Doubling Down or Waiting For The Perfect Storm?

Question

Hey BP Family,

I'm an Investment Agent for an off market brokerage in Houston. Lately, I've been receiving mixed emotions from the investors and landlords I work with.

On one hand, I receive feedback from investors saying that the market is too terrible to keep investing at the volume they once were.

On the other hand, I have investors who decided to alter their buy boxes/strategies instead and stay somewhat bullish in their investment activity, even if it means they don't hit the $50k+ profits they are accustomed to.

I'm curious to know what other investors in the Houston area think. If you're staying out and playing it safe, what cautionary tales do you have for those still active? If you're still active, what about your strategy changed that allows you to still profit in an uncertain market? Let me know your thoughts!

Chris Seveney · Answer

I am not in Houston, but I will comment on the overall state of the real estate industry. Many of the people who are leaving real estate got in during a time when it was very easy. It did not require a significant skill set or patience. Now, those who are successful are the ones who have a lot of experience, have patience, and have the connections to find the deals. It's a game of singles and doubles, and not hitting home runs on every opportunity. I have no issues and actually prefer it when real estate is harder because it reduces the competition.

Aiden Avtgis · Answer

I don't invest in Houston, so take this as an outside view. I'm in the Cleveland/Ohio market, and we're seeing the same split you describe.

The investors who are still buying have mostly stopped chasing big flip profits and started buying for cash flow. A $50k payday gets harder to find, but a duplex that covers its own debt with room to spare still works at today's rates. For us, DSCR is the first number we look at, and we run it with conservative vacancy and CapEx before getting attached to a deal.

The ones sitting out usually bought on appreciation or a thin margin, and they're the ones feeling it. If a deal only works when everything goes right, it's not a deal right now.

My question for the Houston folks: are the investors staying active shifting toward rentals, or just taking smaller margins on the same flips?

Timothy Oyedele · Answer

@Wale Lawal Agreed. The “buy anything and let appreciation bail you out” era is over, at least for now. The investors I see doing well are underwriting taxes and insurance first, before they even look at the upside, and they’re fine with a smaller margin on a deal that holds up.

Thanks for chiming in!

Zury Hamoui · Answer

Not an investor yet, I'm more on the numbers side. But I've been running a lot of Houston rentals lately (25% down, ~7%) and honestly the median stuff around $330k doesn't work. Rent covers maybe 75–77% of the payment once taxes and insurance hit, and less if there's a MUD. The older $250k houses outside MUDs get pretty close to breaking even though. So I don't think the buy box broke, it just moved. Curious if that's what your buyers are doing, or are they holding out for deeper discounts?

Timothy Oyedele · Answer

@Stacy Raskin Agreed. Less competition is the upside nobody talks about. Sellers are a lot more open to price cuts and credits than they were two years ago, and using those credits for a rate buydown can be the difference between a deal that bleeds and one that cash flows. The buyers who are willing to negotiate hard right now are getting terms that weren’t on the table in 2021.

Stacy Raskin · Answer

I agree with Chris. There's money to be made in this market by investment property buyers in general. In many markets, there's less competition from buyers and more opportunity for investment property buyers to successfully negotiate on price and seller credits that can help with decreasing financing costs and increasing cash flow.

Stacy Raskin · Answer

Yes, absolutely. 2021 was a hard market to be a buyer.

Wale Lawal · Answer

@Timothy Oyedele

There is still room for Houston investors to make good purchases, but I do not believe that the time of buying any deal and receiving high appreciation anymore exists. I would definitely tighten up the buy box, underwrite taxes, insurance, rehab and realistic rental rates more conservatively and be happy to make a small margin if the deal was solid.

Good luck!

Ashish Acharya · Answer

Timothy, I think the interesting part is that the right answer may not be “double down” or “stop.” It can be about changing the economics of the deals you are pursuing. On the tax side, I’d also make sure investors are separating their investment strategy from their tax structure. If someone is consistently buying, rehabbing, and selling properties as a business, the tax treatment can be very different from long term rental investing. Property held primarily for sale to customers in the ordinary course of a business generally is not treated as a capital asset.

For an active flipping business with enough consistent profit and volume, I’d also at least evaluate whether an S Corp structure makes sense. It is not an automatic tax savings strategy, and reasonable compensation and payroll have to be handled properly. In a market like this, I’d rather see investors adjust their buy box, margins, or strategy than force deals just to maintain the same volume.

Timothy Oyedele · Answer

@Ashish Acharya Great point, and one that doesn’t get talked about enough. A lot of investors focus on the deal and figure out the tax side at year end, and by then the dealer vs. investor distinction has already been decided by how they operated. That gap can eat a good chunk of a thinner margin, which matters even more in this market.

Fully agree on not forcing volume. Curious, at what level of annual flip profit do you typically start seeing the S Corp conversation make sense for your clients?

Doubling Down or Waiting For The Perfect Storm?

Doubling Down or Waiting For The Perfect Storm?

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