COVID-19 has completely changed the way we do business. In commercial real estate, it has reshaped offices and led many to question the use of office space. It has also led to the explosive growth of grocery delivery services and shifted primary buying power further away from brick-and-mortar establishments to online merchants. It is even redesigning our school systems. This flood of change has not spared passive real estate investing in the residential sector, either.
Investors are reconsidering and redefining the value of markets that were once investing's golden children. Great examples of this are residential rental markets like California, Orlando, Portland, Seattle, New York, and Washington DC that have turned sour due to the economic impact of COVID-19 or the punishing hand of new rental restrictions that define what investors can and can't do with the properties they own.
This has driven investor demand towards markets where they can buy low in an economy where they know they'll be able to find renters who can meet the expectations of a lease. There are several key traits that make an ideal investment, and many of these have to do with the environment that surrounds the rental property itself:
- Location (including the neighborhood)
- ROI potential (what are your expenses like?)
- The condition and value of the property (is it safe?)
With these details in mind, we're going to dive into where passive real estate investors in Texas should be looking at purchasing their next rental property moving forward.
Unlike other regions in Texas that suffered as a result of declining oil prices during COVID-19, Dallas' diverse economic structure was a benefit to investors who chose to diversify their portfolio here. Let's see how Dallas stacks up according to the investment factors above.
Great cities to invest in surrounding Dallas proper include Richardson, McKinney, Plano, and Allen. These cities offer investors the potential to tap into affordable properties in a buyer's market with great turnaround value. These properties also tend to be bread-and-butter homes designed to appeal to and target the surrounding workforce. Dallas is primarily a city composed of renters, and the population is growing all the time. This makes it a great pick for investors as renters move where the jobs are!
It's also worth evaluating if the COVID-19 trend to buck major metros in favor of single-family homes in the suburbs is a lasting change among renters or just a knee-jerk reaction to viral spread. With many millennials moving into family-rearing years, we see a desire for single-family rental living as a long-term demand moving forward. This makes modest, affordable single-family homes and even duplexes a desirable property pickup for investors.
Texas has some of the highest property taxes in the nation but still ranks lower than the real estate nightmare that is California, New York, and Washington DC. This is partly because the state levies no income tax, but it can dip into your return potential if you're not expecting it.
If total housing costs are your concern, pick properties in Garland, Richardson, Carrollton, and Dallas proper. However, higher costs don't mean higher vacancy rates: The Dallas area has one of the lowest vacancy rates in the state. Less vacancy and lower turnover will contribute to your overall returns.
The Value of Property
While property values aren't the lowest in the nation, they aren't nearly as high as other regions where vacancy rates are low. This means there's plenty of room for appreciation while still making investing manageable. As far as security goes, Allen and Frisco both ranked in the top ten safest cities, according to the Houston Chronicle, with Plano a runner up in 11th place and McKinney in 12th.
A tour of the DFW rental market potential wouldn't be complete without the "FW!" Like its sister city in the Metroplex, Fort Worth boasts plenty of affordable opportunities for passive real estate investing when you forge the right connections. Along with surrounding cities Arlington and North Richland Hills, it also boasts lower property expenses on average than the cities we listed near Dallas.
While both markets complement each other and add to your portfolio, investing in each individually is not the answer you need if you want to maximize your profit potential in Texas. The answer is to invest in the market with a DFW UPREIT!
As a "traditional investor," you may be wondering what the benefits of an UPREIT are for your portfolio if you're used to investing using property management. While we could touch on a few, such as tax deferral, easier estate planning, greater portfolio diversity, or ease of entry, that's too much to cover in a single article! However, you can learn more using our guide Let Freedom Ring! or by reaching out to us here at The Peak Group.
Posted by The Peak Group on August 20, 2020