Our Launch Market: McAllen, TX
We are excited to announce the launch of our first property on the Homebase platform in the vibrant city of McAllen, Texas. We evaluated A LOT of different markets before deciding on McAllen, but ultimately came to the decision because we believe it offers a number of exciting opportunities for investors. Let’s dive into what makes McAllen the optimal city for us to launch in. But first, let’s learn more about the McAllen economy and general growth.
McAllen is a fast growing city located in South Texas. The area has a strong and growing economy, supported by a variety of industries that makes the city a desirable place to live.
Healthcare is the biggest sector of the McAllen economy. About 20 percent of McAllen’s workforce is in healthcare. Hospitals and medical centers, including McAllen Medical Center and Edinburg Regional Medical Center, are among the metro’s top employers. The opening of the University of Texas Rio Grande Valley School of Medicine, which welcomed its first class in 2016, points to further sector growth.
Retail is typically big in the larger border communities, and in McAllen, retail employs 14.3 percent of its workers. The metro area serves as the retail trade center of South Texas and northern Mexico. Retail tourism draws customers from as far as Monterrey, Mexico’s third-largest metro area, located 150 miles southwest of McAllen. Mexican shoppers account for an estimated 30 to 40 percent of retail sales.
Outside of job growth, the area also offers a high quality of life, with plenty of amenities and a low cost of living. The cost of living in McAllen, TX is one of the lowest in the country. It is 17% lower than the state average and 23% lower than the national average. When it comes to housing affordability, McAllen, TX reigns king there as well as housing is 41% cheaper than the U.S average. This, combined with the region’s warm climate and close proximity to popular tourist destinations like South Padre Island, makes McAllen a desirable place to live.
A big boon to McAllen’s economy is its close proximity to Mexico and South Padre Island. McAllen is a hot destination for tourists who travel from Mexico, who visit the city to go shopping at its many outlet malls. McAllen is also home to a large group of seasonal residents who, at an average age of 72.3, contrast starkly with the younger inhabitants of the metro and the Rio Grande Valley. These “Winter Texans” come primarily from midwestern U.S. states and Canada to find a more temperate climate and low cost of living. The approximately 106,000 migrants spent $528 million locally in 2017–18.
McAllen has historically weathered out recessions quite well. For example, it withstood the Great Recession far better than most metros. While Texas lost 4.1 percent of its jobs from peak to trough, McAllen employment fell only 1.8 percent from its peak in October 2008 to the trough in March 2009. This bodes well going into the weak economic outlook of 2023. It’s important in times of uncertainty and volatility to invest in markets that have high cap rates that have historically done will in recessions, and McAllen fits that bill.
McAllen future growth looks bright.
- McAllen has greatly improved the quality and availability of education. The merger of the University of Texas — Pan American in Edinburg and the University of Texas at Brownsville created the University of Texas Rio Grande Valley, based in Edinburg and Brownsville, the largest public university by enrollment in the Texas border region.
- The La Plaza Mall, one of the largest retail hubs in the area, opened a 245,000-square-foot expansion in late 2017 that has drawn several high-end retailers.
- A partnership established in 2017 between the city of McAllen and the McAllen Economic Development Corp. seeks to recruit and secure funding for medical research, suggesting the potential for expansion of high-skill, high-wage health services positions in the area.
Overall, McAllen offers a number of benefits for those looking to invest in the area. With its strong economy, low unemployment rate, and affordable cost of living, the region is an attractive option for those looking to buy or invest in real estate.
Let’s go ahead and dive into the real estate data.
Median sales price
- McAllen’s median sales price per home increased by 11.4% between October 2021 and October 2022. The median price is now $255,000 — up from $228,904 a year ago
- Median sales prices in McAllen rose 64% compared to four years ago. The median price in October 2018 was just $155,000.
Median days on market
- Homes in McAllen sold in a median 28 days in October 2022.
- Homes are selling 12% slower than last year when the median days on market was 25 days.
Percentage of homes selling over listing price
- A little more than one fourth of McAllen homes (26.9%) were sold over their original listing price in October 2022.
- The share of homes selling over list price decreased 17% compared to October 2021, when 32.4% of homes sold over their original listing price.
Average price per square foot
- The average sale price per square foot in McAllen is $124, up 2.5% since last year.
- In October 2021, the price per square foot was $122.50.
Historical Home Value Trends
McAllen single family home rentals have steadily appreciated over the past 4 years, with the last two years seeing substantial growth. While McAllen home prices have not appreciated nearly as quickly as other markets, cap rates are much higher indicating much better cash and cash return for investors vs. markets where all value is accrued through home appreciation.
According to the Zillow Home Value Index, home values in McAllen have jumped 18.4% in the last year and 57% since 2017. Values are up from $138,197 in October 2017 to $217,188 now. That means if you’d invested in a $300,000 home in 2017, you’d own a home worth nearly $471,000 today — a significant jump in equity in just five years.
McAllen Rental Market Trends
The hot housing market of 2021 and early 2022 saw its influence seep into the McAllen rental market as well. Median rents have climbed 6% in the last year, clocking in at $1,151 per month as of March 2022. Since October 2017, rents have jumped 23%.
While rental price growth in McAllen hasn’t appreciated as rapidly as other cities across the US, cap rates have stayed high in response.
McAllen Cap Rates
Diving into Mcallen cap rates, you can see that its closely in-line with US national average, and significantly higher than other urban cities. For those unfamiliar, cap rate, or capitalization rate, represents the yield of a property over a one-year time horizon assuming the property is purchased on cash and not on loan. It’s calculated as Net Operating Income / Market Value of the Home. Cities that have had historically high home price appreciation typically have low cap rates vs. markets where the growth is slower. High cap rates are important because it signifies what an investor can expect to generate in cash flow each year from their rental property. You rely less on price speculation of a property, and focus the cash generating portion of the business.
The last few years, this hasn’t mattered because real estate has been on a tear the last 10 years. In this recessionary economy, cash is now king, and people are speculating much less. It’s the primary reason we chose Mcallen. In this case, McAllen real estate is much better positioned, from a valuation perspective, in a recession to withhold its currently value while delivering strong cash flows relative to other markets.
Conclusion
The McAllen real estate market is an excellent investment opportunity for several reasons. First, the area’s strong economy and diverse job market indicate continued growth in the real estate market, providing opportunities for long-term appreciation in property values. Additionally, the McAllen market has high cap rates, which typically means that home valuations are more stable and less susceptible to rapid volatility. This is because home valuation is more closely tied to rental prices vs. future home price growth.
Ultimately as the economy heads into a worsening recessionary environment, it’s important to invest in markets with high cap rates. This typically means that home valuations are less reliant on speculative future price growth, and focus more on stable cash returns for investors. In times like these, cash flow is king, so investing in markets where cash flow is the focus is crucial. The McAllen real estate market perfectly fits that bill, and performed relatively well in the previous 2007 recession. Any unplanned home price appreciation coming out of the recession is the cherry on top.
