What are your minumum return thresholds in DFW SFH rental?

Question

Hello everyone - I'm newer to Bigger Pockets and this is my first post!

Here is my main question, and then I will give you more context below:

- When looking at potential purchases for SFH rentals in the DFW area, what are YOUR minimum requirements for IRR, Cash on Cash, and monthly cashflow?

More background information in case it is helpful:    I spent the first part of my career in the small business "startup" world, and I recently sold my latest company (B2B Saas field). Anyways, with the sale of the company I now have a good amount of capital to invest. Historically, I have invested mostly in the stock market, but I've really spent some time learning more about RE investing, specificallly on the SFH and small MF side, and I'm thinking this would be a good place to deploy some of my capital (if done correctly of course!).  I love the long term wealth building potential that can be found in rentals when done in a smart way.

I have learned a ton about deal analysis and so I feel capable of analyzing deals, but I was really curious what some of the more experienced investors are using as their thresholds to sepearate the "good" deals from the "run of the mill" deals. My mind thinks in terms of IRR, and Cash on Cash, so those numbers woudl be super helpful as well!  I obviously don't want something with negative cashflow, but since I won't need the cash to live off of, I'm not as concerend with this number as I am the other two, as long as it's positive.

I'm open to purchasing a property turn key, or to buying something that needs a bit of work up front. The up front work doesn't scare me since I have a trusted friend who owns a residential construction company and I know I can get great labor rates from him. In fact, buying something that needs a bit of work may allow me to pay cash, renovate, and then refinance and pull out a large portion of the capital I have invested.

Thank you all in advance. I look forward to hearing what everyone has to say!

-Eric

Logan Gerard · Answer

@Eric Hassfurther what I have seen with my properties and my investors is that it all comes down to preference. For certain areas like Frisco, W Plano, and Irving, I have a lot of investors who are willing to pay premium in those areas because they intend to hold on to the property for a long period of time in which the equity value will increase more than other areas. Additionally, similar to what @Omar Khan was saying, you typically see a larger return as a percentage of the purchase price in lower income areas. However, properties in these neighborhoods will not give you as great of a return on equity in the long-run, and you may run into issues with the tenants. A very general rule of thumb is the 1% rule!

Hope that helps:)

Andrew Herrig · Answer

@Eric Hassfurther What is right for me is not necessarily right for you, but since you asked what MY criteria is:

- 10% cash on cash return

- $300/mo cashflow after all expenses

- must be B- neighborhood or better (I don't have a specific IRR requirement, but a B neighborhood should at least keep up with average appreciation in the area)

In order to hit these numbers in DFW right now, you need to be willing to hustle to find good deals, and generally the good deals need a lot of work to get them rent-ready.

Whether DFW is a good market for you or not probably depends how much sweat equity you're willing to put in. If you're just looking to deploy capital with minimal cash on cash return and take advantage of leveraged gain in real estate over time, there are a lot of markets out there where it is easier to do this than DFW.

Omar Khan · Answer

@Eric Hassfurther

Thank you for the kind words. I’ve messaged you about the investor-friendly realtor.

I am not a residential investor. Personally, I wouldn’t be looking at a lower-appreciating DFW neighborhood.

This is primarily because I would only be looking to buy Class B/B+ type houses. Assuming you have no pressing liquidity concerns and have a stable household income, I would prefer to buy houses in middle-to-upper middle parts of the metroplex.

Don’t want to deal with the headaches that come with lower quality tenants.

You are optimizing for peace of mind as much as returns i.e. balance.

Min. CoC: 8-10% because I provide my investors with better #s on our larger, multifamily deals. So that is my baseline. Not a very scientific approach… lol

Caleb Heimsoth · Answer

@Eric Hassfurther yes cash on cash 8-10 percent.  iRR should be 15-20 perfect

Eric Hassfurther · Answer

@Caleb Heimsoth, @Omar Khan, @Andrew Herrig - Thank you each for your responses!A few follow up questions...

1) Caleb - when you meniton your 8-10% return, are you talking IRR or Cash on Cash?

2) Omar -  I have seen your name all over bigger pockets and I always love reading what you have to say. Your analysis makes sense. If you are looking at a property in a lower appreciate area of DFW what CoC return would you be looking for at minimu. And the revers as well.... if in a high appreciation area, what CoC return would you be looking for?  And yes, I would love a recommendation to a local investory friendly realtor. I have met a few so far who claim to be, but the follow through hasn't been great from their end.

3) Ryan - yes, wholesalers are a great source. I'm definitley connected in with a number here in the area. Regarding a 15-17% CoC return, that's pretty impressive!  Also, with being able to pull cash out on once stablaized! Have you been able to find those deals in DFW recently, or more in years past? If recently, do you mind me asking what areas you are looking at?

Everyone, thank you again! I'm loving bigger pockets and the community here!

Ryan H · Answer

I also invest in Dallas from California and agree with what others have said.  Something you may want to try is contacting some local wholesalers buy calling the number on bandit signs or "As-Is / Cash Only" postings on Craigslist and explain what you are looking for and ask to be added to their buyer's list.  It is the way I have picked up some properties that are averaging 15-17% CoC with enough equity to pull out now that they are stabilized to buy another one.

Omar Khan · Answer

@Eric Hassfurther I would keep things simple and use metrics like CoC and a min. threshold for monthly cash flow. This is because the more advanced level metrics like IRR and NPV apply to properties that are valued based off their income stream. In SFRs, the assets are valued based off comps. Hence, you could have a cash flow generating machine but won't get any credit. Alternatively, you could have a train wreck and do okay if the comps work to your favor.

Ideally, you must figure out your end game. The cash #s are not as attractive in DFW but one must look at total returns which are composed of cash + capital appreciation. DFW smokes most markets when you take total returns into consideration.

If you are not cash strapped or don't have liquidity problems, I would suggest starting off in/around DFW and moving out from there. Ideally, you should work with investor-friendly realtors and only buy in middle-class (at the min.) neighborhoods.

If you like I can refer you to a solid, investor-friendly realtor.

What are your minumum return thresholds in DFW SFH rental?

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