What are the key factors and risks to consider when investing in Dallas?

Question

Hi everyone,

I am new to the Dallas market and are interested in learning more about it. What are the key factors and risks to consider when investing in Dallas? Here are some factors I have thought about it. If you could share insights on the market, it would be greatly appreciated!

- Insurance: what would be a reasonable amount or percentage for me to consider when doing the number? Many places, such as California, Florida, etc are experiencing a significant increase in insurance cost. Is this happening in Dallas?

- Weather: is there any extreme weather in Dallas I should be aware of? I read that there is a high wild fire risk. Do properties there generally get fire insurance? If so, what would be a reasonable amount or percentage for me to consider when doing the number? Any other extreme weather to consider?

- property tax: is it generally around 2.29%?

- I know in Florida there is a 4 system to be evaluated. Is there something similar to that in Texas?

- Any other risks/factors to consider?

Thank you,

Jade

Ali Radoncic · Answer

Insurance is going up nationwide.  In Dallas it can range between 3,000-4,000 a year.  I lived here my whole life and never even thought about wild fire risk.

We do get pretty wild and random thunderstorms, hail, and some high wind speeds.  Hail is the bigger issue in my opinion.  Its comes out of nowhere seemingly!

Property taxes are considered to be high in Texas.  That is the number one thing I hear from out of state investors.

From a rehab standpoint, North Texas is infamous for foundation issues.  We basically build our foundations on mud and clay here so movement is inevitable.  If a home owner doesn't properly maintain their home, you would think an earthquake hit their house from some of the stuff I have seen.  The combination of hot long summers (soil dries out) and lots of moisture in winter and spring (saturates the soil) causes the ground to constantly expand and contract.

Out of state investors get freaked out by foundation issues but being that its such a normal occurrence, you have a plethora of foundation companies that know how to fix them with relative ease.  You can pay as high as 1,000 per pier or as low as $175-200 per pier if you're well networked.

Dallas is a highly competitive market.  I wouldn't say it got as crazy as Austin did, but Dallas has been competitive consistently over time.  Maybe I'm biased but I would also say that Dallas is kind of the barometer when it comes to economics in Texas.  I deal in distressed properties and I see deals sell in as little as 30 min to an hour on a daily basis.

The buy and hold strategy has shifted more to an equity play rather than the cash flow play we have all been taught and love.  You can still cash flow in some areas, but it will more than likely be in D class neighborhoods.  Multifamily properties at a discount are hard to come by, especially if you are looking in the nicer parts of town.

The population here is rising and development increasing,  Form me, I remember when Allen was basically a field. Frisco wasn't a thought, and McKinney was farm land.  Now These areas are arguably some of the best places to raise a family in country.

I'm sure some folks here on Bigger pockets remember when Plano was up and coming, but that was before my time haha.

Robert Steele · Answer

As a resident and residential investor of DFW for the past 23 years I agree with everything said here and it's all good advice.

I'd like to add one "key factor and risk" you asked about. Here, they build houses like rabbits breed. I know this used to keep some big out of state investors away in years gone by.

Bruce Lynn · Answer

Our main insurance risks seem to be wind and hail.  For example we often talk about 20 or 30 year roofs, but rare is it that I see one that is that old.  Seems like we get them replaced about every 8 years or so.  One consideration is to always check the Clue report with your insurance agent during the option period to see insurance costs and potential coverage and past claims.

We have had a couple of freezes over the past 10 years or so that wrecked some havick that we normally don't count on.  Not always preventable, but also good to prepare your tenants and take precautions. Gas heat access is better than electric for example if you have a choice.  While the heater has electrical components and didn't work while our electric was off or rolling, the fireplace did and saved my pipes.   Don't just leave tenants on their own to resolve this stuff.  The may either not know or not care.  For example dripping faucets...and covering outside faucets.  If you have to, pay a handyman to do it.  Protect your asset.

As @Ali Radoncic mentions, foundation issues are common.  My advice is normally don't buy one with issues or repairs if you can.  Plenty don't so try your best to stick with those.  #2 don't buy homes that are prone to foundation issues.  There are certain areas of town that are worse than others, and also design features that are better than others...also foundations that are better than others.

As @Ali Radoncic mentions, I've never thought about wildfires in DFW area.  Giant one in the Panhandle maybe 5 hours from DFW and one a couple of years ago West of Ft. Worth.  That's where big empty fields are that are not always maintained, and some unique dry conditions.  I wouldn't really expect that in the city.  Personally I'm not really worried about natural disaster type issues in DFW.  I've seen tornado damage, but I don't think I've known anyone personally that was affected...and really not common.

I would normally estimate about .75% of the value of the house for yearly insurance.  However it can depend on a lot of things like your deductible, your credit, coverage.   Pick a house and call your agent for an estimate.  One thing I've seen is DO NOT GO CHEAP on insurance.  I see way too many people find some cheap unknown provider on a website.  Easy to buy, but not easy to get them to pay.  Stick with the big well known companies that you've heard of.

Property tax is generally anywhere from 2-3%.  Around 2% in some of the cheaper areas, up to 3% in the more expensive tax areas.  Watch out for PID/MUD taxes in some of the newer areas.  Those aren't always nice and could range anywhere from $500-1% a year...that's for sewer and water or flood control improvements.  While it is a consideration, I wouldn't only focus on low tax vs higher tax areas.

Jin Zhang · Answer

Hi Bruce,

Thank you for sharing a wealth of information with me! I found them very valuable.

Best,

Jade

Ali Radoncic · Answer

I think just having full insurance coverage will be fine.  Im not an insurance expert but im not aware of any "hail insurance"  Typically if we have one of these storms and you are in need of a roof replacement, the roofing companies know how to work with your insurance and deductible.  Deductible will be around 1% of the homes value.  People will normally have this replaced with no money out of pocket although your premium may go up.

Foundation issues vary.  I see anywhere from 10-25 piers on distressed houses on average.  Well kept homes don't see this type of damage though on average.

I would respectfully disagree about Dallas market being slow.  Maybe somebody can pull some stats and Id be open to it.  Its my understanding that the DFW area is one of the hottest markets in the country.

Jin Zhang · Answer

Hi Ali,

Thank you so much for sharing such valuable information! I am curious do people generally get Hail insurance then? how much would it cost per years?

In general, how much does it cost to fix a foundation for a 1500 sq ft house there?

The appreciation of the Dallas market seems to be slow. Please correct me if I am wrong. Do you think it will change in the coming years? If so, what are factors changing it?

Thank you,

Jade

What are the key factors and risks to consider when investing in Dallas?

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