All Forum Posts by: Lee Hampton

While there's merit in focusing on equity and long-term gains from A/B-class property investments, it's important to recognize this as just one of many successful approaches. Economic conditions, community developments, and market demands constantly reshape the landscape. For example, A-class areas might become oversaturated with rentals or experience events that reclassify them as B or even C-class, while areas previously considered as C can rise to B or A status through new investments and revitalizations.

Thus, the choice between prioritizing equity or cash flow isn't always clear-cut.

For novice investors, I typically recommend starting with A/B areas due to their relative stability and lower risk, which makes them safer but often with less upside potential. More seasoned investors, who have a better grasp of external factors and market dynamics, find C areas more appealing due to their higher potential for cash flow and equity returns, albeit at a higher risk that requires greater expertise and understanding. Case in point: I moved to Houston in the '90s, and at that time, Houston Heights was clearly a C area; today, it is considered A+.

It’s really about developing a strategy that works for the individual and is adaptable. This adaptability allows for both significant cash flow and equity growth. It also aligns with a comprehensive understanding of how real estate evolves.

Houston's short-term rental (STR) market has been unregulated up until now, but that's set to change by the end of 2024. After prolonged discussions, recent high-profile incidents at STR properties have finally sparked some action. While there's been intense debate about banning STR's, the strong property rights laws in Texas make such a ban a non-starter. Despite this, substantial changes are imminent and will start rolling out this year.

The initial change will be the mandatory registration of all short-term rentals, accompanied by a registration fee. The City of Houston (COH) is enamored with Arlington's regulatory STR model. Arlington is the only Texas city that has successfully withstood legal challenges to its strict STR regulations.

Here is what to anticipate before 2024 ends.

• -- $500 / unit fee registration fee.
• -- Requirement to register all STR units. COH has telegraphed this move for months.
• -- If you're the lessee (and not the deed holder / owner): COH will require written consent by the owner to the use of their property as a STR and to accept liability for taxes if the STR operator does not adequately remit Hotel Occupancy Taxes (HOT) as per local regulations. laws—a responsibility most owners will be reluctant to accept.
• -- Expect a grace period of two months once the new regulations are enacted into law.

Arlington managed to defend its STR regulations in court by carefully gathering concrete data and framing its regulations around public safety concerns. Similarly, Houston has published statistics to highlight concerns with STRs: the city counts 10,545 short-term rentals and has logged 7,789 non-emergency 311 calls along with 61,167 emergency 911 calls within 300 feet of these properties from June 2023 to June 2024. Although this data does not demonstrate causation, it indicates that Houston is amassing data to bolster its upcoming regulations and ensure they withstand legal challenges, mirroring the successful strategy employed by Arlington.

As Houston steps into new STR regulations, now is the perfect time for STR operators to craft a proactive strategy, ensuring readiness and resilience in this evolving market.

Lee Hampton, Builder | Developer | STR Operator | Former P&Z Commissioner

@Ryan Anders

Galveston is generally more welcoming to short-term rentals (STRs) due to its status as a tourist destination. While a few homeowners associations in Galveston prohibit STRs, they are largely permissible. Ironically, in line with your interest in Galveston, I am about halfway through constructing a beach home there (Beachside Village), which I plan to use as an STR / vacation rental.

Short-term rentals (STRs) can be lucrative, though there are headwinds ahead in Houston. The current city administration has telegraphed plans to introduce regulations this year. The initial phase will involve a registration requirement and an as-yet-undetermined annual permit fee per unit. The second phase will introduce modest restrictions, with continued data analysis to inform further regulatory measures. The era of unrestricted, unregistered STR operations in Houston is coming to an end. Based on my observations, there appears to be sufficient support among council members to implement registration and some restrictions. It looks like they are taking cues from recent regulations implemented in Arlington, TX.

That being said, the success of short-term rentals (STRs) boils down to fundamental factors such as location, pricing, and execution. I manage both long-term rentals (LTRs) and STRs, currently operating seven STRs, all of which are profitable. My approach is somewhat unique since I'm a builder; I build my units from the ground up and then decide whether to use them for LTRs, STRs, or sell them outright. Managing STRs involves more effort due to high turnover. I've shifted my focus from weekend stays to targeting guests who need accommodations for 30+ days. However, I still occasionally offer shorter stays.

An alternative viewpoint on this discussion about the future of vacation rental investments, Here are six key points to consider:

1. 1. Market Dynamics: The current oversupply of (STRs) in some markets is better understood as a market correction rather than a sign of impending collapse. Real estate markets are inherently cyclical, undergoing periods of adjustment that typically lead to stabilization and subsequent growth. This adjustment phase is likely to result in a more balanced supply-demand scenario.
2. 2. Tourism's Resilience: The tourism sector has historically bounced back from economic downturns. With travel habits evolving post-pandemic, I anticipate a robust recovery in vacation rental demand, benefiting investors who stay the course.
3. 3. Interest Rates: The challenge posed by rising interest rates also serves as a deterrent against speculative purchasing, promising a more stable investment landscape. The Federal Reserve has telegraphed a decrease in rates this year, which historically bodes well for real estate investments.
4. 4. The Long-Game: Real estate should be viewed as a long-term investment. Market downturns present opportunities for entry at lower price points. The notion that the market might not recover until 2027-28 is speculative; real estate investing requires patience, with well-located, well-managed properties appreciating over time.
5. 5. Real Estate is Local: Real estate markets are local, and conditions vary significantly from one location to another—what applies in Gatlinburg may not in Galveston, and Miami's market dynamics can differ vastly from Maui's. It is crucial to thoroughly understand the specific market in which you are investing. Land is finite, making it a valuable long-term asset.
6. 6. Strategic Holding vs. Selling: For those not facing immediate financial pressure, holding onto properties should prove more advantageous in the long term. Rushed sales often result in losses and regrets.

History and market dynamics suggest a pathway to recovery and growth for well-informed and strategic investors. Instead of Getting Out NOW,  Play Chess not Checkers.

@Amna Khan

You seem to have a good handle on the situation. I can't disagree with anything you have articulated, you are on the right track and going in the right direction. My perspective: I am a builder/developer. I recently built and sold two homes 1 block north of the property that you are considering purchasing, Idylwild St. They are the only two new houses on that street and back up directly to your town-home community. The area is rapidly changing for the better, I started buying there in 2019. Bottom line, the area has positive momentum, so the downside is low and there is upside to your purchase. However, there are properties in the area with much higher upside. The single-story older homes just off airline are a great buy. They have huge upside because land values will continue to trend higher in the area. You also don't have to deal with escalating HOA/Maintenance fees. And you obtain something that is becoming increasingly rare, land inside the 610 loop. They have now branded the area as Greater Heights, a major hint as to the direction of the area. Good Luck!

If you are a novice investor in a normal (not California) market, I would advise against buying a duplex with no or negative cash flow. You are banking on appreciation which will eventually happen but what if it occurs after a period of depreciation. There is no such thing as an "appreciating market", there are just markets, period.  These markets go thru phases of appreciation, stagnation and depreciation.  Can you withstand a price drop and rental stagnation for 3 years. Pure appreciation plays are riskier. I’m not opposed to pure appreciation plays as I am a participant, but I have a cash flowing portfolio to mitigate the risk of my appreciation plays. As a new investor, it is important to get the first one right. Patience young grasshopper.  

@Nkechi Jarvis

My next availability is Feb 21 or 22 between 10am and 3pm.  I have a triplex i recently completed and a fourplex in the frame stage, both new construction, on the same block near I-610 in Houston.  Remind me a few days in advance. 

@Nkechi Jarvis

Practically speaking, you don’t have enough width for a detached duplex. Also, you may not have needed to replat. Duplexes fall under single family code, so you can build up to two units on a single tract unless prohibited by deed. Your question can only be answered by running the numbers. There is insufficient information for anyone to answer your question. But you have the right idea in relation to midterm rentals near the center of Houston, but only if the number work and only if you are in the right pocket of that area. That area still has a mix of great and mediocre lots. I would suggest a 2b/2B on each side. One bedroom down in each unit. I would have 1 car garage on each unit with an additional uncovered parking space. I have one I’m building that will be completed framing in ~3 weeks if you are interested in getting a feel for what might work. But it will all come down to the numbers. Numbers don’t lie, everyone else is suspect.

@ash

From your introduction, you appear to have a good sense of direction, you have done the requisite homework and you have the dollars. Given this, what is the specific reason you want a mentor? Laying this out will be helpful to you and a prospective mentor. I would not recommend paying a mentor for an all-inclusive arrangement. It should be customized based on what you decide is needed. Also, mentors are typically not great at finding properties for other people, that task might best be handled by a “good” realtor. Lastly, in the current market (Houston), deals are NOT plentiful. Good value can still be found but this environment calls for an extra dose of patience and discipline. Best of Luck!