Why should we invest in Houston? In this episode, Marco Santarelli interviews Brian, an experienced investor, about investing in Houston and all the reasons why we should put our money in this city. Covering one of the greatest markets in the entire country, they unpack some investment opportunities in real estate and give the reasons why property management companies are necessary for investment growth. Sit back as Marco and Brian tackle the property mix in Houston, the price range of new construction, and so much more.
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Market Spotlight: Houston, Texas
Houston, with its fascinating history, is considered to be one of the most desirable locations to invest in real estate, not only in the US but in the entire world. Houston’s housing market has been booming for many years and become one of the favorite destinations for those looking to invest. Every once in a while, we’d like to do these market spotlights. We come back to our team and boots on the ground to learn what is going on, why should we be looking at the market and why should we be investing there. With me is Brian. He’s one of our trusted local property partners out there. Welcome to the show, Brian.
Thanks, Marco. It is a pleasure to be here.
It’s great to have you back on. We’re going to cover one of the greatest markets in the entire country. Let’s talk about Houston. The thing with Houston with me is it’s a very large market. I don’t remember exactly how large it is geographically, but I know from a population perspective, it’s got something around seven million people and growing. Is that true?
Yes, it was in 2018 that we went over the seven million mark. It is big and that’s one of the things when people come out and visit us, they’re struck by the sheer size and the amount of time that it takes to visit and drive to different places. If you take Harris County, which is what Houston sits in and it’s seven counties that touch it, you’re looking at a landmass about half the size of the state of New Jersey. It is really big. The Greater Houston Area, which is that seven million people number, is a huge land area. From my office now where I’m sitting down to NASA, which is in Houston, it’s an hour and fifteen-minute drive to get there.
Every market has a story or at least what I like to call a story. Why do you like Houston? What’s the big deal?
I’ve been lucky to be here for many years. I got here in the mid-’90s. The economy went through a pretty dramatic change away from oil and gas. Back then, the economy was about 75% to 80% oil and gas. Now, that’s a much different number. That number is between 33% to 40% oil and gas. At the time, they did it with tax breaks and tax abatement to other industries to entice them to come here. It worked extremely well. There are a lot of other businesses here. We now have the Texas Medical Center down on the south side of downtown. It’s the largest medical center in the world with seven different teaching hospitals down there. We’ve had a tremendous increase in transportation and manufacturing jobs that came here. We’re now a much more diversified economy. We’re a much more diversified population. That seven million number continues to grow. We’ve been adding a population about the size of San Mateo, California for the many years.
Houston is a very resilient city. Every time you have a weather disruption or a hurricane come by, regardless of what happens, you get back on your feet so quickly. It’s an amazing city. How large is the metro area? Do you have a rough idea of its size? I know from The Woodlands all the way down is a massive area.
Houston sits in what’s called Harris County. Harris County is about 1,800 square miles. When you take the Greater Houston Area and you take the other counties that are all around the Harris County area, you’re looking at a geography that’s about half the size of the state of New Jersey. One of the things that tend to strike people that have never been here and come for a visit is how big it is. To give you an example, from our office on the north side of Houston down to NASA, which is on the south side of Houston is at least an hour and fifteen-minute drive. It’s about 55 miles from here, but it’s all considered the Greater Houston Area.
If someone came up to you and said, “Brian, why should I invest in Houston?” If you gave them a 20,000-foot level answer, what would you say to them?
I get asked that a lot, Marco. What I tell them is that it’s hard to find a market that’s more resilient than this. It is more economically and physically resilient. It’s tremendously diverse here. Our economy’s diverse. Our population is the most diverse in the country. In 2016, the census revealed that we had become more diverse than New York City. There are a lot of different jobs that are being created here that draw people from all over the country and all over the world. There’s a lot of strength to that to be the fourth-largest metro and have that critical mass. Another thing is the low cost of entry. We’re 23% to 26% below the median home prices in the rest of the country. The cost of entry and getting started here is very small. In the last few years, we’ve seen appreciation range from 4% to 6% in the homes that we’re managing, that price point. It’s extremely resilient. I tell people it’s not impossible to make a mistake, but it’s pretty hard to make a mistake investing here in Houston.
It’s a strong market. When I look at the rent growth there, this is a question I want to ask you, but I track 405 markets and I know that Houston is in the top 25% of rent growth relative to all the other markets. You’re in that upper quartile. The cashflow potential in the Houston market is also in that top 25% of the upper quartile. From those two perspectives, we are very bullish and happy with Houston. I also look at what markets are doing from a momentum perspective. Our property values or prices are appreciating or depreciating year over year. What’s that trend? I have noticed that momentum has weakened. You still have growth. There’s still positive net appreciation even when you adjust for inflation, but I see it is cooling off a little bit and maybe this is a temporary thing. Do you have any comment or perspective on why that might be happening? It’s not a concern of mine; it’s just what it is.
I saw some data and I haven’t seen numbers for August yet, but the numbers that came in for July for new home sales and new home starts broke every record the city has ever had. I don’t see it cooling off. There’s too much growth in job here and people moving here. We’re still under inventory. The latest number that I saw was four months’ worth of inventory on the MLS, in which a balanced market is six to six and a half months. We haven’t come close to that yet. I don’t think we’re cooling off quite yet, but again, I haven’t seen August numbers yet. They should be coming out very soon.
That doesn’t faze you. You’re still very bullish on the market.
Absolutely. For us, it seems to have as much to do with business news. I continue to see companies moving here because of the cost of doing business. The cost of real estate is less. We have a lot of corporate accounts moving here from other parts of the country. They know that we have a growing workforce and we also have a low cost to do business here. It is a very business-friendly state and Houston’s the fourth largest city.
Let’s transition briefly to the economy. Houston is certainly in the top five largest US metropolitan economies and that’s because not only you have a big market, but you have a wide range of industries within that market. It’s not oil and gas anymore or heavily driven because of that industry. That would have a major impact on you anyway because oil prices are still very low. They were probably in the $50 range, which is a far cry from where it used to be $90 to $100. What does the economy like? What’s going on? What’s the drive in the economy? What would you say?
That’s a great question. Mentioning and talking about the oil and gas industry, that’s an industry that is probably changing faster than almost any other industry and almost at any time in its history. One of the things that have changed that industry is we are now energy independent. The shale plays and fracking created a lot of jobs. Some of those jobs went away, but that part of the industry is not going away. Everybody knows that. We grew very rapidly. That was one of the things that helped us after 2008. Having that contrarian part of the economy, the oil and gas part helped tremendously to keep Houston going strong and getting stronger coming out of it.
One of the things that surprises a lot of people is when I tell him we’ve got the world’s largest medical center here. They don’t promote it. We’re not known for it that well, but it creates a tremendous amount of jobs. It’s a great boon for the rental market all on the south side of town. There’s a lot of growth there because we have everything from nurses to residents who are moving in. They’ll stay a short period of time or a couple of years then they move on. It’s a great rental market that it helps to create. We’ve also had a lot of manufacturing. We’ve got one of the world’s largest HVAC air conditioning called Daikin. It is a Japanese company that came in and purchased Goodman Manufacturing. They built a $400 million facility north of Houston here. It’s the second-largest manufacturing facility in the country.
When you look at the US as a country, we’ve been transitioning to a service-based economy because we have much less manufacturing going on. A lot of it has been shipped overseas, but when you look at Houston, it had over 6,400 manufacturers in that metropolitan area which has a massive amount of manufacturers. From a skills base, that represents over 240,000 skilled workers. That’s huge. As long as manufacturing stays there, you’re going to have a lot of vibrant economies and a lot of jobs. People need places to live, so you have to provide them good and affordable housing.
It’s been very fortunate to have that kind of growth. There have been some serendipitous things as well. For instance, in the Port of Houston, only going back as far as fifteen was maybe ranked number nine. They widened the Panama Canal in 2016. We’re now ranked fourth and growing because all those ships that used to have to go all the way around could cut through the canal. The Port of Houston becomes one of the biggest growing ports in the country. It’s very easy to ship here and then transport things to the central part of the country. That created a lot of jobs.
The port expansions had been great for Houston and Jacksonville, Florida. That’s very positive. You’ve got a lot of medical healthcare and research education there. You’ve got tons of manufacturing and biotech companies. You’ve got a very diverse economy. That’s a very positive thing and a lot in the education space as well. I don’t know too much about the whole education space, but you’ve got a lot of colleges and universities there and hundreds of thousands of students. I’m sure that is a significant part of the economy as well.
We’ve got some well-known schools; Rice University is an excellent school here. The University of Houston is very big and then the University of Texas. The University of Texas Medical Branch and Baylor University are one of the great teaching hospitals down here. They’re all represented right here in the Greater Houston Area.
Who are the major employers there?
It’s gotten very diverse. You’ve got oil and gas companies like Exxon, Chevron and BP. They are all very well represented here. You’ve also got other companies that have moved in, for instance, United Airlines has got a lot of people. Southwest Airlines has a lot of people. One of the things that are growing very rapidly here are the airports due to our location and how centrally located we are. Southwest has brought a lot of transportation jobs here because they’re now flying internationally. That only started a few years ago. They keep going to further and further destinations away from here. There are so many different industries that have come in here. HP is a major employer here, Hewlett Packard. Amazon is growing in leaps and bounds here. We’re a very modern economy that’s growing very rapidly in a lot of different areas.
You’ve got a large population and a diverse economy. You’ve got lots of different sections within the industries that are there and growth. You’ve got a lot of good things going on. Let’s look at what you’re providing in terms of properties and opportunities. Let’s start with the types of neighborhoods that you’re focused on right now. That has changed over the years. There’s a tight inventory and less inventory of distress product type to turn into turnkey rental. I noticed a lot of the providers that we work with around the country are slowly making this shift towards build-to-rent as opposed to a lot of turnkey rentals. Let’s talk about the neighborhoods that you’ve moved towards and the typical properties that we’re putting out in these types of neighborhoods.
It is a great topic because it’s very salient. I had a conversation with an investor who said he had about $300,000 that he wanted to deploy. He was very interested and started naming off a couple of very nice affluent neighborhoods like The Woodlands and Cinco Ranch. These are master plan communities where I could go in and get a $300,000 home that’s right next to a golf course, in great schools and everything. I’m going to be limited in the amount of rent that I can get for that $300,000 home. I would consider that in A neighborhood. We talk in terms of A, B and C neighborhoods. The C neighborhoods are the bad areas there. They are the barrio and the ghetto where you can buy properties very cheaply, but they are property management headaches almost from the very get-go.
Where we operate is almost always in the B areas. In talking to this investor, he said that he wants to get his $300,000 to deploy. We can buy one house in The Woodlands and I’ll get $2,400 to $2,600 a month in rent or we can go outside of The Woodlands. We can go to a place like Spring, Cypress or Crosby. There are a lot of different areas that are outside of the master plan communities. Instead of buying one $300,000 home, I could buy two $150,000 homes. They’re in B class neighborhoods that are going to rent for between $1,400 and $1,450 a month. It gives the investor a much better return on that same amount of capital.
Are these three-bedroom, single-family detached homes? Can you describe the property mix?
That’s pretty common. We get three-bedrooms, a couple of baths and a two-car garage. On average, it might be 1,500 square feet. They’re in very solid neighborhoods with low crime rates. They’re easier for us as property management company to work with and find tenants. The other thing that is very intuitive, but a lot of people haven’t thought through. There are many more people here in the Greater Houston Area that can afford $1,400 or $1,500 a month in rent than there are people running around with $2,400 to $2,600. It’s a pyramid. On those expensive homes with high rents, you’re at the very top of the pyramid. Whereas the B class properties that people can buy for $150,000, there are many more people that can afford that. We’ve worked on our new construction. We’ve added a second single-family floor plan. That’s designed to hit a price point of about $150,000 to $155,000. It rents for between $1,200 and $1,300. That’s a brand new construction. It was hard. A lot of people said, “You can’t build new construction for under $200,000.” We found a way to do it. It’s working great and they’re renting crazy.
What’s the price per square foot on those? Just ballpark. You can estimate it.
They sell for $155,000 and there are about 1,200 square feet. You’re looking at $129 per foot.
People have to understand that new construction is always going to be more “expensive” on a price per square foot basis compared to off the shelf rentals that you pull off the MLS or even a newly renovated turnkey property, which will probably come in around $100 a square foot. It may be a little less but look at the pros and cons or the give and take. You’ve got new construction and everything’s brand new. There’s no deferred maintenance. There are no capital expenditures coming around the corner. Most of the time, they’re in areas that are experiencing growth or high growth. They tend to appreciate faster and better in the short term compared to a turnkey rental or a plain vanilla rental that’s in a stable and mature area.
I don’t know if that’s what’s going on there, but I know that’s what we’ve seen in years past up in Spring, Texas and in The Woodlands. We’ve seen people experience above average rates of appreciation. No one wants to be a gambler or a speculator. We don’t want to sell property based on what it could do in terms of appreciation. We can present the facts and say, “Here’s the trend. Here’s the momentum. Here’s what’s likely to happen, but there’s no guarantee.” You have to have a rate of return and cashflow on the front end. If you’re in a good area, you’re going to experience the appreciation that you expect real estate to deliver. I love new construction. I’ve always had a bias for it. If I can get a good deal on a new construction home, I’m going to take a serious look at it. What’s the price range of the new construction product, the low and high? How does that compare to the rent of those same products, low and high, just to get some perspective here?
You brought up that phrase build-to-rent. We did renovations going back to when the business started. They’ve been in business for several years now. We got many people asking us if we would consider building new construction. It was getting harder and harder to find homes to renovate. In late 2016, the owners hired a builder and we started developing some floor plans. We’ve been building and renting single-family new construction since about the middle of 2017. It’s been great. Our price points, we started off at about $160,000, now we’re up to about $185,000 on the initial floor plan that we had. That was a three-bedroom, two-bath, two-car garage with about 1,640 square feet.
We added to that another floor plan that’s 1,200 square feet, three bedrooms, two baths, no garage. We were a little concerned. We didn’t know if not having a garage was going to be an impact or make it more difficult to rent. We’ve been incredibly pleasantly surprised that it didn’t have any issues. One of the things we found going back to 2017, a lot of our construction finished up late in the year. It finished up during the holidays, which anybody knows is a traditionally very difficult and challenging time to do rental properties. There’s not a lot of people that are out looking for rental properties at that time of the year. We were amazed because as soon as we could finish these new construction properties, people were still willing and wanted to move in. It’s pretty intuitive.
Everybody wants to live in a brand new house, whether it be your house or a rental property. That was a very pleasant surprise that we got. In 2018, we started building multi-family duplexes. We’ve had great success with those. I don’t have any inventory right now on those, but we’re working on building that up as well because it’s been a challenge. There are only certain parts and areas where you can build duplexes. One of the things that we have in this area is we don’t have any zoning in Texas. We don’t have any zoning here in Houston. A lot of areas have HOAs that take the place through deed restrictions and do the same thing so you don’t end up having a neighbor with farm animals or painting their houses, crazy colors and things like that. The bigger problem though in the HOAs is they won’t allow any multi-family housing. We have to look for good areas. We’re only dealing with class B neighborhoods that we can build these duplexes. That’s been the biggest challenge is keeping an inventory on those because as soon as we find them and start to build them, they’re sold. It’s a good problem to have.
It’s a great problem. It’s exciting to hear that. What’s the rental market like? Do you still see a lot of rental demand, quick turnovers or has that been shifting?
We have seen a very strong year. We weren’t sure at the beginning of the year how that was going to play out, but we got a very hot summer and we saw the rental market come roaring back. We were traditionally slow during the holiday season and then it came roaring back to where our vacancy rate is next to nothing. We’re below 3%. That’s a solid sign that the rental market is still very strong here.
Anything below 3% is a virtual zero because that 3% is people transitioning from one place to another because of a job or they’re moving up or down. You’ve got a tight market. Tell us a little bit about the management side of the business. What can investors expect and anything else you want to add?
The management is probably the most important part. Long after the thrill and the fun of looking for a new investment property is over, the hard work of managing that rental property and making it a good investment lies with the property management company. It’s the same ownership here. It’s the same group of people. One of the things that’s very cool is the owners of our company are the largest portfolio of properties that we manage. Anybody that’s considering buying a property and having us manage it for them, the same people, processes and procedures that are going to manage their property are managing the 50 rental properties that the owners of our company have as well. They very much have skin in the game. In 2019, they developed a slogan that says, “We’ve got your back.” If you’ve had a rental property, you know how important that the property management company understands and does have your back. It’s by far the more challenging piece of the business here to run on a daily basis. It’s also one that we enjoy and have a lot of fun doing.
That’s nice, Brian. Is there anything else you want to add?
It’s a lot of fun working with you, Marco and your people at Norada. They’ve sent us some great people. We enjoy working with them. I encourage people to come out. There’s a lot of people that haven’t visited Houston. If they can come out and spend half a day with me, I can show them a lot of the market. It generally changes their perspective. We don’t see too many cowboys and steers and things like that, but it’s a very modern city with a modern economy. The rental market here is as strong as it’s ever been.
Houston has been a great market for a long time. It’s still a great market. It’s a perennial market. It is very resilient. You and your team have been fantastic to work with. We’ve been working with you for years and it’s very rare for us to get a concern or a complaint. Those are my favorite kinds of relationships. I want to thank you and your team. We’re going to continue to work together as long as Houston makes sense, we’re going to stay there. When Houston doesn’t make sense, we’re going to move on. That’s the way it works. That’s part of being market agnostic. Brian, I want to thank you for coming on. For our readers, don’t forget to download our free report, The Ultimate Guide to Passive Real Estate Investing. Go to any of our websites and click the button. If you’re interested in the Houston market and you want to learn more about what’s available, what’s going on, talk to one of our investment counselors. If you don’t have an investment counselor, fill out the form on our website and we’ll set you up with a free strategy session and get you going. Brian, thanks for coming on once again.
Thanks, Marco.
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Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Identify great tenants using SmartMove. Visit www.TenantScreening.com and Save 25% using podcast code NORADA25.
Try LandGlide FREE for a week by visiting www.LandGlide.com/PassiveInvesting
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Please give us a RATING & REVIEW (Thank you!)