Struggling with Buy and Hold Math for Texas Property

[Jeremy Peters]

I've been doing some financial analysis on potential deals to purchase my first buy and hold rental in the DFW area.  I'm struggling to find scenarios that seem reasonably profitable to buy and hold rental property.

Here is a potential scenario that I came across.  Let's say I can steal a $100K property for $50K all in (including closing costs and repairs) that I can rent for $1,000/month.  Our property taxes are brutal here and are almost 2.75% of the county appraised value in Dallas.  This would meet the 2% rule and should be a slam dunk, right? 

Here are the details when I breakout the estimated cost:

Rent = 1,000

Vacancy (100)  --> 10% of gross rent

Property taxes (229) --> 23% of gross rent  (100K x 2.75% / 12)

Property insurance (100) --> 1% of property value

Prop Mgmt (100)  ---> 10% of gross rent

Maint Reserve (100) ---> 10% of gross rent

CapEx Reserve (100) --> 10% of gross rent

Operating Income = 271 --> 27% margin %

Mortgage payment (240)  --> used mortgage calculator $40K, 30 years, 6% (assumes 20% down payment

Monthly cash flow $37

Annual cash flow $372

Cash on cash return = 3.7% ---> 372 / 10,000 for 20% down payment

When I add up the monthly costs and maintenance/capex reserves, this works out to 63% of gross rent which is quite a bit more than the 50% rule .

Am I being ridiculously conservative here with my expense estimates or does our high property taxes make it that more difficult to find a profitable cash flowing rental property?