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Buying your first property is always a big deal. Many people put it at the top of their bucket list, and finally ticking it off is a sign that they’ve really “made it.”
With that said, buying your second property is an even bigger deal. Now you have an opportunity to make a semi-passive income—provided you make the right investment, of course.
Property prices in Texas have gone up exponentially in the past year, which translates to higher rent for tenants. When you own a rental property, the monthly rent from your tenants will go straight into your pocket (or help pay off your mortgage). All you need to do is focus on maintaining the property and let the money roll in.
Here’s everything you need to know about buying rental properties in Texas and making the most out of your investment.
Understand the logistics of buying a rental property
Buying a second property is a big investment, especially when you’re planning on renting it out. Taking on a second mortgage is no walk in the park, and you need to prove to yourself and the bank that you’re well-equipped to make those monthly mortgage payments.
However, before you start thinking about getting a loan, you’ll need to take a few steps to ensure you pick the right property. While this is true regardless of the state you’re in, the rising housing prices in Texas make this process all the more important.
Do market research
Knowing the ins and outs of the area you want to purchase in is essential. Some areas of Texas are experiencing more economic growth than others, so capitalizing on the ups (and downs) of the property market is key to making the right investment.
Below are key factors you should consider:
- Crime rate
- Proximity to schools
- Average rent in the area
- Average property value
Remember, if you wouldn’t want to live in the area yourself, you might have trouble renting a home there, especially to tenants with families.
It’s also a good idea to look at the economic growth in the area. Are property prices going up? Why or why not? Looking at previous spikes and dips in the property value is a solid way to predict how your investment will work out.
Decide on the type of property you want
Single-family residences are a safe choice for a second property. They’re easy to manage and give you the opportunity to learn how to communicate with your tenants without getting overwhelmed.
Either a stand-alone house or a townhouse can be a good choice. An apartment, on the other hand, usually won’t qualify as a single-family home because it won’t have its own street entrance.
There’s nothing wrong with investing in an apartment, but it is important to consider the requirements of each apartment building. If you really wanted to splurge, you could invest in an entire apartment building. However, it’s best to wait until you’ve had experience buying and managing a few single-family residences first.
Perform a property inspection
If you’ve ever lived in a poorly renovated home, then you know just how important conducting a thorough property inspection is.
Regardless of how nice and trusting a realtor may appear, the only person you can really trust to assess the condition of a home is someone with proper qualifications and experience. If you have the requisite expertise, that might be you, but you can also hire someone to help.
What to check for in your inspection
While some imperfections are just unsightly, some can be downright dangerous—and since realtors won’t always tell you all the property’s flaws, it’s your responsibility to check.
Here are some important issues to look out for:
- Signs of infestation (e.g., termites, rodents, or cockroaches)
- Structural deterioration
Bear in mind that some sellers may try to cover up mold or other imperfections with paint or paneling. This is why it’s crucial to check thoroughly and consider hiring a professional to inspect any home you plan to purchase.
Decide how much you’re willing to invest in the home
Renovations in Texas can get expensive. In Dallas, low-range renovations typically cost $80–$100 per square foot. Alterations can burn a serious hole in your wallet if you don’t factor them into your overall budget.
So ask yourself this: just how much are you willing to spend after you purchase a home? Buying a ready-to-rent property is the best way to spend as little as possible on renovations, but this may mean a higher price tag on the property itself, depending on the area.
This brings us back to the last point about home inspections. Just because a house looks ready to rent doesn’t mean it is––so make sure you get it thoroughly inspected before biting the bullet and making the purchase.
Familiarize yourself with Texas tenant laws
Knowing a state’s tenant laws is essential if you’re planning on buying a rental property, especially when it comes to leases, rent prices, repairs, evictions, security deposits, and other important rental factors.
For example, Texas tenant law forbids landlords from restricting a tenant’s right to the following things:
- Smoke detectors
- Security precautions (like deadbolts)
- Legal possession of a firearm
- Access to their home (e.g., locking the tenant out)
Those are all pretty standard rules, but as a landlord, you have a duty to read up on what you can and can’t do while renting a home.
Laws regarding eviction
Evicting a tenant is never an ideal situation, but it’s one you need to prepare for so that you don’t accidentally break any rules or regulations for eviction in Texas.
Notifying a tenant and filing an eviction lawsuit requires patience. If you don’t give enough notice of eviction, you could end up with a nullified eviction attempt or even a lawsuit.
You should also ensure your leases are always up to date and compliant with Texas regulations.
Choose a good location
There are a few things you should bear in mind when buying property in Texas that you may not think of if you don’t already live there or own property in the state.
Don’t buy in a flood zone
It’s easy to think that Texas is basically in the desert and that there’s no need to worry about flooding, but this isn’t exactly the case.
Texas has a hurricane season that brings intense tropical storms and floods. Older or poorly renovated homes are at high risk of being damaged or destroyed by the high volume of water that comes down during these storms.
If you want to be completely safe, you should avoid flood zones, like those in Southwest Texas. Always do your research beforehand to ensure you aren’t buying property in natural or man-made floodplains.
Locate high-rent areas
You may not want to be a tenant in high-rent areas, but you certainly want to be a landlord in one.
Texas is getting exponentially more expensive, which means you can charge higher rent and still receive plenty of tenant applications.
Large cities like Houston, Dallas, and Austin have many high-rent neighborhoods. However, cities like San Marco also have very high rent, so don’t just limit yourself to the three main metropolitan cities.
Buying a property in a high-rent area is an absolute must if you plan on renovating. This is because the rent you get from your tenants is your ticket to ensuring you get every cent back from your investment into the property.
Don’t overlook HOA fees and taxes
Homeowners association (HOA) fees in Texas can reach as high as $600 per month, depending on the area and type of building.
Properties in more expensive areas usually have higher HOA fees, so make sure to factor this into your budget. In Texas, you can find
Prepare for additional costs
Before you commit to investing in a rental property in Texas, take a hard look at all the costs involved and the hoops you’ll need to jump through to make sure that you’re really ready to put down an offer on a property.
Cleaning and repairs
As a landlord, you’re responsible for most repairs that your rental property will need. In addition to being a big responsibility, this can get pretty expensive. Will you be able to cover those extra costs without your investment returns suffering?
Missing out on a month’s rent
Whether the home goes a month or two without tenants or you find yourself with tenants who are refusing to pay, you should be financially prepared to miss out on a month’s rent. With rising rent prices and a recession on the way, you may find tenants suddenly unable to pay.
If you’re going to be completely reliant on a tenant’s rent to pay your mortgage bills, then you may not be ready for this type of investment.
Interest on a mortgage
If you’re planning to take out a home loan to buy your rental property, then prepare for the interest that’ll come with the loan. Your interest rate will depend on various factors, including your credit score.
In Texas, mortgage lenders often require a credit score of at least 620 for conventional mortgages. (FHA loans have lower requirements, but you can’t use FHA loans to buy rental or investment properties.)
If your credit score is just at or below the 620 threshold, then you may want to focus on building better credit before you invest in a rental property in Texas. This way, you’ll have an easier time getting a mortgage, and you’ll be able to get lower interest rates, save money throughout the life of your loan, and make the most out of your investment.
The bottom line
With property and rent prices quickly rising in Texas, it’s an exciting time to invest in a rental property. However, it’s important to take your time to do your research first to ensure that you’re making the right purchase and that you have enough financial stability.
Renting is a great way to generate a mostly passive income, so do your research, make an offer, and enjoy the process of becoming a Texan landlord!
These were framed as high fees in the draft, which is odd because the article is talking about how these are some of the lowest HOA fees in the country.