Hello New Investors,
I know many people get stuck in the analyzes paralysis mode and never move forward. One of the big mental pressure among new investors is, whether I did the right thing to pick up this deal or missed it out. So I thought Iet me share some of the deals which I did for myself and for investors and see whether you will do it or not do it and what would be the reason.
Location: Missouri city
Property: 1628 Sqft, 3/2/2
ARV at that time: $135k, now $151k
Rent -$1365, now $1415
Rehab required: $500
Not lot of discount just $15k from the market. We purchased for cashflow and good rental area. It was rented within 30 days and have tenant living in 2 years now and 2 more extended.
Will you consider this deal or not in 2018 if you were me?
What do u have ur expenses, insurance at? Did you finance, and if so what rate and how long?
@Girish Bharwani Good questions, I will share my tax and insurance. Taxes per year - $3000, Ins for year - $1450
It's up to you figure out all other things if it works with finance or not. Understand, I want you to think like me going back 2018.
@Vijaianand Thirunageswaram . I would do that deal!
Explain why? Just because you now that it's making money and appreciated or what's your decision factor? Explain to others please.
Here is the quick Report from BP Rental analyzer, it shows $104 negative cashflow.
I would not do it. The municipality of Missouri city has known for years that it's not friendly towards landlords for the rentals within its boundary. Although the number on the surface looks okay, I will be more realistic. The house probably was built in 70 or 80s. In Missouri City, these houses are usually not with great construction qualities. I am more concerned about deferred maintenance. Most of them had electric wiring patched up by DIY previous owners. Even though electric still works, down the road it could be an issue. Probably still has galvanized pipe for plumbing. You open up sheetrock, you will find a bunch of other things. All I say here is I don't believe for a second this old house needs just $500 rehab. Why do I not like the deal? Because the real number is not attractive. It's great you raised the rent. How many tenants can comfortably say they consistently make 3 times of $1415? The property tax increase is guaranteed. But raising your rent in a poor neighborhood is not a guaranteed fact. It means you will have more chances of the lease being broken or tenants being evicted.
I like your posts. Let's connect when you get a chance.
Some other factors come into play as to whether or not this is a good deal and it's dependent on other details.
How much money did you put in the deal? What is your ultimate goal long-term goal with your entire portfolio (not just this property alone)?
If an investor's goal is to scale quickly and they might have, say for example 30K saved up, and they do 20% down on this house then they are pretty much out of the game until they either save up funds again or they get creative with finding financing. So, this particular deal for that sort of investor wouldn't be the best deal (unless they somehow got owner financing at some miraculously good interest rate for no money down).
If this is a simple buy and hold, I want to work my normal job and just continue to buy a house a year and then retire and live off my passive income. Then yes, this deal might make sense for that sort of investor.
I would probably say no but I'd have to see the property to figure out condition, given that you only put $500 in rehab, but I noticed that you didn't set anything aside for capex or long-term maintenance. I suspect the capex/ongoing maintenance costs will hurt long-run and the condition of the property would be the defining factor. The deal hits at my 1% rule (rental income is at least 1% of purchase price and 1365/120k > 1%). The cash flow, however, isn't great once you add the taxes/insurance (estimating at $375), capex ($150), vacancy ($50), and management fees ($100) to loan amount (about $500?), it all adds up and doesn't meet my cash flow desires (minimum $250 and ideal range is $350-400). But it's close! I imagine capex will be high because this is probably an older home in MoCity given the purchase price. Also, you didn't mention whether ins. includes flood insurance, which would be extra as well as HOA fees.
@Jesse Mao I like really different perspective with exposure to your market. Interesting!! Let me share some thoughts about Missouri city. It's not that bad as you are saying.. Properties are great properties build in 1980's. I have 5 properties myself and have 4 more investor properties we manage. Yes, they are galvanized pipes and most houses built 1980's are galvanized pipes all over houston. Missouri city is good city to work with and i have done few flips myself. It's hottest rental market I have seen in my 14 years as experience. It gets rented within 1 month and it's B class neighborhood not C class. The missouri city you are talking is west side of Fort Bend Tollway near Briargate. We don't go there. I hope this helps.
@Xenia Kulick That's well done. I would say we bought it has buy and hold investors, buying 2-3 properties every year with our extra income. You cannot do any other strategies. I know 50-60% investors fall under this category.
I like it,, keep sending your thoughts and deal points.
Can you elaborate on "you cannot do any other strategies"? Do you not believe that other strategies are viable in the Houston market or are you referring to the fact that you choose not to do other strategies? Just curious as I'm a newbie investor in the Houston market and I am still trying to educate myself as much as possible. Thank you!
@Xenia Kulick I meant to say for that property, I cannot do any other strategies because of the numbers and situation.
@Rusha Jayasuriya Good insight!! It's deal but not a deal. Anyway, more insight to munch...
It's off market deal purchased directly from seller. It had 7 year old roof, 5 year old AC, no pending repairs when we purchased. Its ready condition. Yes capex I didn't add because no foundation issue, no roof for 20 years and ac is new. Only capex would be plumbing which I usually count is as repairs. Again, many investors get bogged down by putting capex, repairs etc in their report. Just thing realistic, are you going to keep that money assigned in seperate bank account. That's not possible. End of day, you get cashflow from property, and set aside as whole and use it when needed for repairs and what's left at the end of year you use for other property or saved up. People do not think practical. I have 7 properties myself. We had 2 moved out last month. Where do I get funds to rehab and put back in market.. It's from cashflow from other houses and deposits. Guys, think practical, do not lose sign by looking very granular. You will never make it work.
@Vijaianand Thirunageswaram , the reserve is super important particularly for now. It's not just for repair or capex. We have seen once in a life flood and hurricane multiple times in just one decade. Second wave of Spanish flu killed more people than its first wave. God forbid if the COVID-19 has a second wave in the fall which is a very real possibility. What do you think will happen to an investor who has no reserve, and he cannot collect rent for 3 or 4 months?
@Jesse Mao The reserve you are saying is not even counted in the calculators. What we are seeing is out of ordinary and nobody ever imagined. Capex and Repair reserves are not equal to pandemic reserves. Don't compare and confuse it. Let's keep it simple. I know about Harvey and Hurricane, been there and came out of it. What I am trying to say, you need the reserve, your cashflow is your reserve and don't try to split to much and lose it.. You cannot work that way in real life. It's all in one pool rental cash flow pool for all your rentals and keep saving and use it and document it and take deductions in your tax return. That's how it works. I look for cashflows $350-$500 all together on my rentals.
This particular property, I cashflow $440 per month. I paid for pex repipe once and did tile flooring when they renewed the lease last year. So far it's going good.
@Vijaianand Thirunageswaram I will just quote what Warren Buffett said. "Only when the tide goes out do you discover who's been swimming naked."
@Jesse Mao haha!! good one... He knows what he is been doing.. But this tide is unexpected one and unpredicatable.
@Vijaianand Thirunageswaram Given how you describe the property, then my answer would change to yes. You're right in that the cash flow gets pooled into an account for the maintenance but the property must still have a decent cash flow. My base line is $250 and if I mentally put $25 in capex/maintenance (even though it just stays as savings in my bank account) then this property hits my minimum cash flow requirements.
Houston just isn't the kind of market where you can make a straight equity play in the suburbs. Cash flow is so important. The house values historically don't increase so much. Also the cash flow is what allows you to build your portfolio.
@Rusha Jayasuriya Good comments!! So your $250 cash flow is including capex and other repairs or it's after everything and if so what are they and what's would be total cash flow including all.
About your comment on the equity play, it's tricky in houston but you do get deals with large built up equity on it which can really beneficial but it's only on OFF Market properties.
Are you all ready for the next deal analyzer?
On the subject of reserves, HM lenders like us want to see that you can cover (a) closing costs and fees (b) 6 months of payments and (c) about 1/3 of the renovations. OK maybe you don't use hard money, that is great, but I think this is a good way to look at your reserves. I would probably add insurance and holding costs to this.
Also 'reserves' is not just cash, it is also liquid available credit - bank lines and/or credit cards.
@Girish Bharwani , so you're a buyer at 90%? Are you still looking for deals? I have several I'd sell at 85-90%.
As far as this deal, it would have depended on what financing I had at the time. If I had some private money and could get it with little out of pocket, sure I would do it. I'll buy any house if I can get in it with little to no money out of pocket. I very rarely come out of pocket on my deals, and if I do, it's less than 8K. If I had to go HM, no I wouldn't have done it. The numbers wouldn't make sense. However, this would cash flow better for me as I only do Sec 8.
@Vijaianand Thirunageswaram thanks for the post. Very useful information. I am a newbie living in Houston looking for deals and this will help a lot. I would love to connect and see ways of collaboration. Thanks!!