Thinking about investing in Houston real estate?
According to Redfin, Houston home prices have surged over 20% since January 2021. The area is projected to be the second-largest growing metro of this decade in terms of raw population. And to top it off, multiple Fortune 500 companies are moving their headquarters to Houston, bringing thousands of jobs with them.
The city has a bright future, but before snatching up a piece of real estate, it’s important to understand the overall market.
In this guide about how to buy Houston investment property, we’ll look at:
- Important Houston real estate investment market trends for 2022.
- Hot neighborhoods and towns to look for investment opportunities.
- Tips for finding and financing an investment property in Houston.
Let’s jump in.
Why invest in Houston real estate?
According to the U.S. Census Bureau, Houston’s three-country region (Fort Bend, Harris County, and Montgomery) added over a million residents from 2010 to 2020, making up a quarter of Texas’ total population growth during that time.
This growth shows no signs of stopping. Cushman & Wakefield estimate the metro area’s population will grow by over 1.2 million from 2020 to 2029. At this rate, Houston would have the second-highest number of new residents in the nation for the second decade in a row.
New residents will compete for Houston’s real estate — which is already in short supply — pushing up rents and home values.
And people aren’t the only ones moving to Houston. Large companies continue streaming into Houston’s exploding business hub.
Three new Fortune 500 companies — ExxonMobile, Hewlett Packard, and NRG Energy — are all migrating their headquarters to the Houston area. After the dust settles, Houston will house a total of 25 Fortune 500 companies, the third-highest in the nation.
Each company that moves to Houston brings in new residents, creates new jobs, and bolsters the economy.
Speaking of jobs, Houston is home to almost a third of the country’s oil and gas jobs. Studies show that oil prices can affect real estate values, and as the Energy Capital of the World, Houston is especially susceptible.
Before the Russia-Ukraine conflict began, analysts wondered if plunging oil prices might hold back Houston’s real estate growth potential. Since then, oil prices have done a complete 360, jumping 60% this year. These increased oil prices could help lift Houston property values even higher over the short term.
Houston real estate market trends
Houston’s hot 2021 market sizzled straight into 2022.
According to the Houston Association of Realtors (HAR), the median sales price of a single-family home was $310,000 in January, up 17.9% from last year. Total property sales are up 9.3% year over year, but due to the severe housing shortage, active listings are down 14.2%. This shortage has also led to a drop in the average days on market, from 48 to 39 days.
Most of the increased sales volume comes from homes over $500,000. The inventory of low- to mid-range homes is almost completely exhausted, which has helped drive property values up.
Low inventory has also fueled spikes in rental prices. Due to the shortage, many would-be homebuyers are choosing to rent until the market cools off. This added demand pushed up rents by an average of 9.7% compared to last year.
But just how bad is this shortage?
In January 2022, Houston had a 1.4 month supply of housing inventory, down 0.3% from last year. This means that if no new homes were listed for sale, supply would be exhausted in less than 45 days.
This isn’t as extreme as shortages in some other real estate markets in Texas, but it’s trending downward. It’s also far from a balanced market, which would require roughly 6.5 months of inventory. Until a balanced market is achieved, the overpowering demand continues inflating prices.
Despite recent price jumps, the Houston real estate market is still relatively affordable. The city scored a 4 out of 10 on the Kiplinger Affordability Index, which is calculated using the percentage of annual income required to purchase a median-priced home.
For comparison’s sake, Austin is a 9 out of 10, making it one of the least affordable cities to buy property.
Hot neighborhoods for Houston investment properties
Spring is a suburb that lies directly north of Houston.
The town will serve as the new headquarters for both Hewlett Packard and ExxonMobile — the 10th largest company in the nation. ExxonMobile already houses over 10,000 employees in their Spring campus, and the headquarters migration will bring even more.
As these companies move in, money flows into the local economy, employees compete for housing, and real estate investors benefit.
It’s already happening. According to Zumper’s Houston Metro Report, Spring saw the second-largest year-over-year rental increase in the Houston area (11.9%) and the largest month-over-month increase in February (2.5%).
Clear Lake City
Clear Lake City is home to NASA’s Johnson Space Center, the University of Houston Clear Lake campus, and several research institutions.
Students and scientists are constantly moving in and out of the area, which creates continual rental demand. According to Zumper, the median rent for a 2-bedroom apartment currently goes for $1,233, up 11% from last year.
In addition to rising rental prices, the cost-per-square-foot is appreciating at a steady pace, up 23% from 2020 to 2021.
Downtown Houston isn’t your ordinary downtown. It’s not all commercial real estate and exorbitantly expensive condos — at least not yet.
In fact, downtown Houston’s up-and-coming residential market has doubled over the past few years, with new condo developments targeting both high-end and mid-range residents.
Approximately 70% of the residential area is renter-occupied, making it another prime location for rental property.
Greater Third Ward
Greater Third Ward is a historic district located just southeast of downtown, right next to the University of Houston.
The University of Houston is the third-largest university in Texas, and with over 45,000 students, there’s no shortage in rental demand.
There are many new developments in the area driving up prices, which have unfortunately led to gentrification issues. According to Redfin, the median sale price for homes in Greater Third Ward was $389,900 in January 2022, up 18.2% year over year.
How to buy an investment property in Houston, Texas
The process for investing in Houston real estate can be broken into five steps:
1. Choose a type of investment property
There are many strategies for building wealth with real estate, each with unique pros and cons. Before you start property hunting, decide which model is right for you.
Are you looking for a single-family home, or do you want multiple units? Do you have time to work on the property yourself? Or would you prefer a turnkey investment?
With the current shortage of sub-$500,000 houses, now is an envious time to be a landlord. But Houston has lucrative fix and flip opportunities as well. At Longleaf, one of our customers flipped a house in Houston for over $110,000 profit — all within four short months.
2. Plan your financing
Planning is key when it comes to buying investment property in Houston. The best opportunities don’t stay on the market for long, so you need to know how you’ll finance a project before you find it.
You have three main options:
- Conventional loan. Banks and conventional lenders usually offer the lowest rates, but only if you qualify. Many investment properties do not meet bank requirements. And even when they do, it can take months to secure funding.
- Hard money loan. Private lenders offer fast-closing hard money loans specifically for real estate investors. They evaluate loans based on a property’s investment potential, focusing less on your personal financial history.
- Joint venture. Once you have a successful track record, you may be able to finance your project by pooling together funds from multiple investors.
Since hard money loans can finance your project in a matter of days, they are usually the best option for investing in a competitive market.
Whichever method you choose, build your relationships ahead of time. That way, you can pounce on opportunities that arise.
3. Search for properties
Many of the best Houston investment properties never make it to sites like Zillow or Trulia. To find them, you need connections.
Choose the neighborhood you’re most interested in, then connect with wholesalers and agents who specialize in that area. Since they constantly have their ear to the ground, they may be able to help you find off-market opportunities.
When comparing investment options, make sure to consider:
- Vacancy rates
- Job and population growth
- Future development projects
- Housing and rental price trends in the area
- Percentage of renter- vs. owner-occupied homes
Armed with this data, you can calculate the estimated ROI for your project — something a hard money lender will certainly want to see.
4. Secure financing
If you meet bank requirements, don’t mind piles of paperwork, and aren’t in a hurry, a conventional mortgage is the way to go. Underwriting can take 30 to 45 days, so make sure to start the process immediately.
If time is of the essence, a hard money lender can finance your project faster. At Longleaf, rental loans take as little as two weeks, and short-term residential loans (AKA bridge loans) can close in 48 hours.
5. Refinance (if necessary)
Bridge loans allow you to close as fast as possible, but you’ll need to refinance within 6 to 24 months.
You can refinance into a traditional mortgage if you qualify. If not, you can roll your bridge loan into a long-term rental loan. These loans are similar to bank mortgages, but more flexible.
At Longleaf, we can save you fees by bundling your bridge loan together with your refinance.
Need financing for a Houston investment property?
Longleaf Lending is a Texas-based private lender and offers flexible loan programs designed for property investors who need to close as fast as possible. If you have any questions about Houston investment property financing, give us a shout at 979-200-2823 or firstname.lastname@example.org.