Which numbers should you run before buying a rental in Dallas-Fort Worth?
Run seven: realistic rent, vacancy, property taxes, insurance, repairs and capital reserves, financing cost, and your exit value. Put each into a simple monthly and yearly worksheet and test it with a more cautious assumption than the seller's. If the deal only works under the best case, it does not work.
We have no stake in selling you a particular property in this post. The goal is to give you a way to check anyone's pitch, including ours.
1. What rent can you realistically expect?
Use rents that tenants are paying now for similar homes nearby, not asking rents on a listing site that may sit unrented. Ask a local property manager for recent leases. Use a number you could defend if a lender asked.
2. How much vacancy should you plan for?
A rental is not rented 12 months of the year. Between tenants there is time to repair, list, and screen. Choose a vacancy assumption and test a higher one.
3. What are the property taxes?
Texas has no state income tax, and property taxes are a major cost. They vary with the address and can change after a purchase when the appraisal district reassesses. Do not assume the seller's current bill continues. Ask your agent to estimate the bill at your purchase price.
4. What will insurance cost?
Get quotes before you offer. Roof age, claims history, and location affect premiums, and hail and wind coverage can be a significant factor in North Texas. Ask about deductibles, too.
5. What should you reserve for repairs and capital items?
Set aside a monthly amount for ordinary repairs, and a separate reserve for big items such as roof, HVAC, and foundation. Ask for the age and condition of each major system and use a licensed inspector. A low price on a home that needs a roof may not be low.
6. What does financing cost?
Investment loans often carry different rates and down payment requirements than loans on a primary home. Get a written quote from a lender. Then check the cash flow at your actual rate and at a slightly higher one.
7. What is your exit?
Write down how you would sell, or how long you would hold, and what the property might be worth. A rental you cannot sell at a reasonable price is a trap. Look at how long similar homes took to sell recently.
A simple worksheet
Line | Monthly | Yearly |
|---|---|---|
Rent collected (after vacancy) | ||
Property taxes | ||
Insurance | ||
Property management | ||
Repairs and reserves | ||
Loan payment | ||
Cash flow |
Fill it in three ways: your expected case, a cautious case, and a bad-year case. If the cautious case is still acceptable, you have a margin of safety.
What should an advisor show you?
A good investment advisor shows their work. Ask to see the rent and expense assumptions, the sources, and at least one example of a deal they recommended against. If an advisor cannot name one, ask why.
How can we help?
We can build this worksheet with you for a specific property and share the data behind each line. Reach out to The Agency Dallas through txrootsglobalre.com and we will start with your goals and your budget.
Frequently asked questions
What is a cap rate and should I use it?
A cap rate is net operating income divided by price. It is a quick way to compare properties, but it ignores financing, so look at cash flow too.
Is Dallas-Fort Worth a good place to buy rentals?
It can be, depending on the property, price, and rent. The market has large variations from one neighborhood to another, so run the numbers for the specific address.
Do I need a property manager?
Not required, but many owners hire one. Compare the fee to your time and to the cost of mistakes with tenants and repairs.
Damon Williamson, Broker/Owner, The Agency Dallas. Licensed Real Estate Broker, State of Texas. Equal Housing Opportunity. Texas Real Estate Commission Information About Brokerage Services and Consumer Protection Notice are available at trec.texas.gov. This is not intended as a solicitation of property currently listed for sale.
