Good time to invest in Houston?

Question

I am an investor based in California.

After Hurricane Harvey, I figured that investing in Houston apartments that weathered the storm with no water damage would provide value. Particularly as the housing stock had supposedly come down quite a bit, and with rebuilding needed, there was going to be a strong demand to take up any vacancy in any of the existing apartments.

With this thought, I put a bid to purchase a larger apartment complex in Houston. To no great surprise, there were others thinking the same way and the property had over 8 bids. The seller went through 2 rounds, and my bid was chosen to get to the 2nd round. In the interim, I contacted some local realtors to get the lay of the land and one of them gave me a lot of information that questioned my thesis to invest in Houston. He said that only a small fraction of apartments were damaged and these were far below the total number of vacant units.

So the question to the community would be whether my going in premise was flawed or is the realtor feedback flawed? I did decide not to increase my offer in the 2nd round and just found out that the seller had decided to go with someone else. Did I miss out on an opportunity?

Lynn Dee Murrow · Answer

The realtor is correct that only a small fraction of the total units in Houston were affected by the storm. Houston is the 4th largest city in the US. 14,852 units in Houston were sustained storm damage, representing 210 properties, out of a total inventory of 638,603 which is 2.3% of the market. Effective average rent has increased by $16/unit, now at $1,000/unit (remember, averages are meaningless - submarkets determine actual rents) and the effective average rate is now $1.13/sq ft.

That information can help you determine where your offer fits in.

The real opportunity lies with the flooded properties without insurance that may need to be sold in order to be recovered. You will need a good local team to lead you through that process if you choose to buy a flood damaged property and the risk is certainly not for the faint of heart.

The other unknown in the Houston market is the future cost of mandatory flood insurance. The maps were due for an update next month, but my understanding is this has been delayed for as much as 2 years as they redraw flood zones. Obviously, when these new zones come out it will affect NOI and thus values.

Hope this helps! Have you considered markets like Phoenix? Its an easy hop from San Jose.

Brian Foster · Answer

@Arun Iyengar The flood has made the Houston market much more interesting and challenging for some. I was taught many, many years ago "you make money when you buy real estate, not when you sell it". That has always been a great rule of thumb. The better the buy, the more and better options you have with any property.

There are many out of area investors that have come into Houston. They are well funded in some cases. It will be interesting to see how this plays out.

Arun Iyengar · Answer

Thanks @Brian Foster. Excellent resources, appreciate the links. I agree with your analysis. However I decided to back out of the deal since the seller's expectations were higher than I was comfortable on average unit price. I will continue to invest locally while keeping watch on good cash generating and growing properties out of California.

Arun Iyengar · Answer

Thanks  @Lynn Dee Murrow. I ended up passing on the deal exactly for the reasons you mentioned. I am looking close to San Jose as well, thought Houston could have potential. Live and learn!

Brian Foster · Answer

https://money.usnews.com/investing/news/articles/2...

Excellent article on the situation here in Houston. Consistent with my personal observations from  living/investing here since 1990.

http://www.houston.org/pdf/research/quickview/Econ...

Excellent summary of the results of Harvey.

"many of the data points that have been presented as fact are misleading or just plain wrong"

"Harvey will have no lasting impact on long-term population or economic growth. As noted earlier, the engines of Houston’s economy—energy, chemicals, trade, corporate operations—emerged from Harvey intact. Economic growth drives employment growth and employment growth drives population. If Houston’ longterm growth slows, it won’t be due to any impact associated with Hurricane Harvey"

http://www.harriscountyfemt.org/

Harris County Flood mapping tool, updated already. Flooding not new to Houston so unlikely to have any dramatic impact on cost of flood insurance (Federally subsidized).

Buying flood damaged property is far less about risk and far more about an informed decision IMHO. This is not a new phenomenon in Houston. We will have floods again. If you buy your property for the right price and are adequately insured, even the most risk adverse should sleep soundly.

@Arun Iyengar what you are seeing is how competitive this market has become as investors come to the market to capitalize on the opportunities that Harvey has created.

Good time to invest in Houston?

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