Is the Houston market viable right now?

Question

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

Cameron Tope · Answer

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!

Greg Scott · Answer

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.

Daniel Tanasa · Answer

Hi Ryan,

Making numbers work today is definitely harder than it use to be, especially if you have to pay over 6% interest rate. If you don't need the money, I think holding on to the property makes a lot of sense at 2.65% interest rate. The inflation is around 3% so you're basically having free money for it. The house is in a good area and over time it will appreciate and cashflow will get better. Make sure you underwrite the tenants good, have them stay for as long as possible and your cashflow number will get better as you don't have the marketing and vacancy cost.

Good luck!

Ryan Richards · Answer

@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.

Ryan Richards · Answer

@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!

Ryan Richards · Answer

@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.

Cameron Tope · Answer

Happy to help!

Chris Kersey · Answer

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

Ryan Richards · Answer

@Chris Kersey thanks for the reply Chris! I'll message you with a couple further thoughts on this.

Dave Foster · Answer

@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????

Is the Houston market viable right now?

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