Good Evening Texas Investors,
I am curious as to the strategies some of you may use to generate a positive cash flow with your single family rental properties in Texas. It may just be specific to El Paso, but every time I run basic calculations, I typically come up $150-$300 short in monthly cash flow. The only strategy I've noticed working is financing the property for only 40% of its value then paying the rest with your own cash. The culprit is property taxes being close to 2.86%. The same house renting for the same amount and same expenses (P&I, Insurance, HOA, property management fee, maintenance, and reserves) however, has a lower tax rate 5 miles west in Santa Teresa, New Mexico cash flows $100-$200.
Maybe the best strategy is to not invest in SFR and leverage MFRs since the tax can be spread out across multiple units. Any thoughts?
what do the general numbers look like? maybe you are doing it wrong.
Thank you @George P. for checking in.
Here is one of the better examples where I can get a positive $48 cash flow if my maximum offer is 55% of the valuation. 4 Br 3 ba 2707 sq ft home ARV = 202,333. If the purchase price is 55% for $95,387 ($0 for repair costs). The Primary Mortgage is 92,523.85 @ 3.5% APR for 30 years amortized ($415 P&I monthly). Private Loan is interest only $21,140 @ 8% APR for 30 years amortized with a balloon at 10 years ($140 monthly). CMA/Comp average rent for the property is $1750. Expenses total $1045.55 monthly. ($482.23 taxes @ 2.86%, $143.31 insurance @ .85%, $10 HOA, $50 Maintenance, $25 Landscape-Home has grass, El Paso is a desert-, $175 Property Management Fee @ 10% Rent, $160 for major repairs). The Vacancy Loss% is 5.75. With all that I have a NOI of $603.83 less $555.48 for both loans. Grand total of $48.35 cash flow. As mentioned above, this is how many of them work out if I remain conservative. Sure, I could skip saving for maintenance and vacancies or try my luck with increasing rent by $200 but based off the conservative numbers I tend to draw a negative cash flow with most properties. These number only get worse if I try to purchase at 70% or 75% of ARV/Valuation.
first problem i see is who the heck buys a 3k sq. ft house for rent? why would you get such a monster of a house?
2. tenant pays for grass, not u.
3. why would you buy a rental with a part private loan?
of course, getting this house and paying for stuff will kill your cashflow.
here's what "normal" deals look like. maybe your area doesn't have it, who knows..
- purchase - 80k (30 yr conventional, after 20% down)
- updates - 20k
- rent - $1200
tenant pays everything
do you know much it would be to update a 3k sq. ft house? a lot!
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@George P. , great question upfront. Yes, I agree. Typically a 3k house is way more home than many investors would want to deal with. Especially as you mentioned, cost to rehab/update. However, the particular area I'm interested in caters to the interest of military tenants from Ft. Bliss. A little background on their demographics show they are interested in these 3-4 Br homes based on many factors but location convenience, size and rent price are factors. A large majority of the military tenants are "senior" in position. The privates through Sergeants typically reside on post unless married. However the majority of Staff Sergeants and up, warrant officers, and company grade officers live off post in these areas. Their allowance for housing is in the range of $1000-$2000 based on rank whether they are single or married. They may even choose to dip into their base pay for the home renting the home. Something, I did in the past. So, there is a large market to capitalize on if you can make the deal work.
I also appreciate your second piece of advice I wasn't thinking clearly about. Yes, the tenant can pay for yard maintenance. Typically, all the grass will be dead in a year or two, however, is it really that important to have grass? Not really.
Again, great feedback!
@Adrian Silva , Great resource! I didn't know a company like this existed here in El Paso.
We are investors. We own 5 homes, in 3 states. 4 are SFH, 1 is MF. 2 are in El Paso. Also military. Also stationed at Fort Bliss. Also live off post. Also Field Grade officer. Also, live rent-free.
All that being said, I get what you are saying. It is not nearly as easy to own a rental here in EP that has decent cash flow as it is in some other states. Mostly due to the high property taxes, as you mentioned. But also due in part to the rental rates being held low thanks to this crazy market.
Thanks to the timing of the purchase, we just refi'd our rental on the East side a few months ago to finally be making positive cash flow on it. It was purchased at the height of the market (in 2006-7) for more than it's worth today and at a high interest rate, with a 15 year loan. And thanks to the ever-increasing taxes, our cash flow went down a little more every year. I finally gave in to a refi, lowering the interest rate by 1.5% but also extending the loan a bit. That changed our cash flow from a loss of $231/month, to a gain of $246/month. I wouldn't recommend this to everyone, but it worked for us. We plan to keep this house for 10+ years, so extending wasn't a huge hit. But the positive cash flow helped us to purchase another home.
As for a purchase, that you are discussing, I can't help there. For us - it's not beneficial to purchase any more homes here due to exactly what you are speaking of. There isn't enough money in it to make me want to move forward. In fact, we are planning to put our primary home on the market when we leave EP in a few years. And not purchase any other homes in a market with this high of taxes. I have other homes with a tax rate of around 1.5%. That leaves more money in our bank account.
I need to jet right now but I'm happy to discuss further.
Have a great day!
Hi Laci, thanks for the feedback. I am impressed with your determination to hold on for that long with a negative appreciation and cash flow. With many of the properties I've examined here, all having a negative cash flow I'm sure some investors that have a decent reserve or higher tolerance for risk might still purchased due to that bottom line after filing taxes. Only reason I became aware of it was by accident. I was previously stationed here at Bliss, then PCSd to Korea for 2 years. While I was there a tenant rented my home. Overall, the cashflow was a negative $250 but I needed to do something since the house would not sell. (I'm glad it didn't or I would not discovered real estate investing). Due to the interest my tenant was paying on my monthly mortgage, it canceled out what I owed annually on property tax. Coupled with depreciation I got all that money back plus some. WIth that said, It is still possible to make money with a negative cash flow as long as you refinance every couple of years to ensure the amount of interest being paid by your tenants is still high. It may just work out for you. However, I don't have the reserves. So at some point the roof is going to blow away in one of these sand storms, so having to wait until the tax return is deposited in my account would not a feasible plan.
As I continue to research the market, I am starting to believe the most feasible course of action for me to venture in is flipping a few houses, in order to generate capital. I can use that to pay cash for SFRs I turn around and seller finance. The notes would be a passive income stream or instant cash out when the buyer decides to refinance. Like you, I'll probably have to invest in another state until the rental market strengthens if I want to buy and hold.
On a second note, that is great to hear how refinancing worked out for you. Although you acquired additional debt, I think back to Robert Kiyosaki and Dr. Dolf de Roos's explanation of good debt your tenants are paying for you. Eventually you can cash out on what they paid and put that in your pocket. Lol, as long as you don't over leverage yourself.
So, this evening I had a real estate coaching session and I may have inadvertently answered my own question. Its at least one possible solution. Over the last couple of weeks I read 4 books pertaining to creative seller financing strategies that gave me some background. Then my coach while answering a completely unrelated question, sparked an idea in me. All that being said, if the seller is willing to hold the note for the property he or she is selling and willing to agree to your terms. Then you could finance the property from him or her for 40 or 50 years annualized. That will drop the mortgage payment monthly by $100-$200 depending on the loan amount. Now you might be thinking, who wants to carry a note for 50 years, especially, if you are middle aged or older. Some might, but you can offer a balloon payment at 10, 20, 30, or 17 years. Your choice. That gives you plenty of time to pay down some of the mortgage as well as refinance before the balance is due. On another note (pun not intended), if the seller needs the cash up front to pay off an existing loan. You could arrange for a note investor to purchase that note from the seller at closing. That way you get the deal you need, the seller gets his or her cash, and a note investor now collects interest from the note and a balloon payoff when the home is refinanced. (Sounds great in theory, but that is a lot of work for a new investor). Any thoughts?
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