What type of SFH do you invest in?

Question

Hey all!

I’ve been going to multiple showings every weekend in Houston with my realtor to give context as to where I am in this process.
I understand that C class properties are generally the best middle ground when it comes to quality vs cash flow. If I’m not mistaken, most properties I’ve been looking at (C class) range between $165k-$200k with rents ranging from $1300-$1900.
Playing around with numbers using first time home buyer down payments of 10%-15%, after monthly expenses includes taxes and insurance, I’m struggling to find anything that cash flows. Most cash on cash returns on the properties I look at are about 3%-5%.
Being its my first property, I’m looking for homes that won’t require much rehab.
This makes me wonder:

Am I looking at the wrong market? - I see a lot of investors look for $100k properties and then put in rehab. Are the discounted, run down properties what I should be looking for?

- Are the $165k-$200k move in ready properties with less than 20% down just not meant for good rentals/investments?

Is it the high interest rate of the economy?
- Obviously lower rates will improve my return but my concern is then that home prices will increase and then the “move in ready” homes im looking at in this price point will jump and be replaced with terrible homes

In short:
Should I be putting more cash into the property to improve monthly returns? (Higher downpayment)

What kinds of properties do you look for as an investor? At what price point?
I’m probably not providing all the information needed so feel free to ask for more details or make up your own numbers - mainly looking to learn about broader RE investment concepts for starting out.

Anything is helpful, thank you!

Nathan Gesner · Answer

Income minus expenses = cash flow

Property prices skyrocketed, mortgage interest rates increased, taxes have gone up, etc. This increases your expenses, so you'll have less cashflow. Purchase prices and interest rates would have to drop back down to 2019 values to match 2019 performance.

It's a different market now. You have to wrap your brain around that and figure out how to make real estate investing work for you given the current situation. I'll let you in on a little secret: people were investing in real estate in 1978 when rates were 7.5%, in 1980 when they were at 9.5%, and in the 1990's when they were at 10%.

The problem with many investors today is that they all want to invest without sacrifice or hard work. If you can't make a property cash flow with 10% down, you should consider working hard, cutting expenses, saving up a lot of money, and putting down 40%? Maybe you can walk the streets for six months looking at distressed properties, hunting down the owner, and using some creative negotiating to purchase the property below market price? Maybe you can spend money on a website with solid SEO that brings distressed sellers to you? Or direct-mail marketing?

Investing was much easier in 2014 than it is today. You have to figure out how to operate in the current market. Stop listening to newbies that built their portfolio in the last four years and instead listen to the grey-haired guys with 20-40 years in the market. Or talk to your old uncle that bought property 40 years ago.

Amika B. · Answer

When I first started out I wanted to do similar style investments: cosmetic rehab, easy flips/easy fix. Not only did I find the competition was so fierce here in Houston but the numbers were never good enough!

Nowadays, the uglier the house the better!! Absolutely disgusting inside? Yes please! Complete gut job? Hell yeah! I'm not afraid of extensive projects. I've got a great contractor and I know that I can do the work for the right budget and in a decent amount of time.

Find a great contractor and don't be afraid of having to put in more than just some new carpets and fresh paint!

John Morgan · Answer

@Bryan Cheng

I target C+ class properties in the 200k range with 20% down that rent for around $1700-$2000/month. These numbers work for me and I’m in a the DFW area. It may be a base hit now, but will look like a home run in 5-10 years. Especially when you do a cash out refi in 5 years to pull all your cash back out to scale up. Be patient and keep planting trees.

Jennifer Dixon · Answer

Hey Bryan!First of call, good job on getting started! That's the hardest part.

Secondly, remember, you "marry the house" not the interest rate, so although you may not cash flow a ton right now, when interest rates do go down, you can always refinance and then you'll cash flow more. Plus you'll have the benefit of appreciation, possible tax benefits (depending on your situation, of course), and rents, like house prices tend to go up over time, so while your payment will be the same and possibly less, over time, your rent will go up, so keep those things in mind.

finally, I recommend asking your realtor to look for off market / wholesale properties. Even as a newer investor, you can still get into a wholesale deal (which is typically significantly cheaper than properties on the mls). It takes a knowledgeable realtor, and a good team, but i know you can get much better prices for wholesale deals and that helps sweeten the cash flow since you'll have a lower price point to get in your property.

For ex; I have 3 properties going right now. 2 were wholesale and 1 was retail. The retail was a class b and will likely have the smallest "juice" ie equity captured, but I loved the area and I did it as a JV so less cash out of pocket - but the idea is that appreciation. The other two properties 1) class c and 1) class b+ will be flips - both of those were wholesale deals. I plan on flipping those and the equity was awesome - but only bec they were wholesale deals - had those been on market deals I never would've been able to get them (competition is really high here) and that competition would've raised the price too much. Point is, you can get any class in a wholesale transaction (which does have more/different risks) so I recommend looking that route if you can.

Jon Kelly · Answer

This post should be on the home screen when everyone logs into BiggerPockets. The sad thing is most people will ignore this and continue to wonder why they can't find any deals.

Tim Bee · Answer

I suggest you keep your calculate your purchases using a LTR formula.  Cities have been severely restricting STRs and your plan to rent short term might have to abruptly change to a long term rental.  Be careful.

Adrian Tjakra · Answer

Hi Bryan!

Just wanted to share my experience. Currently I have 3 properties at Houston now (2 rentals) and 1 currently going through rehab for BRRR. I purchased this back in 2019 and 2022 respectively and still are cash flowing. At this market, unfortunately, it will be hard to cashflow unless you are planning to put 20% down. With budget 200-250k you might be able to find something decent in the B+ area. Check out the 77429 ZIP code. Let me know if you want to talk more. Would love to share my experience if you are interested.

Bryan Cheng · Answer

I just wanted to share with all that this was my first post and I was not expecting so much insight. These different perspectives have all been super helpful so thank you all for the tid bits of guidance! Hope everyone continues to do well in their investing journey as mine starts out.

Wesley I. · Answer

@Bryan Cheng

There’s new quadplexes in Spring that you could house hack.

My type of sfh is a single story, ideally 3/2.

There’s B class in your area that range from 210-250k.

What type of SFH do you invest in?

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