1031 Exchange - Austin Condo for Galveston Loft

6 Replies | Austin, Texas

I currently own a condo in Austin with spectacular views in the hills near 360 and 2222.  I am really interested in doing a 1031 Exchange for this property and getting into a historic loft in downtown Galveston near the Strand.  While I am familiar with the Austin condo market, I'm just trying to learn what the market for lofts is like in the historic area of Galveston.  Any thoughts / insights / recommendations would be appreciated. I am leaning towards having the property be a furnished rental (30+ days lease term).  Thanks in advance for the responses.

I was looking for a STR at the coast (Port A or Surfside Beach) a few years back, and wound up pivoting to Lake LBJ after watching the rising sea levels, high cost of flood insurance and maintenance - and the risk that the federal government may stop subsidizing coastal flood insurance. Be sure to look into that for the specific property you're interested in. And if you need any advice on your Austin condo sale, I'm happy to help.

There is definitely a strong rental market down here in Galveston but it will depend on what you are meaning with a 30+ day lease. While the STRs here perform well and there is a good long-term rental market, the mid-term market isn't the best. Most of the people we have coming down for those 30-90 day stints are a few workers on larger projects, traveling nurses, and people who are looking to buy on the island but haven't found a house yet. While they are out there, they aren't the most consistent market. 

Since most downtown buildings do not allow for STRs (per their HOA), you are really only left with long-term rental or the occasional mid-term rental if you are set on having a downtown loft. There are a few buildings that allow them but they are typically ones with very few units in the building or those that are privately owned. I have a building downtown with 6 lofts and currently run 2 of them as STRs. Short of buying the building, it kind of makes you stuck with their rules!

While coastal real estate has its risks, the beach and the various attractions of Galveston are what make it a strong short-term rental market. It is all about what you are wanting and if things here are a good fit. I'd be happy to answer any particular questions you have about the Galveston market though. That way you can see if it is a good fit for what you are looking for.

First, thanks everyone for their replies.  I sort of cut my teeth on coastal vacation rental condos back in the early 2000s by investing in the Florida panhandle beach towns.  Granted you have to have a high tolerance for weather related events and the costs that go along with them, but the ownership experience has been enjoyable and frankly lucrative in terms of both appreciation and rentals.

Now, as it relates to Galveston and motives, i sort of equate the situation to jumping from a fast moving train (Austin) to a slower (albeit still moving) train in Galveston in terms of the markets. I have two properties in Austin, so diversifying now (while the market is white-hot in ATX) seems like a good use of the equity that I've been able to gain through appreciation.

Like everything else, I'm trying to figure out the business plan for how loft properties in Galveston pencil. Mid-term tenants have really been my sweet spot in Austin - with lots of people renting for 3 - 9 months because they are relocating or on a special project. Also common for me have been renters that are remodeling their nice homes nearby. These are great tenants to have. I'm currently limited by HOA to no STR and leases of at least 90 days or more for the property that I'd contemplate selling as part of a 1031.

My other ATX property is downtown and has a 30 day min lease period - which is very workable. So it really comes down to needing to know if there is enough demand for those mid-term tenants (30 days to 9 months) to rent one of these places out consistently. I've enjoyed almost no vacancy during the last 5 years of renting my Austin properties. I can't say I expect the situation to be as robust with Galveston...but that is really where my due diligence is headed. So in a nutshell, I can live without STR ability on a Galveston loft property provided that: (1) 30 day leases are permitted (I always rent my properties out fully furnished - so they are good for the corporate housing by owner type tenants); and (2) there is enough demand to sustain rentals of this nature approximately 9 months out of the year or more. Those are the big open ended questions. In terms of why Galveston - I live in Houston and it would be easier to manage the tenant turnover and upkeep on one my properties than having two that I self manage in Austin. Additionally, my family and I would get to take some advantage of the property when vacant (although hopefully not too often). Additionally, as a government relations professional, it is my belief that there is going to be significant federal infrastructure dollars flowing into the Galveston area in the near future. I get asked about Casino gambling all the time and while I don't see it this legislative session, those discussions will become more rigorous in the coming years.

I think that there is a market for mid-term guests but I specialize in the STRs so that is what I see. I know we get a decent number of "Winter Texans" who come from up north in the off-season to escape the cold. I think you'd just have to find the right avenue to advertise and find other mid-term guests. Perhaps getting on a list with UTMB for their housing programs for their staff that's on rotation or something to that extent. I think you could do it but I just don't know if the profitability works.

The island is constantly evolving and improving. I think there are things down the line that could work that aren't be best at the moment and this could be one of them. If there is a personal use as well, you might be able to find an acceptable level of performance for this scenario. It really just depends on what you are wanting out of the deal!

Laird, I totally agree with you on diversifying your portfolio into other markets and also make it enjoyable for your family to use. We had looked at Galveston about 1.5 years ago but decided against it due to these reasons:

1. lack of quality contractors to support our venture

2. flood insurance and headaches of hurricanes and bookings that may be affected by it

3. beach isn't the best or cleanest compared to other locations

4. insufficient tertiary markets to fill in vacancies (i.e. conventions, communities events, etc) ; Austin has SXSW, ACL, COTA, etc

Some things we liked about Galveston are its pro-tourism market, close to Houston, and rich history. One area we looked at that didn't require flood insurance was around the Woodrow and Ave S. It was a former landing strip for the military and it's raised land above the flood plain. That could cut down long term costs. One other thing was to have a 2nd unit on the lot so that increased revenue can offset the higher maintenance of a beach property. The salt will eat most anything!

I'm a proponent of keeping your income producing assets if it makes sense. If you ever need help in Austin or consulting on that, let me know.  Don't throw away your ATM machines (rental properties), lol!