Duplex in Houston, thoughts on the deal and on the city

[Alex J.]

I am in escrow for my first investment property in Houston TX and wanted to get thoughts on the deal...ill provide as much i can to help readers decide good or bad.

Some pre-deal info:  This is not my first investment property, i have about 12 doors across 4 properties but they are all in los angeles ...some great areas some not so great areas but thankfully they are cash flow positive.  I manage those with a local partner and he is the active maintenance part while i manage the "front office" (leases, tenant calls, background checks finding the deals managing budgets etc)

The property is in Houston.... think of it as a "C" or "D"  type of property area basically some subsidized some not in the area.  I have exp in this type of a market this is not my first investment and ive found it to be decent in the investments i have in Los Angeles. 

purchase price, 100,000

25% down say around 4.5% 30yr note

The two units are already rented  total rent combined $1325 / mo

tenants pay for utilities, landscaping, etc

Prop tax is 2.5%

insurance about 2,500 (its a flood zone so its actually two policies totaling that amount)

The inspection came back in decent shape, there is a lifetime transferable foundation work certification, and new 30 year roof put in 2015.... nothing tragic thus far.

I'm coming to around a cap rate of near 10% and a return on equity of about 16%

Numbers wise, its not a bad deal but heres where I am having reservation and here are some general thoughts on the Houston market I would love feedback from readers esp houston investors/residence

1) I dont really see how we will get large price appreciation or any price appreciation really because the areas are kind of low value low income and pricing in houston in generally the last few years grew at a very unsustainable rate.  Generally I dont like investing in an environment like that but if it stays flat to slightly down and cashflows  i can still depreciate so its not terrible.

2) oil pricing might impact investors and could create some situations where investors need to free up cash and basically have to sell properties even if its cash flow positive to raise cash.  As for cash flow homes, they are pretty difficult to come across and the multi unit market here doesn't really exist in a 2-4 unit unless its in "C" or "D" areas....this might or might not present an opportunity i am not sure.

3) Houston is a big oil and gas city and costs in general for housing here compared to the coasts are LOW while incomes the last 2-3 years have been competitive to coasts...this means a lot of discretionary income is around so there might be investors that will keep the real estate market from bottoming once they find cap rates that make sense

4) there is a huge overbuild of commercial properties in the city and ive heard that there is more commercial space coming online this year that is new sqft than the ENTIRE city of St Louis sqft total...and that doesnt even begin to factor in the several huge multi unit mixed use projects all over the city just coming online....soo the mid-upper "a" or "b" properties are probably all overpriced and will see some pressure....which is why i stuck to a "c"/"d" property because they are pretty much not adding more of

5)  This deal seems fine but if i am going to start really building this business in Houston I really need to get a better handle of what can drive this economy if it ISNT going to be oil and gas.  IF there is a pullback is this an opportunity or just the start of a falling knife ya know what i mean?  I mean population wise houston is a HUGE city...but ive never been able to find good value in it other than if a person was to buy hold as a spec...builders did well here but i am not a builder and i think they might be in a bit of pain right now...so I really dont know how to approach this city going fwd.... any investors in houston perhaps can shed some light?

Ok I know this was a long post, and im sorry, but i wanted to give some light to a market that probably a lot of people have heard about out of state and get a real local perspective of the current trends here.