Today I’m inspired to talk about generating positive cash flow from rental property investing.
Couple years back a friend of mine bought a property in the Dallas Fort Worth (DFW) area in Texas. This was his first home purchase, and it was a good one. He bought a an older 1,800 square foot 3 bedroom 2 bath house for under $100 a square foot near the downtown area.
Wow I reacted, and I knew that I wanted to look into TX real estate at some point down the road. If you have been following my blog you may know that I like to take my earnings from my various websites and invest them in real estate.
Generating positive cash flow from rental properties is one of my favorite hobbies. I have been investing since the early 2000s. The new Dallas story just gave me yet another reason to get excited about it in a new way.
So I started traveling, researching properties within the DFW area to learn the various communities and study the local real estate market. I started to establish contacts with local real estate agents, attorneys and tax accountants.
Fast forward a couple years, I am now ready to make my first investment property purchase in the Dallas, Texas area.
The real estate industry is a unique one in that it is very much localized. Property and rent values in one area can be drastically different from another one just a mile away.
For example, anyone can purchase a property in Detroit for $5,000, or even less. This is a microcosm of what has happened to the state of Michigan as a whole. A condominium that sold for $140,000 in one of the more affluent areas in the state is today selling for $60,000.
However, drive down to Ann Arbor, Michigan just 20 miles Southwest and property values have held their own. In fact, some areas of A2 have appreciated even through the down market in the last few years.
Ann Arbor is a country of its own, and therefore an economy of its own. It is home to several well know company headquarters such as Borders, Dominos pizza, the Google Adwords program and previously home to Pfizer. It’s a huge talent farm thanks to the University of Michigan, which one can argue single handedly runs the city.
But this post is not about Ann Arbor, so let me share with you what I’ve learned about rental property investment, generally as well as specifically as it pertains to the Dallas, Texas area.
There are several reasons that attracted me to the Dallas area for my next investment property purchase. Of all the reasons, stability and predictability were likely the most influential factors.
Real estate in the Dallas Fort Worth area has neither appreciated, nor depreciated in what seems like the last 19 decades. I’d probably trust the security of my investment more in Dallas real estate than in the hands of the US Government. Just ask Mark Cuban and he will tell you the same.
I don’t speculate on property appreciation, nor do I care about the topic. As someone who practices value investing in real estate, there is no better place for me to protect my investment principal than in the Dallas area I thought.
Another reason is the high migration rate that Texas as a whole is experiencing. There are over 300 bodies moving to the Dallas area alone daily. That trend is about to hit 24 months, or essentially over 200,000 new bodies. No wonder restaurants and businesses have popped up everywhere. Dallas has become a melting pot (at least it is more so obvious today) that it wasn’t on my last visit just less than 5 years ago.
Why are people moving? Well let’s see. Ideal weather, no state income tax, beautiful, convenient and well maintained freeways, great real estate values, stability in home prices, central location or geographic accessibility, overall cost of living is much lower and most importantly jobs and opportunities.
Texas has surpassed the state of New York as the number one state with the most Fortune 500 companies. Not to mention all the start ups in the oil, gas, information technology, wind energy and alternative energy fields. Banks, venture capitalists and private equity firms are moving to Dallas faster than one can say “money”.
Finally, I have friends and distant relatives in the area who can keep an eye out on the property while I am away. No, I don’t want them to manage, that is what property managers are for. I simply want them to visit the place once a year or so to ensure it is still there and that no one has stole it. That’s the Indian in me talking. Peace of mind counts for something too 🙂
With all that said, I said “why not?”
Everything is indeed bigger in Texas. That is not merely a saying. Yes, you don’t pay state income tax and overall cost of living is lower, but property taxes are ridiculously higher.
Because property taxes in Taxes are the size of Mars, I found out that the traditional equation I use to evaluate rental property investments was showing more unfavorable prospects than it usually does. This just means more preliminary work for me vetting properties.
Another thing that is bigger is utility bills. This is ironic. As an oil, gas and energy state, one would think utility rates are lower in TX. It’s quite the opposite however. Texas has some of the highest utility rates in the country, go figure. Gasoline however is cheaper.
Because the utility bills are higher, I also had to adjust the “vacancy reserve” component of my rental property investment equation. Typically I allocate 5% of monthly rent to this bucket, but I am contemplating wiggling it up a bit.
I have been evaluating rental properties in Dallas for just about a week now. I have learned that foreclosures, bank owned properties and short sales can be found in all kinds of markets, good or bad.
There are always people dying, getting divorces, losing jobs and so on no matter what place on earth we are talking about. Because of the strong economy and stable house prices, the selection in Texas may be far and few relative to Michigan, but Texas has its share of great buys as well just like anywhere else.
And because of the scarcity factor, coupled with the fact that people know real estate values hold their own down in Texas, I will have to make a lot more low-ball offers than I usually do when I purchase an investment property. I am not expecting this to be a quickie at all.
I have also realized that I have to settle for a positive cash flow amount much lower than what I am used to thanks to higher property taxes, which is a fixed expense that I have to bear until I remain the owner of the property.
Understanding real estate investing and the local area where you are going to invest goes without saying. You definitely need some sort of property management software to make it easier to stay organized. But what you need in addition to that are good partners to work with.
I am referring to local real estate agents, attorneys, tax accountants and property managers who can help you navigate the terrain. Of all these, I consider the real estate agent to be the most important. A good real estate agent is well connected with the rest of the professionals you will need, so take your time and do your diligence to land the right real estate agent for you.
You will need an agent who understands the rental property game and who is very much comfortable making ridiculous offers that work for YOU and no one else. I like to work with agents who are absolutely shameless and persevering like I am.
There are not many of these, so if and when you find one, wine them, dine them and do all that you can to hang on to them for as long as you plan on investing in rental real estate. I only have a handful of agents in my rolodex who I always return to for business.
I know that Texas stole the show in this post, but that is only because I am considering an investment there. There are other similar areas all over the country, and I am sure there are several in your own backyard.
You don’t have to fly to Dallas if you want to generate positive cash flow investing in rental properties. The underlying discussion points are applicable anywhere. Just make sure the investment works for YOU when analyzing it. My winning rental real estate investment equation may help.
It is not uncommon to make hundreds of offers to land one that works for you and the seller. In fact, because of the local economics I discussed above, I am anticipating making a lot more offers in Texas than I normally do before I get someone to bite on it.
I will come back and update you on my purchase as soon as it happens. Until then, I will continue to learn the market, evaluate rental properties and make offers.
Download this spreadsheet if you are interested in seeing an analysis of some of the properties that I am evaluating. I have included some instructions to walk you through the steps I took to compile this, as well as how you can use it to evaluate and compare rental properties.
So with attractive real estate prices in most parts of the country making it conducive to generating positive cash flow, is rental real estate investing in your to do list? Why or why not?
Outside of investing in the stock market, which comes with relatively higher risks in my opinion, what do you do with your excess cash? Or your earnings from side gigs such as your website or blog?
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