Is the Houston market viable right now?

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

Often times our home does not make for a great rental.

I agree with your math with one outstanding questions: Is the insurance cost what you were paying or is it the cost for landlord insurance? The latter is cheaper because you aren't paying to cover contents.

Offsetting some of the negative cashflow would be a potential reduction in your income taxes. This is where it is helpful to have a CPA on your team. They will know your personal situation and what deductions you qualify for. If this property also reduced your income taxes $4K per year, you are effectively at a positive cashflow.

I would say this property is towards the big end of what makes a viable rental. At 2450sf, yes you can get higher rent, but you also pay higher taxes and updating a unit with paint and carpet costs a lot more. A 1200sf property will cost half as much for paint and carpet, but rents for more than half a 2400sf property.

Another consideration for you are capital gains taxes. Since you lived in the property if you sell it, you won't have any capital gains tax. But, if you hold it as a rental for 3+ years, now you will be paying capital gains tax.

How depreciation is treated is another thing to discuss with a CPA. You have some choices with depreciation and you can optimize your finances if you are buying a purposeful rental. Converting a home to a rental can create a bit of a clunky financial situation.

3 Reply

Ryan Richards
OP
Member since 2021 · 10 posts · 5 votes
7mo
Quote from @Greg Scott:

Often times our home does not make for a great rental.
I agree with your math with one outstanding questions: Is the insurance cost what you were paying or is it the cost for landlord insurance? The latter is cheaper because you aren't paying to cover contents.
Offsetting some of the negative cashflow would be a potential reduction in your income taxes. This is where it is helpful to have a CPA on your team. They will know your personal situation and what deductions you qualify for. If this property also reduced your income taxes $4K per year, you are effectively at a positive cashflow.
I would say this property is towards the big end of what makes a viable rental. At 2450sf, yes you can get higher rent, but you also pay higher taxes and updating a unit with paint and carpet costs a lot more. A 1200sf property will cost half as much for paint and carpet, but rents for more than half a 2400sf property.
Another consideration for you are capital gains taxes. Since you lived in the property if you sell it, you won't have any capital gains tax. But, if you hold it as a rental for 3+ years, now you will be paying capital gains tax.
How depreciation is treated is another thing to discuss with a CPA. You have some choices with depreciation and you can optimize your finances if you are buying a purposeful rental. Converting a home to a rental can create a bit of a clunky financial situation.

Hey Greg, thanks for the reply. The insurance is a new landlord policy, not my personal policy any longer. I also understand your point that when it comes to maintenance costs that a smaller home would have a relatively smaller impact, but if house prices have appreciated and I pay $200k for a much smaller house with $40k down (same equity position as current) but it now generates less rent and also has higher debt costs, then how does any new deal make better sense than this property, which is already bleeding? I am actually a CPA myself so I understand the numbers and am not considering any sentimental value in the equation, but the home piece of the puzzle aside I just don't understand how anything else would end up being a better deal if I decided to move on from this property and get into something new. I've looked at properties all over the west side of Houston and the rent to purchase price ratios are not even close to what I would consider viable to cash flow.
0 Reply

Wale LawalBusiness Member

Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes

7mo

@Ryan Richards

The market in Katy, Texas is pretty normal for your properties. Many single-family homes for rent are not doing great because taxes and insurance are going up.. You have a good thing going with that 2.65% loan. It is really important for your business because investors get to keep their properties by paying back the loan and getting tax breaks. The property is still an idea because you can handle losing about 270 dollars each month. The property is getting valuable and rental rates are going up in the Houston area so it is creating value over time.

Good luck!

[email protected]832-776-9582 Podcast Guest on Show #469

NETWORTH BUILDERS5237 Reviews

Website View Page

0 Reply

Ryan Richards

OP

Member since 2021 · 10 posts · 5 votes

7mo

@Wale Lawal I appreciate your response. Sounds like this is kinda the status quo in this market right now, but it also sounds like you think long term it's worth still holding onto this property even given current market conditions cause the appreciation and rent should go up in the medium to long term. I do need to balance this against the opportunity cost of selling with no capital gains, but I can always 1031 later so I'm not overly concerned with that.

1 Reply

Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
7mo
Quote from @Ryan Richards:

@Wale Lawal I appreciate your response. Sounds like this is kinda the status quo in this market right now, but it also sounds like you think long term it's worth still holding onto this property even given current market conditions cause the appreciation and rent should go up in the medium to long term. I do need to balance this against the opportunity cost of selling with no capital gains, but I can always 1031 later so I'm not overly concerned with that.

Great. You have answered your own concerns yourself. Keep us posted on your decision.
[email protected]832-776-9582 Podcast Guest on Show #469
NETWORTH BUILDERS5237 Reviews
Website View Page
0 Reply

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

7mo

@Ryan Richards, you're absolutely right! It's all about opportunity costs. Holding onto an investment property for appreciation potential is not a terrible deal as long as you can cover any capital expenses that might come up in the future. Do you need the cash flow? Your competing decision points are giving up that rate to buy better cash flow somewhere else with a better tax structure and rent prospects. Sometimes it's not worth holding onto a rate. But sometimes the IRR, which includes the amortization of the loan and appreciation make up way more than you make in cash flow.

If you decide to just sell the property, you might qualify for the primary residence exclusion, which allows you to take the first $250k ($500k if married) of the gain tax-free. This would allow you to deploy that equity where you might get some better cash flow potential. Even if you convert the property to a rental, you still have exactly three years to take advantage of the exclusion if you decide to sell the property.

If you don't qualify for the tax-free primary residence exclusion, then you can still 1031 down the line into a better property and keep the tax deferred.

But 100K tax-free money right now vs negative cash flow????

The 1031 Investor5140 Reviews

Website View Page

0 Reply

Ryan Richards

OP

Member since 2021 · 10 posts · 5 votes

7mo

@Dave Foster thanks for taking the time to read and reply! I don't actively need any additional cash flow from this property; my family is comfortable with my job and I would be fine long term letting appreciation do its job, but I do want to work toward building a portfolio that cash flows enough to replace my W-2 income.

The house is section 121 qualifying, and I moved out as primary residence in June 2025, so I still have a couple years to make that move if I want to. $100k tax free is certainly tempting, but I probably have a degree of analysis paralysis in deciding if I truly can find better returns elsewhere if I sold and deployed that capital in the current economy.

That ultimately leads me back to the original question of whether anything in the Houston market makes sense right now, or if we are just in a part of the cycle where there aren't really any good deals to be had and I should wait while building up a cash stockpile, whether that looks like keeping this house and betting the slight appreciation in the next couple of years offsets the negative cash flow, or selling and sitting on that cash in addition to my excess W-2 income. That's where my lack of experience is hurting me and I could use additional perspectives. But again, thank you for taking the time to reply and offer your thoughts; it's much appreciated!

1 Reply

Chris Kersey

Real Estate Agent · Houston, TX · Member since 2022 · 135 posts · 84 votes

7mo

Adding to all the good input that has been mentioned above ( especially Section 121 and other tax considerations), It may be beneficial to consider your investment strategy as a whole and if keeping this as a rental would help you diversify away from the traditional investment vehicles (stock,bonds,ect..).

Also consider monthly principal pay down (as minimal as it may be) into your consideration.

My thoughts would be to keep it, as a diversification tool, as long as you aren't loosing money each month. Your low interest rate is powerful here and with section 121, you could always keep it as a rental for the next 4 years or so and then sell it "tax free".

I'm a central Houston builder/developer, Investor and Realtor. Reach out in messages with any other direct questions.

- Chris Kersey

0 Reply

Ryan Richards
OP
Member since 2021 · 10 posts · 5 votes
7mo
@Chris Kersey thanks for the reply Chris! I'll message you with a couple further thoughts on this.
0 Reply

Cameron Tope

Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes

7mo

Quote from @Ryan Richards:

I recently moved into a new home and was planning to deploy my existing home as a long term rental in the Katy area. I've been trying to fill the house, but took a closer look at the numbers as some things have changed and don't know what makes the most sense moving forward. I'll provide the financial picture below with as much detail as I know, but I'm new to the game so please let me know if I'm missing anything relevant.

Estimated home value: $275,000

Current equity in home: ~$114,000

Loan details: 20 year loan from 2021, 2.65% rate. P&I is ~$12,800 annually

Taxes and Insurance: Without the homestead exemption, taxes are projected to be ~$7,200 and my insurance just renewed at ~$3,000 for a landlord policy. Yes, this was shopped through a broker and by far the cheapest option, even with a high wind/hail deductible and no personal property coverage.

Rent: The current market supports $2,100/month in this neighborhood, we have not received any interest at a price above that. (This is a 2,450 sqft home built in 2005, 4 bed 3 bath. All major appliances included)

HOA and misc: HOA is ~$600/yr and I've adopted the 1% rule for maintenance, so ~$2,750/yr. Also assuming 1 month of vacancy to be conservative, so $2,100. All utilities are paid by tenant and also lawn care is their responsibility.

Management and agent: I am managing the property myself so have no outflows there, but will pay a one time placement fee to my agent equal to one month's rent, $2,100 when a tenant is found. I do not expect this to be a recurring amount.

Appreciation: This home appreciated quickly after I bought it in 2020 but has come down from its highs a couple years ago and has been relatively steady at ~8% lower than peak FMV. Given the market, I'm not counting on any appreciation in the short term.

My math brings me to a negative cash flow, despite having a very good rate compared to if I were to buy an equivalent property today at current rates. That's also with no management, and I've pulled all the variable levers I can to minimize outflows. I'm struggling to see if I'm missing something and to evaluate if I should keep this home and accept a bit of negative cash flow annually as it's offset by the principal paydown and tax benefits of the property, although the return on my equity is very low when compared to just throwing my equity in the stock market or simpler investments, or if I should sell the home and look for better SFHs to invest in, but that leads me to the title; is the market even viable when I'm already cash flow negative with a great rate vs buying new properties with a 3x rate? Any and all insight and advice is welcome, and thanks in advance!

Cash flow = $25,200 (gross rent) - $7,200 (taxes) - $3,000 (insurance) - $5,450 (opex) - $12,800 (debt service) = -$3,250/yr

Hey Ryan,

We're seeing the same thing especially with new construction. Investors are getting great rates and a new property but there's very little, if any, cash flow.

Even with the low rate, as @Greg Scott mentioned above, some properties just don't make great rentals.

I would ask, "Why are you investing?"

If it's for long-term growth then I would sell the property and put that cast in the market. With average returns of 10%, compounded over 40 or 50 years, it's a lot more money than the house will make you. And selling with no capital gains is hard to beat!

However if your goal is to diversify, offset income, inflation play, or the eventual cash flow, then I would keep the property.

Best of luck!

2 Reply

Ryan Richards
OP
Member since 2021 · 10 posts · 5 votes
7mo
@Cameron Tope thanks for taking the time to answer! I appreciate each of these considerations and you've done a great job laying out the options and benefits in a really clear way that makes it easier to evaluate relative value.
1 Reply
Cameron Tope
Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
7mo
Quote from @Ryan Richards:

@Cameron Tope thanks for taking the time to answer! I appreciate each of these considerations and you've done a great job laying out the options and benefits in a really clear way that makes it easier to evaluate relative value.

Happy to help!
0 Reply

Daniel TanasaBusiness Member

Realtor · Houston, TX · Member since 2019 · 351 posts · 174 votes

6mo