Investor · Dallas-Fort Worth, TX · Member since 2016 · 80 posts · 31 votes
I'm a wholesaler in Arlington, TX and ran into a few properties with long term tenants. What are DFW, TX cash buyers searching for in this market? Ex: Cap rate, rent/value ratio, cash on cash returns, ect.
I purchased a home in Arlington over a year ago with the following metrics:
- Rent/Cost ratio: 1.33% - cost is all in (includes rehabs)
- Cash on Cash : 12.33% - assumes 5% vacancy, 5% rep/maint, 5% CapEx, and 8% prop mgmt, including property taxes and insurance. I did not finance this property so Cash on Cash could be leveraged higher.
- I don't look at cap rates, they are irrelevant.
The above metrics are not a home run but would pique my interest, I would still look at the area and get a feel for its prospects and desirability. However, I have not found a property like this in over a year now, so I've been sitting on the sideline waiting for the recession.
@Roger Covin Rule of thumb for me is 1.2% rent/cost (all in cost) minimum and 10% cash on cash after accounting for expenses. Also want at least 15% equity in the deal after rehab (so max purchase price 85% of ARV minus repairs).
Depending on the location and age of the property, these criteria may adjust up or down a bit.
I think IRR is one if not the best measure of performance when it comes to comparative analysis of investments, it especially shines when analyzing dissimilar investments (i.e. real estate vs. mutual funds). The reason IRR is best is because it looks at an investment in its entirety (i.e. it looks at cash inflows and outflows over the entire life of the investment).
However, what makes IRR a great performance measure is also a reason it's not very practical in some types of investments. Single family rental is one investment type where IRR is just not a practical measure of performance. Some arbitrary but crucial assumptions are needed i.e. how long you plan to hold the rental house, how much you will sell it for. This is why other measures such as Cash on Cash, Rent/Value ratios, GRM are more suitable for single family rentals because they don't require the above assumptions and they merely evaluate the investment on a year by year basis.
I do use IRR when appropriate. An example would be when I evaluate a passive investment in a syndicated deal (whether single family or multifamily). Such deals usually include exit strategies, how long you'll be tied up in the deal and an estimate of sales proceeds at the end.
Hello and welcome to BP! Thank you for your opinion, Immanuel. I would tend to say that the value on a SFH is more about sales comps that are recent or on an appraisal depending on the lender. I live in Coppell and was born and raised in Dallas and I am 60 years old so i know a little about this area. Give me a call or a contact through this site if you have any questions that you think i could help you on.