Where to invest in residential rental real estate - and retire early

[Gary123]

Twenty years ago the Colorado front range was an excellent place to invest.  Unlike most parts of the east and west coasts along with Chicago and other inland metro areas, you could lease a residential property for more than a thirty-year mortgage payment when putting less than 10% down.

While we made a lot of money investing in Colorado real estate, those days are largely gone.  Rent no longer covers a mortgage on new purchases unless you are willing to put more than 20% down and even then it’s not garaunteed.  In other words, your money sits in the property for years waiting for return maybe in appreciation after you sell (just like California).

As we 1031 exchange out of our Colorado investments (for a number of reasons), we have found south Texas to be the best rental/investment market in the country.  For example, in Jim Hogg county you can still buy a fixer-upper for less than $65,000 and rent it for $700-$800 per month.  Higher property taxes will take some of the benefit these low cap rates provide but it is still the best investment market in the country.

Regardless of how you feel about politics, lower crime along border cities will also make McClellan, Laredo and the larger suburbs of these cities safer whether it’s expanding the wall or just increased law enforcement presence along the border due to federal and state officials increasing spending.  I also love Detroit real estate but unlike Texas the national government isn’t investing billions to lower the crime rate there the way they are in Texas.  In other words, Detroit will still be “emerging” in 10 years while south Texas may be booming again.

Regardless, Hebbronville is one little town where real estate is dirt cheap yet people willing to spend 40-50% of their pay to rent.  We bought an enormous and historic home for ourselves there and are looking to buy three more this year to rent.  Crime is low and people are wonderful.  The architecture is also beautiful in this historic town which begs the question why people still retire in Mexico?  You can have all the history, charm, food and culture of old Mexico along with the laws and protection of the USA.

http://www.tomstexascountycourthouses.com/?page_id=3657

I am not trying to sell anything just letting people know where we believe the best deals are today for long term (not fix and flip) real estate investing.

[waltworks]

you could lease a residential property for more than a thirty-year mortgage payment when putting less than 10% down.

Starting out like that costs you a lot of credibility around here, just FYI. That's not the metric most investors would use to analyze a deal.

-W

[ilsy]

As we 1031 exchange out of our Colorado investments (for a number of reasons), we have found south Texas to be the best rental/investment market in the country.  For example, in Jim Hogg county you can still buy a fixer-upper for less than $65,000 and rent it for $700-$800 per month.  Higher property taxes will take some of the benefit these low cap rates provide but it is still the best investment market in the country.

I do better in Midwest, plus my taxes are $500-700/year.

[tralfamadorian]

40-50% of their pay to rent

An economy where people have to pay over one third of their income in rent is a bug, not a feature. High taxes, high insurance and mediocre rent to price in a place with no job growth?

[Car Jack]

Just as a point of info, it looks like property tax there is 1.13%, which isn't high.  Pretty average.

[Rick Imby]

you could lease a residential property for more than a thirty-year mortgage payment when putting less than 10% down.

Starting out like that costs you a lot of credibility around here, just FYI. That's not the metric most investors would use to analyze a deal.

-W

When I started investing in the mid 1980s you could buy rental houses for 10% down.  I only bought a couple back then but both that I bought cash flowed with 10% down.

[SwordGuy]

$65,000 ready-to-rent cost (i.e., purchase and necessary renovations) and $800 per month = 1.23% of investment in gross rent per month.  If it takes another $10,000 to get the property ready, the ratio drops to 1.01%.   $700 per month rent would be a lower %.

In contrast,

Rental #1: $45,000 ready-to-rent cost and $781 per month = 1.74% per month.   After repair value gain $30k.
Rental #2: $50,000 ready-to-rent cost and $870 per month = 1.74% per month.   After repair value gain $30k.
Rental #3: $50,000 ready-to-rent cost and $850 per month = 1.70% per month.   After repair value gain $30k.
Rental #4: ~$70,000 ready-to-rent cost and ~$900 per month = 1.28% per month.   Haven't got the full numbers on this one yet and it's just up for rent.   Had a bad break on this one, HVAC worked fine when it was purchased and died while renovating. :(   Otherwise it would have been 1.41%.   After repair value gain $25k.
Rental #5: Expected $75,000 ready-to-rent cost and $1200 per month, or 1.6% per month.  Expected after repair value gain of $30k.

Not convinced by the numbers you presented that you've found the best possible place to invest for cash-flow investing.

Now, my properties aren't likely to win anything in a property appreciation compared to places like San Francisco, Seattle or the DC metro area.   But they are great cash cows on a monthly basis.

[clarkfan1979]

Just as a point of info, it looks like property tax there is 1.13%, which isn't high.  Pretty average.

I grew up in Lake County, IL in which the property taxes average around 2.5%-3%. One of my old houses that I grew up in sold for 140,000 in 2013 with property taxes at $7850/year. Now that's high. (5.6%).

[tralfamadorian]

5.6%

!! o_O

[Gary123]

you could lease a residential property for more than a thirty-year mortgage payment when putting less than 10% down.

Starting out like that costs you a lot of credibility around here, just FYI. That's not the metric most investors would use to analyze a deal.

-W

Maybe you didn’t read the entire post, I have already made millions in real estate investing, own dozens of properties so not really looking for “credibility” from “most investors.”  The properties I recently purchased in Texas were for cash using a 1031 exchange. I am not sure what you mean by “starting out” since I have also been on this forum for years but don’t post very often.

An interesting amateur mistake is to believe its only about the numbers.  I remember reading a real estate investing book many years ago by a guy in Northern California who claimed cash flow was number one and he showed the return he expected on every investment.  The problem was he bought only older properties (where the numbers are always better) and squandered whatever inherentance he plowed into real estate investing because the properties were near the end of useful life.

John T. Reed has a good website that exposes many of these frauds including the “Rich Dad” charlatan.

As to the comment above that south Texas property taxes are average (Car Jack) at just over 1% shows a certain lack of attention to detail.  Each county has a different property tax rate since they are controlled by the County government.  Jim Hogg County, the one I referred to is collecting around 2.4% annually on the properties I own.

My objective in the post was to see if anyone could poke holes in the idea of investing in South Texas border areas.  Perhaps the “no jobs growth” was the most reasoned argument as to why they might not appreciate in the future much but that isn’t necessarily true.  The amount of money being dumped into border security via new construction and additional federal employees seems to be causing considerable jobs growth.

 

[Gary123]

Twenty years ago the Colorado front range was an excellent place to invest.  Unlike most parts of the east and west coasts along with Chicago and other inland metro areas, you could lease a residential property for more than a thirty-year mortgage payment when putting less than 10% down.

While we made a lot of money investing in Colorado real estate, those days are largely gone.  Rent no longer covers a mortgage on new purchases unless you are willing to put more than 20% down and even then it’s not garaunteed.  In other words, your money sits in the property for years waiting for return maybe in appreciation after you sell (just like California).

As we 1031 exchange out of our Colorado investments (for a number of reasons), we have found south Texas to be the best rental/investment market in the country.  For example, in Jim Hogg county you can still buy a fixer-upper for less than $65,000 and rent it for $700-$800 per month.  Higher property taxes will take some of the benefit these low cap rates provide but it is still the best investment market in the country.

Regardless of how you feel about politics, lower crime along border cities will also make McClellan, Laredo and the larger suburbs of these cities safer whether it’s expanding the wall or just increased law enforcement presence along the border due to federal and state officials increasing spending.  I also love Detroit real estate but unlike Texas the national government isn’t investing billions to lower the crime rate there the way they are in Texas.  In other words, Detroit will still be “emerging” in 10 years while south Texas may be booming again.

Regardless, Hebbronville is one little town where real estate is dirt cheap yet people willing to spend 40-50% of their pay to rent.  We bought an enormous and historic home for ourselves there and are looking to buy three more this year to rent.  Crime is low and people are wonderful.  The architecture is also beautiful in this historic town which begs the question why people still retire in Mexico?  You can have all the history, charm, food and culture of old Mexico along with the laws and protection of the USA.

http://www.tomstexascountycourthouses.com/?page_id=3657

I am not trying to sell anything just letting people know where we believe the best deals are today for long term (not fix and flip) real estate investing.

Have you though about property crowdfunding? You can invest in several projects all at once with small amount of capital and also retire early.

Yes, but I can retire now in any event.  The problem with investing other people’s money is it becomes more like a job.  What I enjoy most about owning rental real estate is my wife and I don’t answer to anyone but ourselves.

In addition, we made good money by putting our investments into places where others were running away from and thought we were crazy.  One example, a relatively new KB Homes development where the builder was being sued by the HOA for shotty work.  We bought four houses at the bottom in that neighborhood and got on the HOA board to help guide the settlement with KB Homes towards professional fixes.  Bought for around $125,000 and they are well over $300,000 in value.

The problem with crowd funding is trying to sell other investors your ideas.  As this blog string may indicate, I am not very good at it and apparently lost “credibility” with most “investors.”   

The notion you can find perfect properties by just searching for the best numbers I think is flawed.  While we certainly buy low, we also need to know the reason why it’s low priced.  The best deals I have ever made were houses that sat on the market for a longtime and nobody would touch.  In one case, it was a “clouded title” because the bank that foreclosed was being forced by the county to consolidate the two lots it is on but they were in separate taxing districts.......so on and so forth.

We bought it cheap and only took maybe six months to get a certain tax district “exclusion” and a boundary line adjustment to consolidate the lots.  That plus a lot of work fixing and repairing means we brought a property we purchased for $122,000 into a $400,000 range of value.

[Gary123]

$65,000 ready-to-rent cost (i.e., purchase and necessary renovations) and $800 per month = 1.23% of investment in gross rent per month.  If it takes another $10,000 to get the property ready, the ratio drops to 1.01%.   $700 per month rent would be a lower %.

In contrast,

Rental #1: $45,000 ready-to-rent cost and $781 per month = 1.74% per month.   After repair value gain $30k.
Rental #2: $50,000 ready-to-rent cost and $870 per month = 1.74% per month.   After repair value gain $30k.
Rental #3: $50,000 ready-to-rent cost and $850 per month = 1.70% per month.   After repair value gain $30k.
Rental #4: ~$70,000 ready-to-rent cost and ~$900 per month = 1.28% per month.   Haven't got the full numbers on this one yet and it's just up for rent.   Had a bad break on this one, HVAC worked fine when it was purchased and died while renovating. :(   Otherwise it would have been 1.41%.   After repair value gain $25k.
Rental #5: Expected $75,000 ready-to-rent cost and $1200 per month, or 1.6% per month.  Expected after repair value gain of $30k.

Not convinced by the numbers you presented that you've found the best possible place to invest for cash-flow investing.

Now, my properties aren't likely to win anything in a property appreciation compared to places like San Francisco, Seattle or the DC metro area.   But they are great cash cows on a monthly basis.

Sword Guy -

What are the ages of these properties?  I can show you greater near-term cash flow in any real estate market on the oldest properties versus the newer ones.  Twenty years ago I bought new homes where the numbers weren’t great.  In the long run, the appreciation was better and I still own properties people want to rent.  Put a 20 year old home against a 70 year-old home and the newer one wins the tenants in most cases.

Just a reminder that “functional obsolescence” has to be considered in your calculations.  When I see investors jumping on an older 3 bedroom with no master bath it surprises me.  Each year less and less families are willing to live in a property without a master bath.  While each market is different to some degree, we have noticed the vacancies in our area (where the market is very tight on rentals) are those with functional obsolescence issues.

A real estate agent told me many years ago he would never invest in the “last rented” properties in any market.  It took me many years to understand exactly what he meant.  Whenever our rental vacancies exceeded 5-10% (only once in past 20 years) the 50’s houses with tiny bedrooms and tiny windows, houses with only one bathroom and other functional obsolescence remained vacant.

[SwordGuy]

You bring up very valid points.

Rental #1 was built in 1964.  It's in excellent shape.   It has 2 main issues that will affect it over time, it's a 3/1 instead of a 3/2 and the washer/dryer is off the carport instead of in the house.   We're planning on upgrading the house with a master bath and a laundry room in a few years.   Other than that it's a very charming, smaller house in excellent condition.

Rental #2 is also a 1964 home.  It had a handyman owner and had lots of features upgraded over the years.  This one has good legs for the future and is in excellent condition.  A 3/2.

Rental #3 is from 1992.   We upgraded it from a 3/2 to a 4/2, added a pantry and spiffed up the laundry room.   It's also got some good legs for the future as well.

Rental #4 is from 1987.   Kitchen has been nicely updated, lots of nice features.   Bathrooms will likely need to be spiffed up in a few years. 

Our town is largely composed of soldiers and working class folks.   The town underwent a huge expansion in the 1960s (thanks, Vietnam War!) and again in the last decade (thanks, Base Closure and Realignment process!)    The well-to-do crowd are either technical contractors working on post, officers or high-level civil service people, doctors, or business people.   

The bulk of the rental market is for soldiers, working class, and the poor.

Unless Uncle Sam decides to grow our community by another 30,000 people in one go, I don't expect stellar property appreciation.

[Gary123]

For clarification, we were looking mostly for tax avoidance anyway so didn’t want to cash flow until after retirement.  As long as you are not looking to off-set another income with loss and can do some work yourself they sound like a good stable of income producing properties.

Speaking of age, we have found houses from the early 50’s to late 60’s generally to be better built than anything after early 70’s.  While I understand this could be region specific especially due to building techniques and materials, beginning in the 70’s there was a lot more use of plastic sewer mains and less lumber in the structure.

Another comment I see regularly here is any property must rent for 1% of total value per month.  I suppose if cash-flow is your only objective sure but that simply isn’t available in most markets where properties are appreciating.

[tralfamadorian]

I'm glad that you decided to come back and continue the conversation @Gary123 . I haven't explored Texas as a potential place to invest in property primarily because the high property taxes and high insurance. Do you find insurance costs to be high in your area?

Right now I'm paying $450-550/yr insurance for properties that rent for $1.8k-2.2k/mo.

[SwordGuy]

Right now I'm paying $450-550/yr insurance for properties that rent for $1.8k-2.2k/mo.

How much are the properties valued for and who is your insurance company?   I would love to cut my insurance costs!

[tralfamadorian]

Right now I'm paying $450-550/yr insurance for properties that rent for $1.8k-2.2k/mo.

How much are the properties valued for and who is your insurance company?   I would love to cut my insurance costs!

Zestimates are giving me $210k-300k. Insurer is State Farm, certainly not known for being the cheapest. There are some bundle discounts in there and I always choose the highest deductible the lender allows. It's the benefit of targeting areas with relatively low risk of hurricanes, tornadoes, wildfires or hail!

[Gary123]

I'm glad that you decided to come back and continue the conversation @Gary123 . I haven't explored Texas as a potential place to invest in property primarily because the high property taxes and high insurance. Do you find insurance costs to be high in your area?

Right now I'm paying $450-550/yr insurance for properties that rent for $1.8k-2.2k/mo.

We had trouble at first getting return calls and quotes for older properties we bought with cash. 

Finally, we found Puig Insurance in Hebbronville, TX.  Cindy, the owner, really knows the business and insures both commercial and residential properties mostly for Farmers but reps other companies as well.  Since we were mostly looking for liability insurance and wanted to keep the replacement low she was willing to work with us.  For example, we pay $69 per month on one very large property.  It needed the windows fixed and electric service drop updated before they could insure it but she was willing to work with us.

According to the only full time real estate agent in that town, one guy from San Antonio is buying any property under $75,000, making some improvements and then renting them out about every 3 months.  Other than Detroit, where I wouldn’t invest, this place is among the cheapest real estate in the country.