Should I invest in subdivisions within master planned communities

Question

Most of my searching efforts were primarily focused within the loop in better neighborhoods. Problem is, most of these investments are negative cash flowing assets. Given the uncertainty in asset and debt markets, I'd like to err on the side of safety in good locations with above median income levels.

If I look to areas that fulfill these criteria, such as Katy, Pearland, Spring, Humble, etc. I mostly find cookie cutter/deed restricted homes with HOAs. Downsides are the added costs, limited ability to force value through renovations, and lower appreciation due to mass production. On the flipside, these areas are experiencing population and income growth and are desirable places to live. Am I weighting cash flow too heavily when inflation may contribute more to appreciation?

Would love to hear thoughts regarding this specific asset class and how others may be viewing investments in today's market.

Nancy Truong · Answer

I've seen similar scenarios where investors have opt for either side. If you take the negative cash flow method and put faith into appreciation be prepared for a long time haul. Reason being is the future is unpredictable. While there's some forecasting that can help you, the future is uncertain especially with a potential recession, new federal and state laws changing, interest rate changing, etc. I've seen this work out in some investors favor, however, it's not for everyone. Can you dish out X amount of money w/o cash flow for a while? That's your call.

On the other side, having cash flow readily available will help build your nest.

The Houston market is still growing, with multiple economic drives and has one of the high rental markets. So you have that.

Me personally, I need some sort of cash flow because chances are, money will dry up quicker for me if I'm in the negative for a while.

Wale Lawal · Answer

@Robert Allen Lin

I
personally have rentals, in Houston, Spring and Conroe.

These areas tend to command quality tenants and they have great schools.

Income growth and appreciation here are steady.

If you have not already done so, get in touch with a local Investor-Agent.

They can help shorten your learning curve and save
you a lot of headaches.

Good luck!

Robert Allen Lin · Answer

I guess I should have been a little more clear. I'm not considering negative cash flowing assets, but I feel like the only feasible investments from a cash flow standpoint are these cookie cutter subdivisions. These also require 40% down, whereas A/B class assets like those in garden oaks will probably require 60% down just to break even.

My general mindset was to avoid condos and townhomes due to hoa fees and typically lower appreciation. After looking at all these growing master planned communities, where demographic and income trends are favorable, the only rental opportunity I see are these mass built homes. These may pencil better but on the flipside the exit strategies are limited.

I don't know if I have a specific question, but would love to hear what other people in this market or similar markets, are experiencing and doing.

Scott Trench · Answer

I think cash flow is a non-negotiable. You don't have to cash flow a lot, but any purchase in real estate must cash flow at least to some degree, with conservative projections.

We are getting into this business (most of us, at least) to put money into our lives. A negatively cash flowing asset sucks the cash out of our lives.

I think there is a valid argument between smart people who debate whether they'd rather get an 8% CoC ROI in a "meh" market that is unlikely to appreciate and a 2% CoC ROI in a great market that is likely to boom. So there's room for appreciation plays vs pure cash flow plays. But, I think it is unwise to "bleed" money every month on a deal.

Should I invest in subdivisions within master planned communities

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