unless you post numbers

Also cap rates are irrelevant for residential homes. They’re not valued based in cap rates. Cap rate could be 12, wouldn’t matter it’s valued on sold comps

So i'm looking at a SFH that is sold for $175k, but appraises at $192,500. Basically i'm buying at 10% below market value and it is new construction. Rent is roughly $1475/month with annual taxes at $4299 and annual insurance at $900.

@Brandon S. I assumed 25 percent down and 5.5 percent interest on 30 year fixed. I plugged in the numbers you gave me and got PITI of 1216. With rent of 1475 and not accounting for any property management or repairs etc I would not do this deal. To slim of margins

@Brandon S.

Good morning, sir!

When I left Houston a year ago, we were buying roughly 40 homes per month in that market. Many of these SFH properties were buy and hold. I can assure you, there are areas where you can buy low, add value, and rent out close to the 1% rule or higher, AND get a 10% cash on cash return.

Look into areas like Katy, TX. It's a great little suburb just west of Houston. We were buying homes there close to 100k, they needed 20-30k, were worth close to 150k, and rented for 1500 p/month or more all day long. Very desirable area.

Also look into Sugar Land, Missouri City, and even as far down as Pearland, Friendswood, etc.

Hope this helps!

@Brad Larsen It takes time to find the right property. As for Katy, prices have jumped and is tight now.

Try to focus on older homes and around the 100k to 150k and see what numbers you come up with, you could be surprised.

@Brandon S.

@Van Blackman is correct BUT taxes continue to rise and rental rates are slowing. You can absolutely still find deals, they're just harder to come by in years past. 

If cashflow is what you're after, I would be prepared to look at ~100 properties to find one deal. There are a lot of other hungry investors out there today that have cash they HAVE TO put to work, causing prices to rise above levels where they make sense. 

Stay disciplined and you will find a deal, it just won't be as easy as the guru's tell you. 

All the best!

I agree with @Cameron Tope that there are some hungry investors out there and it makes for some stiff competition (and higher prices).  I am also on the buy side of the examples @Van Blackman pointed out (he sold me a couple). I built a nice portfolio of SFH's doing exactly what he describes....bought for roughly $100-110k, put in $15-25k for rehab, ARV around $160-170k, and rents $1400-1500 (not quite 1% rule). What helped my cash flow was that I would acquire with private money, force appreciation with a nice rehab, then refi in 60-90 days. My goal was always 10% or better COCR and $300+ monthly cash flow. I invested in Katy, Cypress, and Tomball. I've since sold off my SFH's but had a pretty nice run, base hit after base hit.

@Brandon S. Many valuable inputs from successful investors..  

Adding my thoughts, i see few investors who want to do safe bet on getting new construction homes for rental. Is it wise decision? may be not. Will you invest in an IPO of company which didn't prove it can make money?? You won't. It's almost similar to it.  

There are some basics to REI,

ABCDE - Appreciation, Built in Equity, Cashflow, Depreciation & Equity. It will need to work together to make it successful investment. If you buy new construction, it will take years to reach good appreciation point. You might not get it with good discount which means not much built in equity. 

Most successful investors build their portfolio buying older properties in better community for good discount price and start adding on top of it. I know there is competition but deals out there. I get good deals every day, just don't have takers/investors who are willing to invest. 

@Brandon S. Houston is a freakishly big area, so the answer to your questions depends on where you're actually talking about. There are different markets and submarkets, and the answer will vary with respect to each of them. In the inner loop, for example, price/rent ratios are so high that it's very very difficult to find a cash flowing SFH or MF place. As others have stated, you'll have better odds looking farther afield. I've found a few promising options in Missouri City, but in each case I've made an offer, the place went for more than I was willing to pay (and, IMO, more than the numbers justified).

The more general point about taxes is well-taken though. Despite TX's rep as a low-tax haven based on lack of state income tax (which is great, of course), the property taxes are killer. Compared to CA, they are higher rates and typically increase every year due to reassessment (while CA has Prop 13, which freezes your tax base at the sales price). This systematically makes cash flow harder to find, esp in a hot market. My only thought here is that prop taxes are county by county, and much of what people think of as "Houston" is actually scattered around different counties. It's possible, though, that some of the surrounding cities where price/rent ratios are lower are in counties with lower tax rates. That said, the only one I know for sure is Ft Bend Cty, where Missouri City is located, which is just as high as Harris and seems to have pretty aggressive yearly reassessment as well.  

@Brandon S. yes you can cash flow. In this market you have to be a bit more patient with deals. On single family anything in the 1% rent to price ratio will cash flow and on multifamily there are plenty of 5 cap+ properties to be had. I don't know what you are doing to find deals, but the harder you are working the more you separate yourself from others. 

To give some context on how it can be done in a hot market. My business partner and I have gone from $0 in real estate in Mar 2015 to ~$6M in real estate. That includes selling 7 properties along the way. 

Originally posted by @Vijaianand Thirunageswaram :

@Brandon S. Many valuable inputs from successful investors..  

Adding my thoughts, i see few investors who want to do safe bet on getting new construction homes for rental. Is it wise decision? may be not. Will you invest in an IPO of company which didn't prove it can make money?? You won't. It's almost similar to it.  

There are some basics to REI,

ABCDE - Appreciation, Built in Equity, Cashflow, Depreciation & Equity. It will need to work together to make it successful investment. If you buy new construction, it will take years to reach good appreciation point. You might not get it with good discount which means not much built in equity. 

Most successful investors build their portfolio buying older properties in better community for good discount price and start adding on top of it. I know there is competition but deals out there. I get good deals every day, just don't have takers/investors who are willing to invest. 

 Not add up siR. 

Your deals probably aren't deals. Lots of money out there looking for deals. 

Originally posted by @Brandon S. :

I'm looking to invest in the Houston, TX area, but the property taxes seem to kill cash flow.  Does anyone have insight on their experience

Yes, you can cash flow strong. I own a ton of properties in Houston and they're cash flow beasts. You just have to buy smart as there is a lot of dumb money here pushing up prices, driving down caps. My last few deals were only bought because I'd pay all cash, quick close, as is, no DD. If you can't do that, prepare for a low CAP retail priced type deal.

Originally posted by @Vijaianand Thirunageswaram :

Most successful investors build their portfolio buying older properties in better community for good discount price and start adding on top of it. I know there is competition but deals out there. I get good deals every day, just don't have takers/investors who are willing to invest. 

 No offence but I find that hard to believe.  In this market there is all buyers / no (few) deals.   10 years ago it was all deals, no buyers.   I can bid on anything I want, any size.  I know if I get some $100m deal under contract and don't have the $20m to put down, I can find it.  And any number of banks that'll do the $80m

So if you say you have deals, and no takers, then maybe it's not really a deal.  If you really do have deals, I'll buy them all. 

Originally posted by @Cody L. :
Originally posted by @Vijaianand Thirunageswaram:

Most successful investors build their portfolio buying older properties in better community for good discount price and start adding on top of it. I know there is competition but deals out there. I get good deals every day, just don't have takers/investors who are willing to invest. 

 No offence but I find that hard to believe.  In this market there is all buyers / no (few) deals.   10 years ago it was all deals, no buyers.   I can bid on anything I want, any size.  I know if I get some $100m deal under contract and don't have the $20m to put down, I can find it.  And any number of banks that'll do the $80m

So if you say you have deals, and no takers, then maybe it's not really a deal.  If you really do have deals, I'll buy them all. 

I find deals everyday; as most experts know, "deal" is relative however. Some "deals" don't have the teeth I need to pull the trigger on so I will pass them on to less active (less needy) investors. They are deals, just not for me. 

"If you really do have deals, I'll buy the all." seems like an olive branch used as a whip. You dont' have the capitol or team to handle a deal a day, and you haven't line out any criteria as to what defines a deal.
I'm at 65% of ARV minus repairs. Thats a good deal (I usually take home around 18%) for me, but others (landlords) would likely need less meat on the bone and wholesellers more. (so they can take a bite and pass it along).

Hell, I pass on "deals" that fit my criteria all the time because I don't want to engage in the time managing emotions, or personalities of the seller.
Being blunt with facts doesn't always go over well with people, so I am grateful to have 100% of my deals be referrals or take overs via referral.

Originally posted by @Van Blackman :

@Brandon S.

Good morning, sir!

When I left Houston a year ago, we were buying roughly 40 homes per month in that market. Many of these SFH properties were buy and hold. I can assure you, there are areas where you can buy low, add value, and rent out close to the 1% rule or higher, AND get a 10% cash on cash return.

Look into areas like Katy, TX. It's a great little suburb just west of Houston. We were buying homes there close to 100k, they needed 20-30k, were worth close to 150k, and rented for 1500 p/month or more all day long. Very desirable area.

Also look into Sugar Land, Missouri City, and even as far down as Pearland, Friendswood, etc.

Hope this helps!

 Would you recommend Friendswood for multifamily investing?

I'm only interested in acquiring a duplex, triplex, or fourplex. Not interested in SFH at all.

With that said is it better if I focus in Pearland since Pearland is bigger population, more urban, more businesses, and closer to Houston ?

Thank you!