Is This Worth It?

[Joshua Morris]

Hello! I'm learning about real estate investing and am very interested in the buy/hold strategy. I've been running some numbers and, I'll be honest, I'm having doubts as to whether or not this strategy is worth the risk. I'm posting my assumptions and calculations here. What do you think? Keep in mind, my numbers are very generic. As such, I may be WAY off on my assumptions, in which case I encourage you to correct me. 

Take this house in northern Houston for example: $150,000 with 20% down ($30k cash invested). 3bed/2ba in a great neighborhood. Rental estimate is about $1500/month. Here are my numbers: 

Yearly Rents: $18000

Yearly Taxes: $5100

Yearly Management (10%): $1800

Yearly Maintenance Allotment: $2000

Yearly Vacancy Allowance: $1800

NOI: $7300

CAP Rate: 4.8%

Yearly Mortgage Payment: $7728 (assuming 5% interest)

Annual Cash Flow: -$428

That doesn't look good. I understand that I'm also building equity in the place, which after 10 years is worth about $52k without considering house appreciation (just initial equity and principal paid... I'm trying to be conservative). Considering I can invest in a REIT with a sound 7% dividend, that same $30k paid as a down payment after 10 years could be worth $59k (again, without considering asset appreciation). Even if I bumped the rents up to $20k per year, I'd still only be cash flowing about $1090 per month. The present value of that (new cap rate is about 5.9%) after 10 years is only $8000... even if I consider the same amount of equity built, that's only slightly beating the REIT I could invest in with no work at all. In my opinion, this is not a smart move. I'm very interested in hearing your opinions.

[Hattie Dizmond]

@Joshua Morris You're tax estimate does seem high.  Check the Harris County Appraisal District sight to get an accurate number.  It's public information and listed online.

@Leigh Ann Smith There are definitely areas where you run the danger of having bought at the top of the market right now.  However, I don't believe the Far North Dallas area is at the top of its market.  The new State Farm HQ will begin occupying their building in Nov.  Toyota is opening a huge new plant in Frisco.  TI, McAfee, Intuit, Fossil, Erikson, Raytheon, BCBS, Dell, HP, Tenent Healthcare...I could go on and on, are already there and expanding.  Add to that the fact that Richardson, Frisco, Plano, Allen, Wylie, Lovejoy, Prosper...etc., all offer outstanding school districts with some areas boasting private school quality schools.

I do believe rents will adjust.  I also believe that, by the time they do, some of the market pressure you are seeing right now that is partially owing to the lack of new construction in the last few years (a result of the tight funding in the post subprime crisis space) will ease and hedge funds/institutional investors will pull out.  When that happens, I expect appreciation to return to at or near historic levels of ~6%, allowing rents to catch up a little easier.  As to whether or not people can afford higher rents, the rents in Far North Dallas are actually low for the level of employment available in that area.  I paid $2500/mo for a house just outside of downtown Dallas that I could rent for $1800 in Richardson.

There are still areas within the metroplex that are producing cash flow positive properties.  Most of those area - not all - are not places I want to be.  The areas to the east & northeast of Dallas are more appealing to me.  However, right now, I'm just going to ride the wave and concentrate on flips.  In this market, if we get to the point we want to grab a couple of buy & hold properties, I'm much more likely to look at the Bryan/College Station area.