The Houston luxury housing market offers investors a unique investment niche opportunity unlike most real estate investment ventures. They provide investors the ability of maintaining a secured collateralized position while realizing returns superior to traditionally unsecured alternatives. These investments also offer investors the unprecedented ability to take debt, equity positions or a combination in the capital structure stack.
Houston Economic Market
Houston Texas is an second tier international city with 3rd tier cost of living, which continues to attract mid size and corporate blue chip companies. Businesses are attracted to the State of Texas for the non state tax incentives and for its pro business growth initiatives. Houston remains popular with businesses for a number of favorable growth factors.
Houston is one of the most affordable cities in the US. for companies employees. Marked with good school systems, affordable housing and a low cost of living, Houston’s positive attributes assist growing businesses with controlling pressures on other rising cost. Although the Houston economy has historically pivoted around the energy industry, the economy has proven extraordinarily resilient even during low oil prices due in large part to the growing industry diversification of the Houston local economy. This economic diversification includes growth in high-technology industries, medical research, health care, international trade and professional services.
Houston is the home to more than a dozen corporate Fortune 500 companies. The unemployment rate steadily remains lower than the national rate, while job growth is projected to be nearly 38% over the next ten years.
Defining Luxury Homes
Luxury home properties that reflect a distinctive lifestyle will produce a premium value in the Houston housing market. The affluent buyers require locations that allow for immediate access to finer dining and ease of shopping. The home architecture needs to be classically unique but not too trendy. The properties require a heighten curb appeal and an increasing demand for above average personal security.
The product size and price points for luxury homes is a product of the land price, square footage of the structure and the surrounding competitive alternatives for the immediate market demographics. A well designed floor plan with the appropriate architectural appointments will produce buyers if properly priced with its competing comparables.
Premium priced homes are in great demand if the buyer can perceive the value. This subjective value are nurtured by a well developed marketing offer that promotes a good location, the quality of the finished product design and its appointments of products used. Understanding this mixture is the secret sauce in any successfully offered luxury home product.
Building Lot Location
Like any real estate venture, the location dictates the ultimate appeal and the baseline of a property’s perceived value. This begins with the fact that land is an appreciating asset raises in value principally due to the simply reality that there is a limited supply. The rate of the lands appreciation depends on its location. There are typically several high price apex points in the city of Houston where the value radiates from these cores and leads property values.
In Houston there are price leading neighborhood areas that also initiate home price increases. The Memorial Villages, West University, Tanglewood and River Oaks are examples of the apexes that lead land prices and consequentially home values. These high demand areas establish the pricing benchmark for the pinnacle for luxury homes.
Luxury Home Market
The luxury home market is cyclically and sensitive to regional economic factors. That is to say that the luxury home market can be very strong in one national major city, while weak in another. As previously mentioned there are various levels of the luxury home market. The high end market is generally considered two primary segments. The premium home pricing segment is defined by home prices of $600,000 – $1,000,000, while the luxury home market pricing above $1,000,000. The medium sales price of a luxury single family homes in Houston is $1,385,000.
The luxury home market does not always follow the general housing market buying trends. The luxury home market segment demand tends to follow the commodity and stock market indexes. These buyers are usually sophisticated home buyers that convince themselves that the local and national economy will be growing for a period of time in the foreseeable future. Although if they are thinking about buying a new home and they can see the value in the home, they will not hesitate to submit an offer.
The rising number of Houston high net worth individuals and their growing disposable income is increasing the demand for premium and luxury homes with added fuel from historically low interest remain. The number of affluent foreign buyers continues to increase as well in Houston metro areas. The Houston economy continues to be attractive to Asian and Middle East investors as their numbers have doubled over the past 20 years.
Variety of Home Construction Opportunities
There are a variety of different investment opportunities with an array of risk factors to consider from when evaluating a luxury home offering. The following are the most common investment options to consider as housing ventures;
- Spec Single Family New Home Construction – Single family spec custom homes are an attractive investment for investors that understand the needs and desires of affluent buyers. The use of leveraging investment capital equity also remains an attractive element for investors. Deals can be structured as funds that would allow an investor to make interest income for interim financing as well as participating in a equity position of the distribution of profits.Financing such projects has become much different since the 2009 national financing crisis. There are many more non traditional lenders that entered the interim construction financing market in the past 7 years in addition to the banks. This is also due to the prevailing low interest rates. Depending on the strength of the borrowers current rates are 1% – 2% more than mortgage rates, with terms typically of up to 12 months.
- Planned Single Family Patio Home Development – Planned single family patio home developments have been very popular in the Houston metro areas for medium size land purchases that allow for subdividing the property. If the property deed restrictions do not disallow subdividing the existing lot, the developer can prepare a higher unit density preliminary land plan and submit to the City of Houston for approval for utilities and right away access.This higher density home and lot approach is also an effective strategy for reducing the high cost of the land associated with metro Houston land prices. By increasing the number of housing units and living square footage you effectively reduce the overall sales price of the new homes.For luxury or premium home projects, it is essential for small planned developments to provide a higher environment of security for the future residents and available parking for their family and guest. Other community amenities that are in high demand are common gathering areas, green garden spaces and the privacy that goes with single family ownership.
- High End Attached Townhome Development – These types of housing projects are very similar in conceptual use and function to patio home developments. The obvious difference being that the townhome housing units are attached to at least one common wall. Townhomes also present some architectural challenges different from patio homes. The first is because of the common attached wall the living area receives far less natural light. This can make the living areas dark and unattractive without the proper lighting. The second challenge is designing the highly desired personal privacy.
- High End Existing Single Family Renovation – An less common home investment project is acquiring an older home in some form of distress or neglect. A good example of these types of homes are when the property is being sold for lot value. During your inspection of the home you discover that through some redesigning and updating the subject property could be sold for a attractive return.
These types of properties require a careful inspection for concealments and a good imagination of what the home could be. They also demand a vigilant feasibility analysis of the comparable neighborhood home sales. The offering sales price of the renovated home should be in the price sweet spot. The sweet spot is defined by the price range between new home offering prices and the prices of comparable properties that have not been completely renovated. The larger the spread the sweeter the spot potential.
These types of investment opportunities present a number of attractive benefits to investors above the other mentioned alternatives. The first would be that typically home renovations can be completed in a shorter amount of time. This usually means less interest expense and a faster return to the market then new construction homes. Secondly, provided that you have done a good job redeveloping the home, the price point should be appeal to a larger buyer audience then comparable properties.
All these types of investments will typically require an equity position of a minimum of 20% capital and earn returns on that same capital of 10% – 15%, depending on the deal waterfall. The determining factors as to what housing investment strategy to employ is a result of a thorough due diligence and local feasibility study.
Optional Exit Plans
Since in most cases luxury home building investments are short term periods of 12 – 36 months, the exit plan for the fund becomes an important consideration in the evaluation process. Other than holding the venture to it sells, there are additional exit strategies that can be employed as supplemental offerings.
- Market Lot During Home Design – For land that is purchased for the purpose of making future improvements, the venture fund can employ a short term strategy of offering the land for sale while home plan designs are being prepared.
- Sell During Construction – It is not uncommon for a home under construction to be marketed and sold before completion. To successfully use this strategy you will be required to enter into a marketing plan that provides a compelling story for the product and a clear detailed image of what the home will look like when its complete.
- Initiate Permanent Financing – When arranging the interim construction financing it is a good idea to arrange the permanent financing for the property when complete. This will allow for a lesser interest carry during the home marketing period after it has been completed.
- Lease and Hold – nother advantage of having a mortgage arranged for the completion of the construction improvements is that you can lease the home. If there has been an unanticipated negitive impact on the local economy or the home is not selling at an acceptable market price, you can select to hold the property as a income producing asset.
