Ready to put your money to work for you in the Houston real estate market? Rental property investments could be the key to your success. Houston is home to 2.3 million people — and a surging job market means more and more people are moving to the metro every day. We’ve got great news for rental property investors — every one of those people needs a place to live. So, if you have thought about buying investment properties in Houston, now is a great time to do so.
What is an investment property?
Forget “Flip This House” and similar TV shows on which construction-savvy couples turn trash into treasure while blowing through their construction and remodeling budgets. Investment properties are homes that you plan to buy and rent to generate income.
Are investment properties right for me?
The value of investment homes is never guaranteed. Still, over the last decade, middle-tier home values in the Houston market have risen from $122,000 to a whopping $196,902. Zillow predicts they’ll increase another 6.4% in 2021, pushing values into the $200s.
That’s good news — couple rising values with the rental income you could receive, and there’s money to be made in property investments. Let’s take a look:
- Let’s say you purchase an investment property and have a $940 monthly mortgage payment.
- In September 2020, the average rent for single-family homes in Houston was $1,940 — an increase of 5.5% over the previous month.
- So, if you charge $1,940/mo. for your rental property investment, you will have a gross profit of $12,000 a year before taxes, maintenance, renovation costs, fees, and other homeowner-related expenses. Not bad!
One last thing. Being an investor might sound amazing, but remember — in this case, investor equals landlord. Once you rent out a property, you’ll have maintenance and repair issues to deal with. If you’re handy, you could take care of problems that arise on your own, but many investors tend to hire property managers to deal with the day-to-day issues. So, that’s another cost to factor in.
How do I find an investment property?
To maximize your investment, you’ll want to make sure any rental home you buy is in the right location — one in which people want to live, work, and play. Good schools, parks, and plenty of good restaurants are high on the list of renters and homeowners alike.
According to Norada, one of the nation’s largest turnkey real estate providers, there are many great neighborhoods to choose from when it comes to buying investment properties in the Houston metro area:
- Greater Heights
- River Oaks
- Eastern Downtown
- Museum District
- West University Place
- Rice Military
- Humble, Texas
- Webster, Texas
Another way to locate investment property is to use this Real Estate Heatmap to find hot neighborhoods for rental. You just need to sign up for a free, 7-day trial. While you’re on Mashvisor, you can even search for rental investment properties for sale in Houston as well as details usually not covered on ordinary home selling sites.
How do I pay for an investment property?
Well, the first thing you’ll need is money (or a plan to borrow it.) That starts with building a budget. A budget is a simple tool that shows you how you plan to use your money. Simply adding in all of your income and expenses will give you a good idea of where your money is going, as well as how much you have to put toward a rental investment property — as long as you keep following your budget.
Start Saving: If you don’t have the cash to invest, you can always look for a business partner to purchase the property with you. If you go this route, we recommend working closely with someone you trust, as well as real estate experts and attorneys, to draw up the necessary legal documents to establish a stable co-investor relationship.
Start Small and Simple: If you’re looking for your first investment property in Houston — or anywhere else for that matter — don’t dive in head-first and try to turn a multi-unit apartment building into your first venture.
Instead, look for properties that need modest repairs priced at below-market rates, says U.S. News & World Report contributor David Schepp. Until you’ve got a solid feel for managing rental property investments and tenants, a fixer-upper could drain your bank account quicker than you’d anticipate that it would.
That’s because, no matter what type of rental investment property you buy, you’re going to have additional expenses, including landlord insurance, HOA fees, recurring monthly expenses, and an emergency fund that’s separate from your personal one.
OBTAIN A MORTGAGE
If you don’t have cash or a co-investor with a hefty wallet, you can apply for a mortgage. However, unlike traditional home mortgages (those for people who plan to make a home their primary residence), you can’t get mortgage insurance on a rental investment property. So, you’re going to have to put a lot of money down to get approved for a home loan — usually 20%. (That’s $20,000 on a $100,000 loan.)
Also, as an investor, you’re not privy to the same low interest rates that ordinary homebuyers receive. So, your rate will likely be higher. However, you could receive a lower rate by putting more money down upfront.
Other than that, some of the basic rules for mortgages and personal financing also apply when you’re looking at investment properties:
- Know How Much You Can Afford: That budget we mentioned earlier is a great start, but here’s where you can use an investment loan calculator to estimate your monthly payment. This will help you determine what you need to charge for rent (and help ensure that your rental price is feasible for the home and neighborhood you’ve invested in.)
- Check Your Credit: Your credit score can make or break a lender’s decision to offer you a mortgage on a rental investment property. Beforehand, pay off as much personal debt as you can — and be sure to make your payments on time.
GET THE WORD OUT
If you’ve successfully closed on your rental investment property loan, your first payment’s due date is right around the corner. So, you’ll want to find a paying tenant as soon as possible. That way, you’re not covering the mortgage without any income coming in. Here are a few other tips from the experts at RentPrep.com:
- Ask for Personal References and Previous Rental History: This will allow you to learn more about each applicant, see if they paid their rent on time, and learn if they adhered to any rules or guidelines that were in place.
- Run Background Checks, Credit Checks — and Verify Employment and Income: A general rule is that your tenant should make at least three times their monthly rent payment.
- Follow the Rules: As a landlord, you are allowed to screen potential tenants, but no matter what, you cannot discriminate against them. The Fair Housing Act of 1968, which protects people from discrimination when they are renting or buying a home, states that you may not ask questions or make decisions based on race, color, religion, sex, disability, familial status or national origin.
Central Bank is Houston’s longest-serving independent bank, with experienced mortgage lenders who know the ins and outs of investment property loans as well as Houston’s local housing market. Want to learn more? Contact us, visit us online or give us a call at 832.485.2316 today.