Does Dallas/Ft Worth have the best ROI in the country?
ByWow – so after my Seattle-property search-fest this weekend (in which I only found 2 short-sale properties using my free ziprealty.com search tools… and one of those just by accident…) I decided to console myself with a little loopnet.com searching. Nothing like seeing those 12-cap mobile home parks to make an investor feel better!
I was doing a pretty broad multi-state search for property in the 300-750K range and came across a gentleman named Tom Wilson who was advertising packages of 5 or so homes in the Dallas/Ft. Worth area.
According him, these properties (valued at approximately $120K for a 3-bedroom, 2-bath home) will rent out at a 1% rental rate… meaning the monthly rent is 1% of the price of the home – an old landlord’s trick for figuring out what will cash-flow.
So a $120,000 home might rent for $1200/month, and even after paying 8% property management fees, including a 5% vacancy rate and a few hundred dollars a year for repairs (low in my book) the property will cash flow about $200/month on a 7% interest-only loan with 20% down.
Now, normally, I don’t like interest-only loans that much, and I’ve never gotten one on a house, but his arguement makes sense (and I’ve heard it before…) the money you save on a higher monthly payment, will get a better rate of return being invested elsewhere than it will on paying down the mortgage.
He owns 240 units in the Dallas area and lives in California. He has a crew of agents, repairmen, and property managers that find, rehab, rent and sell these homes. We can buy them directly from him (FSBO) at their comparable market price (full price) and still expect them to cash flow.
Obviously, with 200+ homes owned in the area, Tom really likes Dallas. He says he regularly keeps track of the housing market and trends there (since he CAN invest anywhere in the country, not just his own back yard) and he gets market reports from a variety of other cities (Seattle included!) and Dallas/Ft. Worth seems to consistently be at the top, with good trends in job growth, unemployment rates, and appreciation. National pundits (whom he cites on his site) say that Dallas/Ft. Worth is highly undervalued (18%) and project about a 6% appreciation rate there over the next year or so. That’s nothing flashy after some of the high-flying markets we’ve seen in the last few years, but compared to the rest of the country right now, it’s very good. In fact, 6% is about the historical national average housing price growth… slow and steady…something about a tortoise winning the race.
Anyway, in addition to investing there himself, Tom specializes in selling these homes to his fellow Californians as investment packages and his numbers do look good. (Note of caution: Some of my friends have had bad luck buying packages of homes from out-of-state investors when their price is based on cap rate. Make sure if you buy a HOUSE that you’re buying based on COMPS not on the income approach or cap rate.)
His numbers look good (and I assume he is honest and bases his pro formas on his own real data, but YOU should NEVER ASSUME. 
) and he projects a 10% cash-on-cash return your first year (goes up after that) given 20% down and 1% in closing costs. You might have to pay 1% in points to the mortgage broker, but in my experience closing costs have run higher than that (appraisals, prepaid tax and insurance, inspections, etc. so be careful there, too).
Your projected rate of return can go up even higher if you factor in tax savings, appreciation and rental increases. You’d normally also factor in loan-paydown, but there is none in his scenario…
So, I haven’t bought anything in Texas yet, and don’t have any relatives there whom I could visit and write off the trip for, but I may just decide to put this little metro-plex on my radar the next time I have $25,000 burning a hole in my pocket and ready to get invested.
Do you like Dallas/Ft. Worth? Any other cities I should be checking out? Let me know in the comments!
Emily
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April 2nd, 2008 at 5:42 pm
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