April 28, 2021

rental comparison

The saying “Everything is bigger in Texas,” while colloquial, applies across the board as we perform a rental comparison in the second-largest state in the U.S. The expansive state is home to a substantial population. It offers a unique mix of urban and suburban living, outdoor recreation, and thriving retail districts—ninety-five of the Fortune 500 companies headquartered in Texas, representing good-paying jobs for millions of people.

Today’s assignment compares three of Texas’s top rental markets head-to-head based on rental rates and returns for rental property investors. We looked at Austin (population of 950,000), Dallas (population of 1,330,000) and Houston (population of 2,310,000).

Methodology for rental comparison and investment returns

The Rentometer report parameters are set to pull average rents over the most recent 12-month period for a 2-bedroom, 11/2 (or more)-bathroom house/duplex in Houston, Austin, and Dallas. We reviewed properties renting at the 25th, average, and 75th percentiles to explore likely cash flow across different rent levels. We gathered additional data from Realtor.com® from tracking price and sales increases in all three cities.

Three key metrics will combine to reveal which market is most attractive for the rental property investor:

  • average purchase price
  • the average rent for a 2-bedroom, 1 1/2-bath house
  • cash flow potential

To estimate cash flow, we looked at the details for an “average” property in the rent report from Rentometer.

  • assessed tax value
  • last purchase price
  • mortgage amount

For loan terms, we assumed a 20% downpayment and an interest rate of 5% on a 20-year loan – similar to terms an investor would get at a local bank.

To estimate operating costs, we used conservative industry standards and then factor in debt service for the loan:

  • 5% vacancy allowance
  • 8% management fee
  • 5% maintenance allowance
  • 10% for insurance
  • 5% to fund capital reserves

With the three key metrics in mind, let’s see which area will generate better returns for the rental property investor – Houston, Austin, or Dallas?

Austin’s Rental Market

Austin is our smallest market and ranks #37 in Realtor.com®’ top housing markets for 2021. Like most places in the U.S., Austin continues to experience a competitive seller’s market. The median home price is $500,000, with a 4.6% increase over the previous year’s prices. Home sales have grown at a rate of 8.4%. As real estate investors know, when retail prices go up for area homes, so do rental prices – this growth data in Austin is encouraging for investors.

What do Austin’s Rentometer reports show?

Austin has 395 2-bedroom, 1 1/2-bath houses currently listed for rent. Rentometer’s QuickView report shows 25th percentile rent at $1,438 per month; average rent is $1,833 and 75th percentile rent is $2,231. Using these numbers, we’ll look at a sample property in each percentile level for rental comparison to determine possible cash flow.

Lower-rent property

Our sample property in the 25th percentile, 5017 Cana Cove, is listed to rent for $1,425, just below the average of $1,438.

The area’s rent trend line shows a steady increase in this area since October of 2018. Compared to other areas, where 2020 rents were volatile, this Austin neighborhood hovered around $1,500-$1,525 for the year to end at $1,525 in April 2021.

Based on tax information from Rentometer, an average property value of $467,300, and estimated operating costs outlined above, the Cana Cove property shows dramatically negative cash flow per month. Unless this investor came in with a large downpayment to secure a minimal mortgage, mortgage payment, and local taxes, put this property severely underwater.

Higher-rent property

Rent at the 75th percentile in Austin averages $2,231 monthly. Our sample property, 901 W. 22nd St., asks $2,200. The rent trend line shows a higher rent average for this neighborhood across all of 2020 and into 2021. The area took a hit in 2018, dropping from $1,600 to $1,200 in April that year. But it clawed its way up to hover in the $1,400s for 2019. Rent continued to increase to $1,700 in April 2020 before dipping back down during the pandemic. Now the average rent in this area sits at $1,625.

Our sample property is asking for $2,200, 26% above the average.

At this rate, the property has a positive cash flow of $835 monthly, making it an attractive property to own based on the mortgage information from Rentometer, tax information from tax-rate.org, plus estimated operating costs. The low mortgage and low taxes help keep this property a cash cow.

So what does a property offered at average rent generate for cash flow?

Average-rent property

Austin’s average rent is $1,833 per month; our sample property at 505 W N Loop Blvd asks $1,800. The area’s rent trend line shows it did not fare as well and the other two areas we’ve analyzed. After a rent spike in July 2019 to $1,668, the average rent has fallen, bottoming out at $1,473 in April 2020. The average rate has now settled at $1,583 for this neighborhood.

The W. N Loop property shows negative cash flow to the tune of -$5142.16 monthly, based on the tax information, the assumed property value from Realtor.com® and estimated operating costs. Unless it was purchased as a package deal or for a lower purchase price, this property does not make sense as an investor purchase. The taxes in this area are high, at $17,000 yearly. This would have to be a creative deal to generate positive cash flow.

In our rental comparison, the only property segment that seems to make sense in Austin is the 75th percentile, thanks to lower mortgage and tax amounts. Whether the general area makes sense for an investor will depend on what they learn through their due diligence, investment goals, and the kind of off-market deal they can find.

What’s happening in Dallas in the same rental rate segments?

Rental rates in Dallas

Dallas ranks higher than Austin on Realtor.com®’s top housing market report for 2021, coming in at #22. Also, in a seller’s market, the median home price is $390,000; sales have increased by 11.3%, and prices grew 4.4% over the past 12 months.

Rentometer reports 142 2-bedroom, 1 1/2-bath houses currently listed for rent in Dallas. The QuickView shows the 25th percentile rent is $1,387, the average rent is $1,835, and at the 75th percentile, rent is $2,283.

Lower-rent property

In the 25th percentile,10356 Oak Branch Lane asks $1,395 in rent, slightly above the area average of $1,387. According to the rent trend line, the area saw rent growth in 2020, from $931 in January up to $981 in October. 2021 has not had the same growth, falling back to the 2018 rate of $878 by April.

Based on tax information from Rentometer, Realtor. com®’s average home value of $390,000 and estimated operating costs, the Oak Branch Lane property, shows a negative cash flow of -$1,357 monthly.

Higher-rent property

The 75th percentile segment in Dallas has an average rent of $2,283 monthly. Our sample property, 6713 Del Norte Lane, rents for $2,200. According to the rent trend line, the area has shown a steady increase in rent since bottoming out at $2000 in April 2019. By January 2020, the average rent had increased to $3000 and still sits there now in April.

The Del Norte Lane property has negative cash flows -$757 monthly. The numbers are based on tax average from tax-rates.org, average home values of $390,000 from Realtor.com®, rents from the Rentometer report, and estimated operating costs.

This rental comparison shows that a high rental rate does not prove the property can earn money monthly. Due diligence on comparative property prices, taxes, and other expenses are crucial when considering a rental purchase.

What does our average rental property in Dallas look like for cash flow?

Average-rent property

The average rent in Dallas is $1,835; our sample property, 8615 Groveland Drive, lists rent at $1,850. The area’s rent trend line shows some ups and downs but stays within a $100 range between $1,100 to $1,200 throughout 2019 and 2020. In January 2021, average rents crashed, declining from $1,167 to $1024. By April 2021, rents recovered to $1,155 for this neighborhood.

The Groveland Drive property shows a slightly negative cash flow of -$38 monthly, based on the tax information, the mortgage listed on the Rentometer report, and estimated operating costs. This is close to positive, and the property needs little or no work in the short term; an investor could cut back the capital reserve amount to create some cash flow.

For the most part, Austin and Dallas show similar patterns for negative cash flow. The stand-out exception is the 75th percentile property in Austin, which showed significant positive cash flow. It seems likely that the best property deals are those that get negotiated off-market and in a lower tax neighborhood.

How does more densely populated Houston compare to Austin and Dallas?

Rental rates in Houston

Houston ranks lower than Austin and Dallas on Realtor.com®’s top housing market report for 2021, coming in at #61. While this city is still in a seller’s market, sales increases have not been as high as those seen in Austin and Dallas. Sales increased by 5.3% over the past 12 months, compared to 11.3% gains in Dallas and 8.4% gains in Austin. At $314,900, the median home price in Houston is lower than in the other two cities. Houston prices have, however, seen an increase of 4.6%, similar to Dallas and Austin.

What do the Rentometer reports reveal about Houston?

For 2-bedroom, 1 1/2-bath houses, Houston has 314 properties currently listed for rent. According to QuickView, the 25th percentile rent is $1,485, the average rent is $1,901, and at the 75th percentile, rent is $2,320.

Lower-rent property

In Houston, 8330 Cassidy Creek is the sample 25th percentile property, now offered at $1,450 per month. This is slightly below the area average of $1,485. According to the rent trend line, the area saw rent grow and decline in 2020, starting at $1,145 in January, it then fell to $1,115 in April, rose to $1,189 in July, and reached $1,205 in October. January 2021 brought another decline to $1,137, but April’s rent is back up to $1,163.

Based on tax and mortgage information from Rentometer and estimated operating costs, the Cassidy Creek property cash flows at $211 monthly. This property demonstrates how a lower mortgage on a property that rents at a reasonable rate can earn investors steady money each month.

Higher-rent property

The 75th percentile segment in Houston has an average rent of $1,901 monthly. Our sample property, 2427 Charleston St., rents for $2,300. According to the rent trend line, area rents jumped by more than 50%, from $1,500 in October 2019 to $2,332 in January 2020. 2020 rents fluctuated, but had increased to $2,880 by January 2021, then fell sharply to $1,765 by April 2021.

The Charleston St. property has a negative cash flow of -$639.38 monthly, based on tax and mortgage information from Rentometer and estimated operating costs.

What does our average rental property in Houston look like for cash flow?

Average-rent property

Houston’s average rent is $1,901; our sample property, 1736 Aden Dr., lists rent at $1,895. The area’s rent trend line hovers between $1,500 and $1,600. Now in April 2021, average rents sit at $1,604 for this neighborhood.

In this rental comparison, the Aden Dr. property shows positive cash flow at $61 monthly, based on the tax information, the mortgage listed on the Rentometer report, and estimated operating costs. Slightly lower mortgage and tax amounts than the other segments offer modest earnings to a property offered at average rent.

Summary

Predictably, the rental comparison shows that the higher your purchase price and taxes, the more you need to charge in rent – or operating and carrying costs can completely eat up your rental earning. Purchase price matters and investors need to find off-market deals to cash flow in a traditional seller’s market. At least right now, buying property at retail prices in Texas does not look like a route to profitable rental property ownership.

In this three-city rental comparison where we explored all rental segments,

Austin comes out on top in the 75th percentile

In contrast, Houston comes out the leader in the 25th percentile and average rental rate properties. Dallas, at least for now, is the least attractive market for real estate investors.

This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology. If you liked this article, subscribe to Rentometer's email newsletter to stay up-to-date on the latest trends in rental housing.