Alternative Real Estate Investments

13:38 Jun 2019

Accredited investors have many options for growing and maintaining their investment wealth. Securities are by far the most popular investment instrument for investors. The S&P 500 performance over the last 10 years has been more than 10% per annum. That does not mean that investors did this well or worse, but rather if they followed an index fund matching the S&P that their returns would likely reflect similar results. This is also an indication of the equity markets since 1990.

Comparing Real Estate Investment Trust (REIT) performance during this same 10 years yields have averaged 9.5%. This is slightly less than the REIT investment performance of 11.4% the past 10 years. Examining the correlation of both REIT’s and the equity market indicated a relative consistent return behavior during this period of both investments.

The driving factor of high performance real estate is much different than the equity markets. Real estate investment is directly affected by the economic dynamics of local markets and industries. The location of the land typically drives both the prices and real estate values. For commercial real estate, the land is valued by the highest and best use, while with residential real estate investments it is the comp land values. Other local direct factors that create a favorable investment climate are the population growth trends and the employment rate. The cost of living and local housing prices are an indicator of a workforce growth trend.

Houston, Texas is a very favorable economic environment for real estate investment. Houston is a major city that has experienced record growth, low unemployment and a lower cost of living then the national average. The Houston economy is driven by the oil and gas industry, port of Houston and a world class medical center. The growth in Houston Construction is driven by migration of international and domestic population that past 5 decades. The population has recently grown 17% from 2011-2016., which represents 11 million residents in the greater Houston area.

The Greater Houston Partnership estimates that the total metro Houston population will exceed 7.1 million by the year 2020. The trend is that domestic migration from northern states choose to move to the suburbs and outlying communities such as the Woodlands or Katy, TX areas. While the movement for the international migration in Houston is to settle in the metro areas. The international migration is represented by people from Central Americans, Middle East and Asia regions thereby boosting New Construction in Houston.

Houston has been third in job creation among metro cities in February 2019 by adding 72,600 jobs. The local unemployment rate remains at 3.2 % in a declining trend since first quarter of 2017. The cost of living in Houston, TX remains substantially below the national average. The medium price for a home is $182,500 compared to a national average of $219,700. The consumer cost of health care, grocery’s and utilities is also below national averages.

Residential Real Estate Investments

Residential real estate is an alternative investment to the equity and debt securities markets. Under alternative real estate investments, residential housing consist of 2 primary segments, single family homes and multi-family homes. Multi-family homes have been an established and acceptable investment vehicle for many years. Single family homes have also been a popular investment with small investors for many years. Over the past decades major investment funds have taken single family homes far more serious as a long term play.

Multi-Family Apartments

Multi-family homes have traditionally been a low cost housing alternative for blue color workforce families under real estate investments in houston. These types of apartments are usually multiple stories and identical floor plans. There may be several different floor plans for 1, 2 or 3 bedroom units. Apartments have changed the last several decades as the use and demand has changed.

The apartment industry has become more sophisticated and offers far more options these days. Multi-family properties investments are defined by class, with higher end apartments being class A and lower end apartments being class C.

The Houston Construction housing continues to be a safe harbor and an attractive investment for investors ranging from 4.0% for class A luxury to 8.0% CAP rates for class C properties. The demand for apartments in the metro Houston areas is strong in the senior housing market and with the younger professionals entering the employment market.

Apartments provide multiple conversion opportunities as well. They can be converted into condos for sale or senior communities for sale or rent, Air BNB and short & long term corporate housing.

New Construction Apartments

Apartments born out of New Construction in Houston has been very active since 2010. The financial crisis caused havoc with the new construction both multi-family and single family housing supplies as the financial markets dried up in 2008. During the years afterwards investors flocked toward alternative real estate investment options. This shortage of housing supply caused by the financial markets problems set new multi-family housing soaring in Houston proceeding the 2008 financial crisis.

New apartments of Houston construction continues to be attractive to investors producing solid returns and providing the necessary liquidly for a quick exit plan. The boon left the apartment market exploded from 2012 to 2016 before it hit an overbuilt stage. Hurricane Harvey changed all that by destroying more than 150,000 homes. Vacancies went from this storm went from 86% to 98% over night.

With the anticipated steady flow of migration to Houston, new construction apartments will do more than replacing aging properties. Senior housing and student housing continue to be rapid growth segments of the multi-family market.

Single Family Real Estate Investment

Single family homes under residential real estate investments has been historically attractive to small investors. This is due in part to local investors buying homes in some form of distress. This is when the properties are substantially undervalued by the buying market compared to a repaired or normal market condition. They have purchased these homes with the intent of repairing them and either renting income or flipping the home after repair.

There are a variety of residential property types including distress homes (rehabs), high rise condominiums, townhomes and new construction homes. The single family real estate investment in Houston options serve both institutional and private investor groups.


Rehabs have attracted private and small investors for decades, but around 2012 Wall Street institutional investment groups stood up and took notice to single family rehab asset class. Groups like Blackstone began buying 10,000’s of homes and packaging REIT’s. Single family homes have become an accepted one of the alternative real estate investments.

There are a number of reasons that have kept institutional investment firms from entering this asset class before now. Housing is very sensitive to local economic cycles. The national economy can be expansive cycle while a specific local market can be in a contractive economic cycle. In addition, the investor communities have not found housing portfolios to be attractive residential real estate investment risks to create financial instruments to package multiple homes or deeds.

This has changed with greater diversification of geographic properties and the acceptance of investment fund portfolios. Rehabs will continue to have a place with investors although during expansive economic periods, the supply of rehabs shrink and make the cost of purchasing much more competitive.

High Rise Condominiums

Due to Houston’s international population migration, the high rise of Houston Construction in housing market continues to grow in its metro area. The primary growth of this market segment is located in the Galleria and River Oaks areas of Houston. The close in shopping, dining and cultural arts makes these areas very attractive for second homes of international residents.

High rise housing offers 2 basic opportunities for investors. First the ability to purchase for rental income, secondly the ability to invest in the pre-construction funds to build them. Investors must be willing to commit their capital to the funds for 5 to 10 years and expect pretax annualized returns from 8% to 12% on new construction under residential real estate investments . It is difficult to project the returns on purchasing for rental income. This is very dependent on the amount of current supply of new and existing supply of condos at any given time.


Townhomes are a form of multi-family housing because of the property deeds and common interest like condominiums. Although townhomes are private residences, each house is attached to the home next door through a common fire wall. These types of homes have common community property and maintenance facilities with each of the other property owners.

The supply of townhomes is aging and replacement inventory has waned with high density patio homes in this market segment.

New Construction Homes

There are many different criteria to consider when making new construction real estate investments in houston. Are you purchasing for capital appreciation or dividend income? What is your exit strategy? Do the numbers work? Is the area in the path of growth?

New construction homes routinely cost about 20% more than existing homes. Although homes do not typically depreciate like automobiles, instead they hold their value and increase over time. New ground up home construction set the benchmark for neighborhood home prices and market values.

There are many advantages to purchasing New Construction in Houston. These advantages include the builders warranty, little to no maintenance expense, higher rents and special builder incentives. If your investment strategy is to hold a property for 5 – 10 years, purchasing a new home can be a competitive alternative. Higher rental income and little to no maintenance expense provide a financial justification to closely evaluate this option. New built homes are also easier to sell without refinishing or renovations.

The prices of new homes under Houston Construction come in many types and designs. The home price is a reflection of land, construction cost and soft cost associated with builders fees, marketing cost and general condition construction cost. The new home prices are principally driven by the lot cost and the size of the living square footage.

Alternative real estate investments are here to stay. They offer diversification in your income steam, while preserving and growing capital over the life of the investment.