Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
Hi all, I'm currently evaluating a 4/2.5/2 turn key SFR located in the Cy-Fair suburb of Houston. Price is 105K, which looks to be right around market price. Just over 2000 square feet with good school districts, rent estimated at $1300. Local investors, please let me know if you think market value, rent, and expenses are reasonable.
Price: $105,000
Down payment: $26,250
Closing costs: $400
Monthly:
Rent: $1300
Vacancy (8%): $104 (1 year guarantee, but leaving this in anyways)
Taxes: $210
Insurance: $100
Maintenance: $100 (1 year home warranty, but still including)
PM (9%): $117
HOA: $38
Mortgage (30 yr @5.25): $435
CF: $196
Shawn and his wife Joni sell turnkey properties and run a full service property management firm. You do not have to buy a turnkey property from them to have your house managed. They manage a small portion of my portfolio and I have been very happy with them. They have been very responsive and have proven to be honest and straight forward with pricing and status updates. They may even consider me a high maintenance client due to the closeness of my involvment. They always respond to my emails in a timely fashion and in a way that makes me feel they know exactly what the status of each of my properties are and are taking the appropriate actions to handle any issues that come up.
Tell them I sent you over and they may give you a break on their already reasonable rates. For the record, I think the management fees in the area are pretty standard. It is the in-house maintenance and rehab experience that saves me money. Since they run a turnkey company they have all the systems in place to rehab and manage under one roof. For example, they have their own rehab crews and have consitently outbid my contractor bids and do similar quality work. I also always know the exact finish out I will get on a rehab because they have rehabbed 100s of houses and can walk you through before and after projects and do similar work on every rehab. They just make it easy for me.
Rent ($1300)/2 = $650 - mortgage ($435) = $215 so you should be ok here.
Are you anticipating any upfront repairs? If possible, better to fix/replace the major items (AC, foundation, roof) if need be upfront so you don't have to worry about it as much.
Not really a fan of home warranties and better to save that money as part of the maintenance budget. If you set up your lease agreement right, tenant would pay up to a certain amount before it comes out of your pocket for items that the tenant damaged (ie clogged plumbing, broken windows, etc).
What's the ARV on this property? You can ask an agent to get this for you so you can determine if $105k is a solid offer price.
If ARV is $150k, 70% is $105k but this doesn't take into consideration the profit and rehab.
Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
12y
Hey @Cuong Le - Thanks for your response! This is actually a turn key property, so no repairs needed. I have asked about the scope of work for this property and am waiting to hear back. I'm not buying to flip, I'm buying as a buy and hold investor, so 70% rule doesn't really apply.
Investor · Houston, TX · Member since 2013 · 228 posts · 30 votes
12y
Sarah,
Due your due diligence on the property. When people say turn key, I always verify if this is truly the case. It maybe good for a few years and then suddenly your water heater goes out, this is your money out the window. If you know the water heater only has a few years of life left, you can roll it into your loan (if it's within your lender's Loan to Value).
Are you going for cash flow only? If you're not looking to get any capital gain from this and you're alright with that, then ok. We try to look for at least $10k in unrealized capital gain.
Ask your agent for comps on this to get an idea of the ARV. It's good to know whether you are flipping it or buy/hold. If nothing else, you know what to expect on your purchase loan and how much out of pocket money you will need to bring to the table even with the 25% down payment.
Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
12y
Closing costs of $400? Bank + Lawyer will probably run $1800 alone. Did you mean $4000?
I'd bump your maintenance up to at least $200/month. A $5000 roof will eat 4+ years of your current estimate and that assumes nothing else breaks along the way.
Wholesaler · Houston, TX · Member since 2013 · 56 posts · 3 votes
12y
@Sarah Lam make sure you verify the property tax information. $210/mo. seems a bit low for a Houston suburb. So just double check those numbers. If it's located in Harris county you can use www.hcad.org to find out.
@Sarah Lam make sure you verify the property tax information. $210/mo. seems a bit low for a Houston suburb. So just double check those numbers. If it's located in Harris county you can use www.hcad.org to find out.
I live in Cy Fair and $210 is pretty close to what I pay. I would check HCAD just to make sure though as suggested.
Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
12y
@Cuong Le Totally agreed - I've asked them for the scope of work, and will be hiring an inspector, as well. I'm actually working directly with a turnkey property company, not an agent.
Hey @Aaron Montague - Good catch! I listed the estimated closing costs for an all cash purchase, but I will be using conventional financing. Not sure how much closing costs usually run (first purchase!), but if a few thousand, that certainly affects the numbers. If this is a true turn key property, there shouldn't be any major repairs for a while, but I'm waiting to hear back concerning the scope of work to see how much work they actually did.
Thanks for that great resource, @Darien Gipson - I'll take a look at it!
Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
12y
@Sarah Lam Make sure you get an inspection closing contingency as well. I'd ask for them to pay for it as well. If they are selling a "turnkey" property, NOTHING should be wrong with it. Make sure it is your inspector as well, not one associated or recommended by the seller.
San Francisco, CA · Member since 2013 · 13 posts · 0 votes
12y
@Sarah Lam Coming from California with 1.15% or so property tax, I was also surprised to see Houston prop tax is at 3+%, so $210 tax seems low so make sure you verify that. And like Aaron said, closing cost is definitely more than a few hundred dollars.
I'm also looking to invest in Houston, I was actually there for a week looking around just couple weeks ago...wit SFR or Multi-Family, and being out of state, a PM is a definite must. Do you mind shating which company you're working with?
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
12y
Okay, I'm coming at this from Dallas, but my understanding is that DFW and Houston share a lot of similarities.
The biggest thing that jumps out at me is the rent. $1300/month on a $105K property (if that's the market value) seems really high to me. That rent guarantee is only for one year, too.
I'd want to know a ton about the mechanicals/structure, HVAC, roof, foundation (big issue down here in Texas, though I'm not how it is in Houston.)
Taxes and insurance seem about right.
That's also a big house so I'd put more on maintenance/repairs and I don't see anything in your analysis for cap ex.
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
12y
The only thing that caught my eye on this particular purchase is the size of the house. That is way too much house for my taste as a buy and hold investor. The bigger the house, the more it costs to repaint, refloor, etc., and since rents are based more on # of bedrooms/baths then they are square footage (unlike purchasing), I think you could do just as well with a 1200-1500 s.f. house, which is still very rentable at $1150-1250.
Trends are showing renters (and even homeowners for that matter) prefer smaller properties now, so be mindful of this before you purchase a house that big.
SFR Investor · Friendswood, TX · Member since 2013 · 136 posts · 11 votes
12y
I deal in houston but south part your rent seems about righ for price of home. The main concern is insurance. In southeast houston the insurance would run more like 200 a month or more.
Also your closing costs are low for cash or for financed. For cash I factor 800-1000 for financed 2000-3000 closing costs.
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
12y
Sarah, you'll want to check the title report for the exact amount of property tax. With $210 a month, you're looking at 2.5% assessed at $100k, less than what you are paying for! I have seen property tax in the Houston area range from 2.5 to 3.6%. Agreed that 2000+ sq ft is large, but if its two stories, it should be okay. However, you will be paying more when you need your A/C replaced as you need a large one and if you ever need to repaint or redo the flooring it will cost more as well.
If you have good credit, your mortgage rates have declined and you maybe able to get 4.75% on a 30 year fixed investor loan these days. In addition, I would increase your closing costs to around 4% depending if you go negative points or not to cover some of your closing costs. Take a look at this article here.
Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
12y
*Disclaimer - I know the property and turnkey provider you are considering. I can vouch for the company. My only affiliation is that they manage a portion of my single family portfolio (less than 10%) and I have been happy with the work they do. They managed a complete rehab on one of my homes and in my opinion were fair on the price. PM me and I am happy to discuss details.
With that said, rents are right on for the area and for the Cy Fair school district. Property taxes are as well. They will be 3% of the CAD value (which can move around quite a bit each year so make sure to challenge the value each year).
For a turnkey provider I believe they are fair and leave more on the bone so to speak than others I know of. I have never purchased one of their properties, but they have treated me well from a property management perspective.
If I did not find my own deals I would consider their inventory. For me as a local, I can find better deal as I have feet on the ground and time to spend looking. The value they add is they do everything for you like any other turnkey provider. My suggestion is have a safety net and let the trust build slowly. You could even call a few other PMs or realtors and see what they think about the rents FMV of the house.
As tp your numbers, I agree you should increase your expenses. Even with an 8.8% cash on cash it just seems there are easier ways to make that kind of return. Consider also that Houston is not going to see the appreciation you guys see up there (lucky to see 2-3% a yr) and the principle paydown will be almost nothing for the first 10 yrs of a 30 yr note. Make sure the risk is worth the reward.
Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
12y
Wow, tons of great responses!! So thankful for this community!
@Aaron Montague - great tips, and I will definitely include an inspection contingency.
@Frank Wu - Yup, I'll verify those taxes with HCAD. Crazy property taxes in Texas! I'll shoot you a PM with the name of the company.
@John Chapman - Thanks for your insights and observations! I didn't think about bigger square footage = higher repair costs. I will add a buffer in for more maintenance. I checked rentometer, and it was in line with rents, but definitely hope other Houston investors can chime in if they think the rent is reasonable. I'm waiting to hear back from the company on the scope of work, but I absolutely expect it to be a true turn key property - new roof, HVAC, foundation repair, if needed. What kind of cap ex should I budget for a turnkey?
@Sharon Tzib - Thanks for that great tip; I definitely didn't factor in the size of the house when estimating repair costs. Obviously, the first year will have $0 maintenance costs, but I will keep a conservative buffer for maintenance for subsequent years.
@David A. - Glad to hear you think that the rent sounds reasonable! That's reassuring :) Thanks for letting me know what to expect for closing costs - I'm new to this whole process!
@Johnson H. - It is a 2 story house! And as mentioned above, I'll definitely have to increase my maintenance budget. I will get an independent inspection done - that is a non-negotiable. Thanks for the tip on mortgage rates - I thought a 5.25% seemed a little high, but wanted to be conservative anyways. Thanks for chiming in - always appreciate your thoughtful responses! :)
Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
12y
@David J. - Great to hear from someone who has worked with this company before! I hear good things about them, but always nice when another BP-er can vouch for them. I'll send you a PM to discuss more :)
Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
12y
Hey @Gil Dotan - fair question; thanks for asking! I do have a preference for multi-family, but I actually really like SFR's for Texas. In such a vast state where land is plentiful, there is no shortage of opportunities for new housing. Because of that, I believe renters will have a preference for houses. Additionally, the houses I'm looking to purchase are in good school districts, which tend to be in owner-occupied communities, rather than majority renter communities. Owner occupants tend to live in houses, rather than multi's.
In short, I'm looking at SFR in Texas because of the market conditions there.
Investor · Kadima, Out of State · Member since 2013 · 7 posts · 0 votes
12y
Thanks for taking the time to clear that up Sarah. I like to focus (at least as I'm starting out) and deciding whether to go for SFR's or multi-family is still something I haven't figured out yet.
If I can find other SFR's for above 8% cash on cash return in other areas, would you go for it? Or are multi family the preference because they generate more?
Also, do you mind sharing your turnkey provider? I think the good ones are probably worth their weight in gold.
Rental Property Investor · San Francisco, CA · Member since 2013 · 141 posts · 93 votes
12y
Hey @Gil Dotan - just sent you a message. My preference is for multi family because of the reduced vacancy risk, but just know that multi's do tend to have a higher frequency of turnover (renters stay in houses longer), so expenses will be higher. There was a recent blog post on the pros and cons of SFR vs MFR investing here: http://www.biggerpockets.com/renewsblog/2013/10/21/pros-cons-single-family-rental-properties/
If I could find other SFR's that meet my personal investing criteria for the Houston area, I would definitely go for it. Again, my preference for SFR is market-specific. Different cities have different market conditions.