3 Year Rent vs Buy in Houston

19 Replies

Hey BP Houston!

My husband and I are moving to the Houston area while he is on active duty in the USMC. We will be there approximately 36 months and will arrive in the early summer. He is currently deployed and we are considering buying a home in the April/May time frame so it is ready for us when he comes back from deployment. We are excited to move to Houston as we are from the Dallas area and my husband went to school in Austin. We have been linked with an agent and lender by someone we trust and are in the process of being preapproved to use to rest of the VA loan, we used some on a house in Oceanside CA.

Situation:

-My husband will be working on the UH campus recruiting officer candidates, we want to minimize commute within reason.

-We will have two children in elementary school by the time we leave, so a good elementary school is important to us.

-We are looking at Pearland and Sugar Land as they have good schools.

-We will get ~$2000 a month in housing allowance from the military monthly, what we don't spend goes in our pocket.

-We know Houston can be prone to flooding and will avoid homes which flood.

We are coming from San Diego which has a very different real estate landscape. How do yall feel Houston is in terms of a rental market? Is there an upper limit to price and size which people want to rent? (E.g. 3 or 4 bd and no more than 2k a month). Would it make more sense to rent in an area with good schools instead of buy, or is potential appreciation a factor worth considering in Houston? Where would you avoid living? Are there any extra expenses to being a landlord which are specific to Houston? Seems many houses here do not pass the 1% test, let alone the 2% test. What else are we missing?

Additionally, last year my husband's business partner and him closed two deals which are currently being rehabbed, one in Texas and one in Virginia. We are interested in BRRRRing, flips, multi, etc while in Houston. We would love to attend any meetups in the area and talk to any like minded individuals!

We are excited to be back in Texas! Hope to see yall around!

Assuming your question from the title of the post, buying a house and selling after 3 years will not be better than renting. Simply because the appreciation (close to inflation rate) will be less than the cost of owning and selling (closing costs, commissions, downpayment). You just need to hold it longer to be able to make any profit.

That said, if you can get a house for zero downpayment and closing cost (possible for military?) with 3.5% 30-year loan (common in the market these days), with PITI+HOA less than or equal to $2k/month, then why not?

As someone from San Diego (who still lives there) and invests in and knows Houston well, I'd really recommend viewing the different neighbhoroods to see which ones you like and want to live in.  Personally I'd jump off a bridge before moving to Sugarland or Pearland.  Way too burb-like for me.  But some people dig that.  I lived in Montrose while I was here, even after I was married with kids.  By far the best area of Houston IMO.  But you have to like living in a funky/hip type place (and you don't get NEARLY as much for your money here.  I have old 60's built small junky 2 bed apartments that rent for $1300 for example.  Yet a few miles away you can get cheap 2 beds for $700)

Normally I'm all about buy vs. lease but if it's only 3 years, I think the costs to get into and out of a house (realtor fees, etc) would make it not worth it. If you really want to own vs rent then rent something where you want to live, and then buy an investment property to lease out where the numbers make sense. Often times where you want to live, and where you should buy, are different locations.

Originally posted by @Tushar P. :

Assuming your question from the title of the post, buying a house and selling after 3 years will not be better than renting. Simply because the appreciation (close to inflation rate) will be less than the cost of owning and selling (closing costs, commissions, downpayment). You just need to hold it longer to be able to make any profit.

That said, if you can get a house for zero downpayment and closing cost (possible for military?) with 3.5% 30-year loan (common in the market these days), with PITI+HOA less than or equal to $2k/month, then why not?

Tushar, thanks for the response! I think I did a poor job explaining our intent in my original post. Our goal would be if we purchase a home, we would live in it for the three years, and then rent it out. Is that strategy viable in Houston? We are aiming to stay out in the burbs so our kids can do to better schools. 

 

Originally posted by @Chris Hopper :

Completely disagree with @Tushar P.   I would definitely buy instead of rent.  Especially since you're getting 2K from the military.  You will most definitely enjoy some good appreciation and come out ahead --- tax free.


 Chris, really appreciate your response. We would probably be looking to buy, live in it for three years, and then turn it into a rental after that until it makes sense to sell or move on. Who knows, maybe we'll want to settle in Houston instead of Dallas. The question is, are properties out in the suburbs good candidates for cash flowing homes? Hopefully in the three years it'll appreciate some and the rents will increase as well. What do you think about that strategy?


Additionally, I see you're from Cypress. We are looking at some homes there as the schools seem on par with Sugar Land/Pearland but the prices are a little more reasonable. Any areas to avoid? Do you have experience with the rental market there? Really looking forward to your input.

Originally posted by @Cody L. :

As someone from San Diego (who still lives there) and invests in and knows Houston well, I'd really recommend viewing the different neighbhoroods to see which ones you like and want to live in.  Personally I'd jump off a bridge before moving to Sugarland or Pearland.  Way too burb-like for me.  But some people dig that.  I lived in Montrose while I was here, even after I was married with kids.  By far the best area of Houston IMO.  But you have to like living in a funky/hip type place (and you don't get NEARLY as much for your money here.  I have old 60's built small junky 2 bed apartments that rent for $1300 for example.  Yet a few miles away you can get cheap 2 beds for $700)

Normally I'm all about buy vs. lease but if it's only 3 years, I think the costs to get into and out of a house (realtor fees, etc) would make it not worth it.  If you really want to own vs rent then rent something where you want to live, and then buy an investment property to lease out where the numbers make sense.  Often times where you want to live, and where you should buy, are different locations. 

 Cody, thank you so much for your response. I can dig someone who's into San Diego and Texas! I did a poor job explaining in my original post, but I think the idea here would be to buy the house, live for three years and then use it as a rental property after that. Hopefully catch some appreciation and have the rents raise. I know you don't live in Houston anymore but do you see that as a viable strategy? 

I do like the look of Montrose but buying with the VA loan I think we will be able to get more for our money out in the burbs just like you said. We would really like to buy a house and also look at buying some additional investment properties. Looking forward to your thoughts!

Originally posted by @Erica Castro :

I would agree with @Cody !! The appreciation for anything inside the loop is higher but the school districts...Lets just say I wouldn't put my daughter in them.

Erica thanks for your response!! Will definitely keep that in mind as we look around for schools for the kids.

@Amy Friend Just keep in mind, if your husband is working at U of H and you live in the suburbs, prepare for 45min - 1 hr commutes each way.  Third Ward area and Midtown, located close to U of H is seeing the most rapid appreciation at the moment, with many homes gaining $100k-$200k in value over the last 3 years. These are gentrifying areas that you can catch on the upswing.  

Yes, the public schools there are terrible, but you can do charter or private school possibly. 

Originally posted by @Adriel Hsu :

@Amy Friend Just keep in mind, if your husband is working at U of H and you live in the suburbs, prepare for 45min - 1 hr commutes each way.  Third Ward area and Midtown, located close to U of H is seeing the most rapid appreciation at the moment, with many homes gaining $100k-$200k in value over the last 3 years. These are gentrifying areas that you can catch on the upswing.  

Yes, the public schools there are terrible, but you can do charter or private school possibly. 

Adriel, really good point! I will look more into those areas. What is your experience with the cash flow there?

 

Originally posted by @Amy Friend :

Chris, really appreciate your response. We would probably be looking to buy, live in it for three years, and then turn it into a rental after that until it makes sense to sell or move on. Who knows, maybe we'll want to settle in Houston instead of Dallas. The question is, are properties out in the suburbs good candidates for cash flowing homes? Hopefully in the three years it'll appreciate some and the rents will increase as well. What do you think about that strategy?


Additionally, I see you're from Cypress. We are looking at some homes there as the schools seem on par with Sugar Land/Pearland but the prices are a little more reasonable. Any areas to avoid? Do you have experience with the rental market there? Really looking forward to your input.

Hi Amy. I currently live in Cypress and grew up in the Sugar Land area. Cypress and Sugar Land are both great areas outside of Houston and neither of them are prone to the flooding that makes the national headlines. Sugar Land is entirely within the FBISD school district and has no shortage of exemplary schools, elementary through high school. The Cypress area on the other hand is mainly in Cy-Fair ISD but has some pockets that are in Waller ISD and I think might have some fringe areas that are zoned to Katy ISD. CY-Fair and Katy ISD are on the same level with FBISD from what I've seen over the last 20 years. Waller ISD is more of an up and coming district. Waller County is much more rural than Harris or Fort Bend County and does not have the same tax base size or wealth to support the school bond initiatives the others have had over the last 15-20 years while their growth exploded. The path of progress is heading NW along the 290 corridor, which puts Waller County and Waller ISD in position to see huge growth over the next 10 years. If your strategy is long term buy and hold, you could certainly get in early here for relatively cheap.

The neighborhoods are very similar in both areas, meaning if your driving in subdivision in Sugar Land you'd have a hard time distinguishing it from Cypress. By and large the builders are the same with similar lot sizes and nearly identical floor plans. I know for a fact you can rent a 3-4 Bedroom 2400+ sq.ft home that's less than 5 years old for around $1850 in Cypress. Ton's of new build developments are happening around both areas and keeps the appreciation in check to around 3-4% so you aren't going to see a significant increase in value over a 3 year timeframe. Cash flow in the suburbs is curtailed by the property taxes, unfortunately. The new build areas have property higher tax rates due to a unique concept that we have called MUD's or Municipal Utility Districts. There's a long explanation to that which I won't get into here. The trade off is we have no state income taxes. HOA's are rampant here, so don't discount those fee's especially if you look at the amenity centric developments like Bridge Land and Towne Lake in Cypress. Amazing communities, but high tax rates and high HOA fees.

All that said, your husband's daily commute is going to absolutely suck for those 3 years regardless of whether you choose Sugar Land or Cypress. Both US 59 and US 290 morning inbound and afternoon outbound traffic is horrendous, simply too many cars and not enough concrete to drive on. Living inside the 610 loop would alleviate most of that headache but you would be getting much less home for your dollar. HISD as a whole is a step or two below Fort Bend and Cypress but does have some great schools, with the majority of the recognized or exemplary rated ones being elementary schools. Many parents, who can afford to do so, send their kids to private school starting in 6th grade (middle school here). So for your specific situation, husband work location, housing allowance and the age of your kids, living in the city may work out. Here's a link to the rankings list of top elementary schools in the state from 2019 if you wanted to look for places in Houston zoned to those. Good luck and welcome to Texas!
https://texasschoolguide.org/content/uploads/2019/11/2019-Texas-UPDATED-Elementary-School-Rankings_Statewide.pdf



 

You're kind of all over the place as far as what you're looking for. Adam gave a great explanation above. Commute will suck regardless of what suburb you're in. If that's a concern, then you'd be better off renting something close to work (using the 2k you're getting) and then buying a nice rental out in the burbs or somewhere more affordable. The tenant would be paying that mortgage. You would also enjoy the extra 3 years of cash flow as opposed to waiting 3 years and then renting it. You really need to narrow down what's more important to you -

Close to work - no commute, less house for the money, worse schools, not much cash flow on higher end property

In the burbs - horrible commute, more house for the money, better schools, better cash flow

Amy, cash flow varies drastically based on many factors as I assume you know.  So it would be best to list your criteria and ecpections.

I have 3 rentals with 30 yr. mortgages and 6 with no mortgage.  I cash flow $400-$500 on the ones with loans, and about $900-$1000 on the wholly owned.  Rents average $1400/mo.

The return on cash for rentals with loans is about 25-30%. Where owned homes is about 10% (I think the national ROI on real estate is about 6-7% without loans.).

Don't consider me average to set your expectations. I buy properties at discounts (not MLS) that you may not be able to do.

If you pay retail price (MLS) for a property in Sugar Land with a 95% mortgage, your chances of cash flowing from it as a rental 3 years from now is extremely low. I assume Cypress is likewise.

@Amy Friend Whether a house will be attractive as a rental investment after 3 years will depend on the price point - if the house is worth more than $300k then cash flow will be challenging, while a house worth less than $150k may be easier to cash flow.

So it comes down to finding a house worth less than $150k that is desirable to live in for 3 years, if you care about the rental attractiveness.

Welcome to Texas.  

I'm still a newbie to the investing thing, but as a resident of Houston for many years, I can say for certainty that if you don't want a long commute, the key to living close to where you work.  If you choose inside the loop, your husband could actually take the train strait to campus.  HISD is not the best, and indeed many do private school their kids.  I live in Spring and work in the Medical Center (close to UH) and I avoid the commute by starting my day early....so there is that.  

In Houston in general most houses do not suffer large swings in value either way.  Typical appreciation is 3%.  It seems that you are looking for a property that falls between $150 and $165k if your looking for cash flow.  

If I had a vote, I'd vote on using the stipend to supplement a house close to UH Montorse or the Heights and budget an amount to save to supplement some savings to purchase a B class property in the burbs.  

Sugarland, although a suburb of Houston is a stand alone municipality. Large areas of Cypress are unincorporated Harris County.  I live in unincorporated Harris county in the Spring area and one of the things I miss most about Colorado was that I lived in a town.  But living in the county does have its benefits.

You mentioned flooding.  Yes, it happens, sometimes frequently and without warning.  Some flood zones are being redrawn.  Make sure you have a knowledgeable agent and do your own research, ask your potential neighbors...they will tell you.  Due to the large size of this city, during any rain event some different areas can have huge extremes in rainfall.  For example, see below;

https://www.chron.com/neighborhood/sugarland/article/Sugar-Land-flooding-This-was-quicker-than-13829208.php

Its not uncommon to have 8" of rain in one area and 0" on the other side of the metro area.  You can also use this link to check historical data and flood zones by address:

https://www.harriscountyfemt.org/

Hope this helps.  

Originally posted by @Tushar P. :

@ROBERT HANEY seems like your rentals are approaching or exceeding the 2% rule - is that right? What area is this, and are there more renters or owners in this area?

The common accepted dogma is that landlords can (and usually so) pay more for a specific property than flippers.  I think this CRAZY.  

My strategy is to buy rental properties that could/can be flipped for 10% to 20% net cash profit the day they are ready to be out on the rental market.  My goal is monthly rent of 1.2% or more of my total investment in the property.

For example: one property I have $81,000 total invested, rents for $1230 per month. 1230/81000= 1.52%. I don't look at the ARV for rent return. I look at ARV for flip return. The property is worth $122,000. It would cost me 4.5% of ARV to sell it which would leave me $35,510 profit. But I don't have anywhere to put the profit so why sell and put it in the bank for 2% annual return?

Another I have $112,000 invested.  It rents for $1400.  1400/112000= 1.25%.  It is worth $165,000.  If I sold I it my net profit would be $45,575.

The key is my strategy to buy flip properties and rent them, unlike common "wisdom" of landlords paying more than flippers for properties.  

Can landlords pay more for properties and still come out ahead? Absolutely! But their rate of net worth growth will be far slower than my approach. It will take them (read "typical landlord") much longer to reach their net worth or return goal. At least they can reach their goal. Doing something is much better than doing nothing.

I invest only in Fort Bend county in all cities within a 25 minutes driving distance of the intersection of Hwy 59 and Hwy 6.

PS: If I wait one year and then finance a property my cash on cash return generally goes to infinity since I'll get all my investment back. That is a reason to be weary of putting too much emphasis on cash on cash returns. Having very little money in a property sky rockets the return unless something drastic happens and it goes back to the bank in foreclosure (flood, hurricane, etc. )