Check my buy-and-hold rental assumptions for Houston, Texas

[Account Closed]

Hi all,

I'm interested in acquiring a small (~10) portfolio of SFH rentals to supplement my income in ~15-20 years. As I play around with my numbers, and especially as I look at how property taxes work here in Houston, I've been questioning if a long term buy and hold strategy works very well here. I've probably been playing around with spreadsheets too much, so I'm taking a step back and hoping some more experienced folks can check my reasoning and assumptions.

First, my assumptions - by my numbers, the profit margin here in Texas is more like 40% (i.e. 60% expenses instead of 50% that everyone quotes as a rule of thumb).  I'd love to hear other people's thoughts on this.  A typical example of my assumptions in a decent B suburb:

- $130k retail value

- $1350 market rent, netting $1285/mo gross revenue after accounting for $65/mo (5%) physical vacancy

- $300/mo property taxes (2.8% annually on assessed value.  I know it will probably be lower initially based on an off-market purchase price, but I'd imagine the appraisal district will aggressively increase the assessment to market value within a few years).

- $110/mo (8%) PM

- $70/mo insurance (just hazard, no flood ins)

- $75/mo turnover allowance (1 month rent to PM to place new tenant every 2 years plus $500 every 2 years to get the place cleaned up for new tenants)

- $75/mo maintenance allowance

- $75/mo capital allowance ($900/yr, or $27k in today's money over a 30 year span)

- $50/mo misc (usually like a $25/mo HOA for the subdivision, plus accounting for other misc things like lawn maintenance when the place is vacant).

Total:

- Gross Revenue: ~$15,400/yr

- Average Expenses: ~$8,800/yr (57%)

- NOI: ~$6,600/yr

The off-market price for this sort of house that I'm seeing from wholesalers is maybe 110k purchase + rehab cost if you're super lucky, which after a 75% LTV debt service at 5%, is pretty much within noise of no cash return, and yet these deals are getting snatched up immediately. Yes I know there's the tenant paying down your debt, but the return on that in the early years is around 4%, so that's not terribly compelling to me.

Am I missing something here? I'm really interested if I'm being overly conservative relative to a lot of folks' assumptions, but at the same time, I question if $27k capex is really enough over a 30 year span, and I'm not really accounting for the rare evictions, etc. I see lots of posts that people won't accept less than 10% CoC deals, but I'm not sure if that's because they are getting deals for so much less or that the assumptions on expenses are different.

Thanks!