Does school district matter that much when it comes to rental

Question

I am having a dilemma on picking the proper location for an "eventual rental" Currently I am looking to pick a primary residence for myself as I do not want to pay rent anymore. My current job gives me the flexibility to be anywhere within the city that i am in currently(Houston, TX) it is really up to my personal preference as to where i want to be or how close to the city i want to be. I've read that when it comes to rental properties, the Class C/D areas tend to produce higher ROI overall but obviously they are in a less desirable area. Better districts with better schools might produce better tenants/higher appreciation in the long run, but obviously I might have to buy at a loss initially (I might end up losing in the beginning anyway as i will be the one paying mortgage, it's not a straight up rental) Also, those areas don't really have any fixxer uppers(not major ones) so the pricetags basically give no margin and you will basically buy at a loss/breakeven deal.

So i am having a tough time debating between "Good school district" vs " cheaper/potentially better ROI but bad school district locations"

Appreciate any input on this matter. Again, this is a property i foresee turning into rental property eventually as I am simply trying to own a home for myself right now.

So i am having a tough time debating between "Good school district" vs " cheaper/potentially better ROI but bad school district locations"

Appreciate any input on this matter. Again, this is a property i foresee turning into rental property eventually as I am simply trying to own a home for myself right now.

Matthew Paul · Answer

My rule is " I never buy a property I wouldnt live in with my family "  Including sending my kids to the school .  It makes it harder to find a deal , but I still do .

Michael B. · Answer

I can't agree with that at all. I personally wouldn't live in any of my rentals and most successful real estate investors that I know in the US and in Germany say the same. @Joe Villeneuve hit the nail on the head as always. It's a numbers game! You guys talked about "intuitive feeling." Intuition has absolutely no place in real estate investing.

Successful real estate investors in Germany that are in the buy and hold business (like Gerald Hörhan) will tell you: "the uglier the property the more money it makes" this applies to the US as well. A great school pushes the prices up exponentially to the point where it can be hard to find a deal that provides good cash flow.

What is your guys' concern about lower class houses? Is it vacancy? I just checked my last years vacancy rate and is was 3.4%. All my properties are C properties one is even in a straight up war zone. Nothing fancy and no good schools. All my properties are professionally managed by a reputable management company. When I pick a property I always ask my PM's opinion on rentability. If my PM tells me he is going to rent it out for X Dollars then I usually believe him after double checking rental comps.

Of course, it all comes down to cash on cash return. And your expectation regarding your desired return. I know a lot of people in this forum listen to the deal analysis videos on BP and hear Brandon say that a deal should have a cocroi of at least 12%. However, 12% return will not get you ahead. It's a good return if you want to secure your wealth - but it will not get you ahead. I personally wouldn't touch 12%. Below is a deal that I did a few months back in April. Since then, I sold off another deal package worth 1.7M with a similar return and I have currently another 5 properties under contract.

Burdick Deal

You guys have to chase returns and not pretty properties.

Russell Brazil · Answer

Im with @Matthew Paul....all the rentals I currently have, Id probably live in.  A class all the way.  Making a couple hundred bucks in cash flow doesnt get my juices running anymore. Making a couple hundred grand from buying in high demand locations does though.

Matthew Paul · Answer

@Michael B. I understand where you are coming from . But as you know there are different angles in investing . I have lived in 4 out of 5 of my rentals . Appreciation has been exceptional . Once my kids are out of school , I am going to move in reverse . I will sell my principal residence and have no capitol gains . Move back into the  rental with the most appreciation for 3 years and sell with no capitol gains . And so on . With the exception of my 8 acres  which is in a subdivision process .

I dont want to deal with the stress of war zone properties no matter the $$$

Joe Villeneuve · Answer

Can you answer the next 5 questions?  The answer to the question you posed above can be found in the following 5 questions:

1 - Are you attending the school?2 - Are you involved in REI to attend school in the school districts you own properties in?3 - Are you in REI own properties with really nice classifications (or, to make money)?4 - Realizing that cash flow is a result of a mathematical formula where you subtract your expenses (Including the mortgage payments) from the rental income, does the quality of a school district automatically increase the rent, and thus the cash flow you make when you rent?5 - Realizing that profit is a result of a mathematical formula where you subtract your costs (Including the cost of the property and rehab) from the ARV, does the quality of a school district automatically increase the ARV, and thus the profit you make when you flip?

Answers:  (Hint)...they're all the same.

Joe Villeneuve · Answer

If you plan on using this at some point as an investment, then analyze it as an investment.  There are no Mulligans in REI.

Brian Cheng · Answer

Yes exactly! I am not sure exactly how i should approach this because this is technically not "an investment" even though it is, eventually.

I guess i'm really looking to just own a home right now for myself, so I have to prioritize my needs a lil differently than if it's just going to make money passively right now. In my opinion, if i'm not overpaying, and it doesn't give ridiculously negative cash flow, given enough time(because i'm paying down mortgage, i will plug it into calculation and see how long it takes to cash flow obviously) it will cash flow positive. So i'm just trying to think ahead to see how good of a deal i can get when turning my home into an investment, i guess there's really no good ways to tell.

Joe Villeneuve · Answer

There are multiple factors that go into this...ALL of them have $$$ in front, not %%% behind them.

The quality of the school district might (or not) increase the value of the property...and the taxes, and the insurance, but not always the rent...at least in proportion to the property values.  The cash flow is a result of these numbers, so if the rent goes up a little, but the PV jumps up, along with the taxes and insurance, there may not be any increase in the CF.  It may even go down.

Brian Cheng · Answer

Thank you all for the input. For my current situation i definitely prefer to get a place that id live in( would probably look to breakeven worst case scenario or perhaps a minor loss in the beginning). Then perhaps the next property i can look into  a higher cash flow stream vehicle.

Brian Cheng · Answer

@Joe Villeneuve thank you for taking your time to answer my question. My question is based on the theory that good school district will attract higher/more stable income families that have kids with parents wanting their kids to attend the best school possible. Thus making it easy to rent( less vacancy time.) I understand your point about ARV not automatically go up just because the house is in a good district, but comparing to a bad district, the chance is higher.(Maybe this type of thinking is completely wrong, and i'm not in the game long enough to know, or it just makes intuitive sense but in reality doesn't work this way at all)

Another thing about it is, im not planning on renting it out right away because im planning on owning it as a home for at least a few years.(might lose money, but i'd rather lose money here than just losing money on rent and own nothing)

My thinking is it might be more worth it to find a property in a safe, good district where i feel safe living in myself, because i am living there. Then the process of renting might be easier down the line just because of the location is more desirable. I am not betting on appreciation of the property by any means even tho there's a good chance of happening.  I guess my question really is: is it a safer bet to get a property that breaks even in Cash flow( might even be net negative in the beginning ,as long as it's not a lot and my paycheck can well cover it) then later down the line as i own equity in it, it will cash flow positive + being in a good location  VS  Poorer, less desirable location that has a little bit better cash flow(realistically, maybe not much more, but more than the first scenario) which i might feel less comfortable living in, and having a tougher time renting later down the line because tenants might feel the same way.

Does school district matter that much when it comes to rental

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