What is your buying criteria for cash-flowing rentals in Houston?

20 Replies | Houston, Texas

I'm looking to buy cash-flowing rentals in the Houston area, and I'd love to hear what target numbers and buying criteria others in this area are shooting for when deciding to purchase a rental.

For example:

- Rent should be no less than 1% of the all-in purchase price (1% rule)
- Property should cashflow at least $200 / month after all expenses
- Property should be located in North-West Houston area, or an area I'd be comfortable living in
- All in cost should be no more than 75% ARV
- Rehab must be medium to light, no tearing down to the studs.

What is your buying criteria, and are you meeting it in today's market?

Yeah, NW Houston is pretty much what everybody is looking for.  You might be looking for awhile.  

The deal you describe is out there but it might be in Pasadena or Missouri City or someplace.  You are might to need to toss out or modify a couple of those parameters - at least one of them.  

We should go have a brewed beverage.  I actually did get a pocket listing exactly as you describe - partnering on it with another buddy here from BP, actually.  So keep networking - it is probably the only cost effective way to get a deal right now.

@Axel Norvell Hi Axel, I live in the montrose Houston area. I am looking to buy rental properties as well. I've been looking to see what's a good area in Houston buy, considering it's a big city.

I'm your experience, what is a cheap area to buy that will rent for around 1000-1200 in a good area with low crime rate?

Originally posted by @Axel Norvell :

I'm looking to buy cash-flowing rentals in the Houston area, and I'd love to hear what target numbers and buying criteria others in this area are shooting for when deciding to purchase a rental.

For example:

- Rent should be no less than 1% of the all-in purchase price (1% rule)
- Property should cashflow at least $200 / month after all expenses
- Property should be located in North-West Houston area, or an area I'd be comfortable living in
- All in cost should be no more than 75% ARV
- Rehab must be medium to light, no tearing down to the studs.

What is your buying criteria, and are you meeting it in today's market?

I bought a lot of single family homes before I started buying multifamily.  I still have 7 or 8.  I can't tell you what a "good" area is to buy, but I can tell you most of my properties all fit the same type of profile.  They're about $120k, and rent for about $1200 (some more/less, but you get the idea).

I've owned them all for about 10 years at this point.  They've been paid off.    I have them as far north as Conroe and as far south as Dickenson.  To be honest, I think it's hard to go wrong with this type of property if you can get cheap 30 year money.   See map.  The green ones are the homes:

@Cody L. Thanks Cody for your help! This helps. If you don't mind me asking, how were you able to pay them off since you've only had them for 10 years now?

Also, im super interested in multi-family homes, like a duplex. In your experience, What's an area in houston that has duplexes? I've only found the montrose area, and even that area the homes don't drop less than 400-500k.

Originally posted by @Account Closed :

@Cody L. Thanks Cody for your help! This helps. If you don't mind me asking, how were you able to pay them off since you've only had them for 10 years now?

Also, im super interested in multi-family homes, like a duplex. In your experience, What's an area in houston that has duplexes? I've only found the montrose area, and even that area the homes don't drop less than 400-500k.

multi units 4 and under can be found all over.  Search HAR.  Set a saved search to see new ones when they come up.

As to how I paid them off.  It's more of a "why".  I was tired of dealing with the residential loans.  The escrow for taxes, the demand for insurance.  Plus they were some of my higher rate loans (most in the high 5%).  So I just paid them off to be done with them.  I didn't necessarily pay them off using the income from those specific properties.  I just paid them off out of my main operations account for my company.  

 

@Axel Norvell I don't necessarily recommend where you would want to live. As @Cody L. mentioned those lower price point homes are going to be higher rent to price. I also started in homes and we really liked Channelview, Baytown, Deer Park, etc. Areas where you get blue collar factory workers. They make great tenants and don't tend to move much since they are on shift work.

I am in the same boat as well. Looking for lower priced deal with minor cosmetic that fits 1% rule seems to be really tough right now, esp in areas near the city on major MLS. I am looking to get my first property that I am could potentially househack. I am down for a meet n greet if anyone's interested. I will try to attend the upcoming BP local meetup groups as well!

Here are some of the rules I've used: 

- Run accurate comps (solds and rentals) using most conservative comps available.  I have my realtor's license so this is a bit easier for me than those without.

- Baseline monthly rent should be minimum 1% of price (after rehab)

- Baseline cash flow of $200/mo. after all expenses.

- The area should be a place I'm comfortable to drive to in terms of distance and safety.

- Get a Seller's Disclosure that's fully filled out by the seller.  This is one of the few consumer protections property buyers have in TX so every time I've gotten an incomplete one or one that was carelessly filled out, I've pushed back.  There's a new Seller's Disclosure that will be mandatory from 9/1/19 onwards and it's more thorough with regards to flooding on the property.  

- Avoid foundation issues unless the numbers make sense.  

- No tear-downs.  

-Know your exit strategies going in.

Using these rules, I've been able to find some gems all around the city.  The real estate market has seen a bit of a slow-down this summer compared to last year so in some areas there's lots of inventory on the market and not the best for flips.  However, the rental market is holding strong so it's a good time for properties where your strategies include buy and hold.  Good luck!  

Good Question and great inputs!  @Rusha Jayasuriya how you doing? You nailed it right on.. 

@Cody L. is right about the price point.

1% rule is the basic for every thing. But start looking at DSCR (Debit Service Credit ratio) and try to be close to 1.25. Many lenders see that number if you want have multiple properties and want to keep adding to your portfolio.

Also try to diversify with not rentals, also with Owner Financing deals.. It's another way to have long term passive income.  It's our exit strategy if we couldn't sell the flip property. 

$200 cashflow after all expenses is good but whether you going to include your capex as expense or part of cashflow is decision point. That can change the math. 

Our Strategy(my wife and me), we want to keep building our portfolio if it makes sense to buy and hold it long term. We don't really look for 75% ARV after all cost. We believe that GOLD and REAL ESTATE never lose value. As long your rent pays your mortgage and takes care of expenses, it's good long term investment with cheap money from lenders with so low interest rates.. That's how we look at it.. We have 5 rentals, 2 Owner finance and target to get 3 more rental this year.. with slow market lets hope for some great deals.

 

@Rusha Jayasuriya

By $200 cash flow after all expenses, do you do mortgage+taxes+insurance+(HOA)+vacancy+CAPex+property management?

Or do you have a different criteria?

Because I'm having a hard time finding a cash flowing property at all...

Thank you in advance

Yes, I use the BP calculators for this. I factor in mortgage, taxes, insurance (including flood insurance if applicable),HOA, vacancies, repairs, CapEx, and Management fees.

I understand the numbers can be tight. In many areas, the rental rates haven't increased to reflect the increase in house prices so it's hard to hit that 1% ratio and get cash flow. What numbers or percentages are you using for the last three things listed? On one recent deal, we picked up a property that doesn't have HOA fees so that's money that went straight to cash flow and it's strategy to use.

@Mark Sewell I'd definitely love to take you up on that brewed beverage sometime.

I think my biggest concern with looking way outside of my area is the long-distance management. This would be my first investment property, and I want it to be a more of hands-on experience, not something I pass onto a property management company right away.

I work a full-time job too, so if something does come up, driving out to Baytown doesn't seem ideal, unless it's on the weekend.

Maybe these are just excuses I'm coming up with that have good solutions to them. I think the biggest challenge I'm facing right now is just finding a deal, but I think a big part of that is because I don't have my buying criteria well defined so I don't know if what I'm looking at (for the Houston area) is good enough or not.

The criteria that @Rusha Jayasuriya posted is exactly the details I'm interested in! What metrics are you looking for in a deal that makes it worthwhile for you to pull the trigger?

@Axel Norvell I am relatively new myself, but I find that I really do meet some cool quality people here on BP forums - just got to put myself out there a bit and be willing to listen and learn.

I will PM you my number. We'll skip the Baytown excursion for now. : )

@Mark Sewell @Kevin Wood for you guys who invest in the Channeview/Baytown and areas closer to the coast, what are your thoughts on potential flooding and hurricane damage?

I know that these areas were devastated by Hurricane Harvey. Is flood insurance even enough to protect you from another disaster? Assuming we have another Harvey, potentially all of your investments in the area would be uninhabitable which means you experience huge loses due to vacancy (and damages if the insurance doesn't come through).

How do you mitigate risk in case of another disaster?

@Axel Norvell I had one house flood. It didn't have flood insurance. I got an SBA disaster loan for 53k at around 3% interest. It costs me about 15k to fix the property. I used that remaining money to put in more real estate making more than my interest payment. I would say I made money in the flood.

We only get flood insurance when it is required (and subsidized) by the government. If your home gets damaged by a hurricane (roof, windows, etc.) then it's considered wind storm and is covered by your insurance.

Here is the thing - you can buy flood insurance but it takes a bit of time to file a claim and actually get the proceeds in hand. So again it comes back to having reserves to get through during those weeks/months, with no rental income flowing in. Sure in a named storm event like Harvey, banks will grant some relief but even that wasn't enough for some folks.

I think you need to understand if the property flooded ONLY during Harvey or if it flooded prior to that.

Also, the terrain changes. I had a flip that had flooded way back in 1982 or something - been fine ever since, and made it through Harvey fine. So that tells you that the country flood plain authorities and the Army Corps of Engineers are doing something, continually, to address weak spots. In fact, I understand the a new 'flood map' has been issued since Harvey. And there is an excavator out there behind every tree, putting in retaining walls, rip-rap and just dredging out bayous all over town. There wasn't a lot of this kind of work out there before (I was a Caterpillar rep here, so we had a pretty good idea who did what kind of work) but it is way more obvious now, at least out on the west side of town.

I would suggest to you that nobody really knows what areas will flood next time. Not sure that is a very helpful answer.

@Axel Norvell being an investor here in Houston and owning a PM company. I would suggest that you first figure out what your goals are and why you are investing. once you know that and you know where you are going then you can create your strategy to buy. That will determine the type of deals and even the area you are looking to buy in. After you know what is and is not a good deal for you and your strategy then you can create your team around you that aligns with your goals.





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