2 percent rule Houston

[Daniel Fierros]

hello BP.  I would like to know opinions about what's a good percentage to shoot for in regards to rent rates compared to purchase price (i.e. 2 percent rule) in the Houston area.  Thanks!

[Don Konipol]

Texas is a great example of why any general "rule", like the 1% rule, or 2% rule, needs to be modified in certain locals, with certain property types, and with property condition, etc.

Since Texas does not have a state income tax, property taxes are very high.  With no homestead exemption, taxes typically run 2.5 - 3.0% of market value, or more.  Further, some smaller subdivision developments have very high temporary water tax rates, as much as 2 or 3% additional.  

So, a $250,000 property in Arizona would pay $2500 annually in property tax, while a $250,000 property in Texas would pay $7,000.  

Also, in coastal regions of Texas, prone to hurricanes, property insurance can be very expensive.  I own a $600,000 property in Tempe, AZ and my annual property insurance bill is $435.  My insurance bill on a $300,000 property I own in Texas is $1600.

So you can see, that i all other expenses except taxes and insurance are the same, and rents are the same, a $250,000 property in Texas will have a net income approximately $6,000 less then the same priced property in AZ.  

This is why a NET income multiplier is much more important then a GROSS income multiplier.  The 1% rule or 2% rule is merely another way of using a GROSS income multiplier.