Investment in Houston, TX

[Bruce Cash]

Hello there

I have been posting in BP to seek your expert advice on real estate investment. As my previous post indicates, I have started to be (hopefully) a real estate investor. 

I have read few articles in BP and other website on when/if a real estate investment makes sense or not. Terms like "Cash Flow", "Cash on Cash", etc. I have been looking for a good and affordable SF which is zoned to good schools and stays below 150K. For those who are familiar with Houston, I focused in area north of I-10 and west of I-45. My realtor found a house for 160K with avg rent of 1450/month. House was built 2005 and does not require too much rehab. Property tax is 3% and estimated insurance 1200/year. So with 30 years mortgage/20% down, the cash on cash number came out as 2%. Even if I buy the property in cash 100%, the Cash-on-Cash is around 4%. These numbers are well below recommended 8% limit. 

A quick answer would be to find a 1) cheaper house or 2) house with higher rent. I think ( and I may be wrong) that #1 can be found in lower income neighborhood (lower rent) and #2 can be found in high income area (more expensive house). 

All of a sudden, my driving force in real investment comes to a halt because it seems I can't find a good return on my investment. 

So I would appreciate your comment on

1) where is my mistake? I know my logic is not right somewhere, otherwise there won't be too many investor in Houston. 

2) For those investors in Houston, where do you recommend me to zoom in (neighborhood) and search for an affordable and positive cash flow property?

thanks

[Joe P.]

160K with avg rent of 1450/month - so it doesn't hit the 1% rule?

Let me understand your P&L - I ran it into my spreadsheet using the following:

• Purchase price 160,000 (25% down mortgage balance is 120,000 at 5%/30 yrs)
• 25% down and 5% closing costs (total all in cash = 48,000)
• Rent is $1450 per month

Income:

• RENT:  $1450.00

Expenses:

• Mortgage:  $644.00
• Insurance:  $100.00
• Taxes:  $400.00 (3% of purchase price per your note, so $4800 per year)

Net Profit:

• $306.00 per month

What you are NOT considering:

• Property Management:  $145.00 (10% of monthly rent)
• CAPEX: $145.00 (10% of monthly rent)
• Vacancy:  $116.00 (8% of monthly rent)
• Maintenance:  $116.00 (8% of monthly rent)
• Other Expenses: $????? (utilities, HOA, garbage, advertising, etc)

Cash Flow:

• -$216.00 per month (thats a negative number)

Happy to have other investors weigh in, but this is not a good deal. Using even the 1% rule you can see this probably shouldn't have even made it this far. What are comps in the area like? Can you go to a slightly worse location to stretch your dollars further, and perhaps into a multifamily unit?