Replicating my Wisconsin Business in Houston?

15 Replies | Houston, Texas

Hi guys - I own mostly one up one down duplexes (plus a couple of triplexes & a quad) in and around Appleton, WI.   These are older (normally 100 years old) in urban  core areas.   I rehab them within reason, although I do like those where the main need is mostly cosmetic.  My cash on cash returns are north of 15% and I use one bank here which will lend me 80% on most anything I spot based on a phone call and a few calculations.

I have few questions and would be grateful for some ideas/guidance:

Are there decent cash on cash return markets in Houston?   

Is the landlord basically free to rehab and work on the plumbing and electric etc? 

How aggressive are lenders there (with experienced landlords/operators)?

Andrew,

We are just starting our move in the Houston market (and surrounding areas).  Based on allot of research here is what I found.

- Some areas of Houston are appreciating at $3K a month, so finding great cash flow is tough.  But there is allot of surrounding areas.

- The lending criteria is no different in TX than in the other states I own property in.

- As far as the rehabbing rules, they have allot of HOAs that manage what you can do, so you need to know the locations rules.

I hope you get some Houston investors to respond, I would like to hear from them as well.

Cash flow is hard to come by in general around here, but it’s doable. I dont know if i would go as far as to say an entire sub-market in the area has a lot of cash flow potential, but individual opportunities exist in almost every sub-market. Working with a realtor who understands this is key.

Landlords can’t just come and go here, tenants have a right to quiet enjoyment of the property, so you have to have your work on the units scheduled and your tenants made aware. 

Going to be tough right now in Houston. What about just expanding what you currently have in Wisconsin since it is going well there?

Originally posted by @Andrew W. :

Hi guys - I own mostly one up one down duplexes (plus a couple of triplexes & a quad) in and around Appleton, WI.   These are older (normally 100 years old) in urban  core areas.   I rehab them within reason, although I do like those where the main need is mostly cosmetic.  My cash on cash returns are north of 15% and I use one bank here which will lend me 80% on most anything I spot based on a phone call and a few calculations.

I have few questions and would be grateful for some ideas/guidance:

Are there decent cash on cash return markets in Houston?   

Is the landlord basically free to rehab and work on the plumbing and electric etc? 

How aggressive are lenders there (with experienced landlords/operators)?

Hi @Andrew W. , to answer your questions:
1) 15% CoC is difficult in Houston at the moment. It's not impossible because there are definitely opportunities. It's just that there is an insane level of competition going on, with most homes going above asking price. While competition in multi-family is lower, there is very little inventory in the 2-4 plex space at the moment. Property appreciation is fantastic though - I've got properties that have appreciated 11-12% in less than 6 months. You can still make good overall returns (cash flow + appreciation + principal paydown) , but if you're specifically in it for the cash flow, you might find better returns elsewhere.

Also, you may have a little trouble if you're thinking of replicating your strategy from Appleton here - something you should know about Houston (and several parts of Texas) is that the weather + soil composition often leads to home foundation issues. I'd wager that most homes in Houston that are very old will have some kind of structural issues. These are fixable, but often a very expensive proposition.

2) With regards to rehab work, I haven't understood your question entirely. Are you trying to figure out if you can have work done on properties while they are rented? As mostly others have said, you can certainly do whatever rehab work you need to, you will have to inform your tenants and work with them in a reasonable manner. 

3) Lenders here are pretty good if you take the time to shop around. You'll likely have to talk to multiple banks and mortgage brokers, but in the end, you should be able to get favorable terms.

Hope this helps! 

Thanks to all.

Just to add to clarify my read of your comments - I am all about tenant's quiet enjoyment, just wanted to make sure that code enforcement/issues are not extreme and that handy Landlords are able to do as much of the work as they are capable.  

@Ethan G. - my wife is mandating a gradual move to a warmer and more vibrant place ... not a knock on WI.

@Nikunj Merchant - on prospective MF properties there that are held for appreciation - how do the banks underwrite and how do you carry the mortgages (if cash flow is tighter)?   An example would help if you are willing to provide.   Thanks also for flagging the foundation due diligence theme ... have some experience with that here, if you can picture 100 year old basements.   Normally the fix is to address the way the land around the house drains - although I did have one basement here braced.

@Andrew W. , hey bud I am going to echo what everyone else has been saying. finding 15% COC even on multi is going to be uber hard. because when you enter the multifamily place the prop taxes shoot through the damn roof. HOA fees in some ares will eat you alive as well in the multi space going as high as 1000/ MONTH. think of the appreciating submarkets here in Houston as the Mercedez Benz Arrow. The Fort Bend/ sugar land area is popping, the clear lake/ Webster area is exploding and the woodlands/ conroe areas are poppin. you also see good growth in the Katy area (west) when looking at a Houston map look at the tiny circle and draw a big backward "C"  around it and those areas where your "C" are the bad areas of Houston. I think until the California money finally makes its way down here and settles and we might have to wait before we can raise the rent to the 2xxx to 4xxx plus range. finding a 15% COC is gonna be hard, but not impossible. 

@Joseph Medina thanks much for the additional comment.   I made it down to Houston on my first research visit this weekend and while I think it will take a lot of research I was pretty impressed with the action I saw in many of the areas close to the city (lots of building, lots of rehab crews at work).    In particular the Near Northside looks promising.    I absolutely agree that noone is going to give you profits in this market and I am probably a bit spoiled by my experiences in WI.    But I do see plenty of scope for intelligent remodeling, where you’d get some cash flow, but I do also see why now there are those who continue to be strong believers in solid appreciation here.   I get it that banking on “appreciation” is more like “speculation”, but Houston does seem like it wants to continue to move ahead.  I am not sure on the next move yet, but do know now that there are options. 

@Andrew W. hope you had a good trip to Houston!  If you're looking for small multifamily you definitely would be best served staying inside the loop.  Inside the loop in areas of homes needing rehabs, you won't be dealing with HOAs (generally), that's more common in the suburbs.  I'm sure some people pull permits for everything, but in general, I think you'd be fine to DIY as needed.

There's a few good threads on her for specific neighborhoods inside the loop.  Feel free to reach out if you have any questions.  

@Andrew W.

In regards to doing the plumbing and electrical yourself....if it is minor like changing out the ceiling fan or light fixture it is ok. But if you are re-wiring a house or changing out the main water line then you will need a permit. If you don't have one and the city inspector drives by and sees you working it will be red-tagged. With all the new builds and rehabs going on there are more inspectors driving around. Cheaper to just pull permits than to cut corners. 

Originally posted by @Luciano A. :

@Andrew W.

In regards to doing the plumbing and electrical yourself....if it is minor like changing out the ceiling fan or light fixture it is ok. But if you are re-wiring a house or changing out the main water line then you will need a permit. If you don't have one and the city inspector drives by and sees you working it will be red-tagged. With all the new builds and rehabs going on there are more inspectors driving around. Cheaper to just pull permits than to cut corners. 


Got it - although I take it that even in Houston inspectors can't see through walls from their cars as they drive by.   If the message is "don't push it" then I agree.  In WI the tradition here is fairly DIY and I sense there is some of that in Houston also.  I quickly checked the permit exemptions and see them actually as more liberal in some cases, such as the size of unpermitted accessory structures and allowing you to put up fences without permits.   I am with you on being careful with the corners you cut 

I've completed ~ 20 flips in Houston/ Harris County.  Highly recommend pulling permits for new electric panel, roof, foundation work, shower pans when doing rehab.  For new construction, additions, footprint expansions, recommend submitting drawings / all permits/ inspections. City is not horribly onerous in that regard, just safety and code-minded.  

Not sure of bigger pocket rules, posting 2 duplex examples here, though they're self-serving.  1st example is my own SF which is converted into a duplex: https://www.har.com/homedetail...  It's under contract, ~ 9% cap rate. 

Second example is a friend's duplex which is currently off-market, will be listed at ~ $395,900 when he's ready in ~ 3 weeks.  https://www.har.com/homedetail... 

Honestly, I think nobody really knows right now, if they are being honest.

Still not clear how many are really going to pay the premium to live in close - none of us knows what the commuting schedules will be, or said another way, to what extent this 'work remotely' thing will be part of the new normal going forward.

Also rental rates will go up.  There is a big lag right now, but eventually we'll have a stable market again and rental rates will catch up.

lenders will do typically 75% to 80% cash out refi, 80% to 85% rate and term.

im getting 300 to 400 dollars a month gross cash flow per SFH, but im sourcing my own deals off market.

most wholesalers in the area, that ive seen, mostly blast out class C & D deaals.

I'd try to stick to class B or C+ areas if you can. this is a great market with low regulations