All Forum Posts by: Dave Fagundes

@Cheri Crane, To @Chris Seveney's point, I agree that performing notes are promising but  having looked into this option I think note funds are a better bet for getting into that niche for a few reasons. First, they are diversified; if you buy a performing 1st and it goes south, you can always foreclose but that is a costly and protracted process, and unless you bought the 1st at a deep discount (unlikely in this market) you'll end up recouping only part of your investment. But with a note fund you aren't exposed in the same way because you're effectively investing in pieces of numerous different notes. Second, the holding period for note funds varies but will tend to be shorter.  The typical term of a mortgage in the US is 30 years, sometimes 15. That's a long time to lock up your capital. Note funds are usually for periods of fewer than 5 years so you have a shorter time horizon for committing your funds. Third, the returns on note funds are generous, often around 10%, which will approach or exceed what you would get with a typical performing 1st at today's interest rates. Good luck!

Was talking to a colleague recently who mentioned the importance of land value as a benchmark when estimating the value of property. This led me to think about what the best way is to estimate land value apart from the value of any improvements. The first thing that occurred to me is the HCAD estimate, which splits its property tax base value into both land value and improvement value.

That said, I've heard that HCAD property tax valuations can differ from going market rates for a lot of reasons. This could mean that the land value listed in property tax records is not reliable. Then again, it seems it should be a lot easier to estimate the land value of a parcel than the improvement value. Land is going to be relatively uniformly valued in a given submarket, putting aside any features that make it especially attractive (ocean view) or unattractive (backing up to a bayou). Improvement value seems like it would be a lot harder to estimate and may be the major reason why HCAD valuations can differ from market rates.

So is HCAD's land valuation figure a reliable reflection of the land value of a given parcel in Harris County? If not, is there a better way to figure the value of land separately from improvements? One option would be to figure the $/sf of any recently sold vacant lots in the area, but in Houston (inner loop at least) there aren't a lot of those for sale, plus sales figures aren't public in Texas. Thanks for any thoughts on this. 

@Kyle Bryant: Thanks, good info. The $1/sf figure I got was based on a small sample size of three places, all of which were in older buildings without central HVAC or other modern amenities. Two of the three were first floor units. They were also in a smaller submarket of Montrose (east of Montrose and near the 59 spur) that has older, lower-quality housing stock. And right now the city is tearing the hell out of those streets to install new storm drains in that area, so the lower prices may just reflect that relatively small submarket at this particular time.

Beyond mid-rise v multifamily, the bigger question is whether the Inner Loop is being so saturated with housing supply  that it will drive down rents regardless of type.  

I've looked at a lot of smaller multi-family properties in the Inner Loop as buy/hold options (by smaller, I mean from a duplex to a six-plex). As I drive around the area to look at them, I'm struck by the quantity of mid-rises that continue to go up in Midtown, Montrose, Rice Village--basically, everywhere it seems. 

This got me thinking about what the expansion of mid-rises means for the market in smaller multifamily rentals. In particular, I wonder if the ongoing increased supply of mid-rise housing will suppress demand for traditional multifamily rentals from duplexes to quadplexes. Renting in a mid-rise gets you a newer place with modern amenities, while most of the multifamily housing stock I've seen around the Inner Loop is older construction, some without parking or HVAC.

For one example, I was just in the Montrose area north of Richmond and west of the 59 spur, where there are a lot of older small multifamily properties renting rooms. I know this because there were at least 5-6 for lease signs in just the several blocks I drove around, suggesting pretty high vacancy rates. And along the southern strip of this area, at Richmond & 59 there's a relatively new mid-rise advertising 1/2 BR apartments (I looked at this place had quite a few vacancies as well for what that's worth).

Of course, if there is an oversupply problem, it would cash out in pricing, and the rough numbers I looked at bore this out. The rental prices in the traditional smaller multi families in this area seemed to be around $1/sqft, while the nearby mid-rise was charging $1.7/sqft for similar places.  

So the big question is: Does the rise of the mid-rise in the Inner Loop spell decline for the market in rentals of units in smaller multi-family? Or are there other factors that cut back against this trend? Thanks for any thoughts on this.

I've had the same observation in terms of multifamily I've looked at in the Montrose area. Given the asking prices, the cash flow would still be well negative, especially once you account for things like vacancy rates, capital expenses, possible management fees. I think this is a product of an overheated market, where people are focused on appreciation and willing to lose out on cash flow in the short term. 

One point about your numbers is that's a really low down payment, especially for commercial property. The lower your down payment, the higher your finance costs, and the harder it is to cash flow. If you put down 20% on a $350k place that would be a PITI of about $2000 (if you got a low mortgage rate for owner occupancy), so your leftover payment (not accounting for vacancy etc., see above) would be market rent assuming a duplex. That's not really a house hack, though, just a traditional buy and hold rental with the owner-occupancy twist to reduce your interest rate.

@David Hines: it's a good question. I've thought about this too. One theory could be that wholesalers add value by contributing inventory to the market that would not exist otherwise. My understanding is that WS often find off-market properties that would not make it to the stream of commerce by other means, or at least facilitate them getting there faster (e.g., WS can liquidate a house for an estate a lot faster than by grinding through the probate process). Sellers may find that the upsides of WS in terms of speed of transaction and quick cash are worth somewhat of a lower price, which is plausible because the margins WS get on sale/resale are not great.

Overall not sure if I think WS add value to the market, not all market actors do for sure, but if I were to make the argument it would run something like the above. 

I was born and raised in SoCal and lived in the LA area again for about seven years before relocating to Texas in 2014. I moved for personal/work reasons but nothing to do with economic opportunity or housing. I like TX a lot, and appreciate the lower regulations and lack of state income tax (though people often forget that many TX local gov'ts have very high property taxes, much higher than CA plus no Prop 13 so your base can grow every year). I can see why on the pure economics of it leaving CA may make sense. But pure economics is not the only way to think about the best life. I went back to live in CA in 2007 after decades away with eyes wide open about the economic costs like state income tax, high housing prices, and the non-economic costs like hellacious traffic. I never regretted it. Being in a place I loved was worth the higher costs of living and other annoyances for me. Your mileage, of course, may vary. 

Final note: My whole life since I was a kid in the 80s I've heard these same concerns: SoCal cost of living is too high, people are fleeing, folks in and out of CA bashing the state. In those nearly four decades, despite all the gloom and doom predictions, the state has figured out a way to survive and thrive despite the challenges. No guarantee this will continue, but I still think the odds are in CA's favor.

My understanding is lenders do not require you to get flood insurance unless you are in a 100-year flood plain. So it's not obligatory unless you meet that condition.

That said, Houston has had three major flood events in the past three years. Some insane percentage of the houses damaged in Harvey were outside *any* flood plain. And as others have said, given what's happened recently we have very little idea what will happen next with flood events. A lot of the homes flooded in Harvey were safe during the storm but inundated due to required reservoir releases. 

Given all that uncertainty, I think getting a flood insurance policy is very advisable for anyone owning property in the Houston area, especially given how underpriced those policies are thanks to ongoing federal subsidies. 

Excellent. One thing that jumps out at me from your description is it seems like you got a really favorable interest rate. I've seen lots of folks reporting that even with premium credit they're getting upwards of 5%. Did you get a lower rate because you paid points?

Here's one data point based on my experience with a SFR home in Harris County (West U). Purchased 2016, notified 2017 that the assessed value was about $50k above the 2016 purchase price. They did provide a lot of data indicating that the assessed value was in line with local comps, but this was still unwelcome news from the perspective of a higher tax bill. I filed a protest with the HCTO (on my own, through their automatic protest filing service--did not retain one of the many lawyers who yearly send solicitations to do this on my behalf). HCTO called and offered to settle the matter by setting the 2017 tax base at the 2016 purchase price if I agreed not to proceed with the protest process. This seemed to me a fair outcome, since I had more or less agreed by buying at the 2016 price that that was a minimum estimate of FMV.

What I took away from this was that there is value in just filing a protest to any property tax hike with the HCTO. My experience may not be universal, but at least in this instance they offered an immediate reduction and settlement when I simply indicated my willingness to protest. 

And for what it's worth, this most recent tax assessment--the one immediately after Harvey--was the same as the 2017 assessment. The home was not remotely affected by Harvey. I had been concerned that they would hike the tax base to offset presumed tax base losses elsewhere in the county, but that didn't happen.