San Antonio, TX - SFH vs townhouse...who's your tenants?

Question

Hi y'all. I'm a recent Navy Veteran living in California w/my home just recently listed. I'm looking to walkaway with about $250K in capital to purchase my 1st rental investment property. I've done all my DD and have chosen San Antonio...preferably Live Oak, because it's access to the I35 corridor, proximity to San Antonio and Austin and it's recent growth with that Ikea shopping center, etc.

My question is; why would tenants choose to rent out a unit in one of those 4-unit townhomes for $1,250/mth when they can rent out a SFH for similar $rent? Granted many of these 4-unit townhomes are brand new and approximately 1,250' sq ft, but some of the SFH's are almost the same $rent and 2,000' sq ft. I'm curious who would be my tenants...my plan is to purchase (2) 4-units giving me 8 doors right off the bat. Good idea? Any insight, experience or knowledgeable help will be very appreciative!! Thanks.

Jaime Sepulveda · Answer

Frank, I think you have a valid question of "why". In my opinion, it comes down to 3 reasons. The first is yard maintenance,  especially in San Antonio where you at minimum need to edge, mow and blow twice a month 10 -11 months out of the year. This can easily run an additional $75-$150 a month for equipment, fuel/electricity and time. Second, newer MF is attracting younger generations who have spearheaded the new "shared industry" (ride share, office share, house hack). They love to interact in their spaces. The third one would be that most new MF builds are now being built with luxury finish outs because they have identified the trend that renters are now renting by choice, not because they can't afford to purchase a home. As @Sterling Williams mentioned, it would be greatly beneficial to take the time to visit and tour the multifamily scene before acquiring.

Happy investing, and thank you for your service.

Sterling Williams · Answer

Frank,

Welcome! Most of the tenant base in that location stem from Randolph AFB and employers in the periphery. Medium income around $45k-50k and mostly blue collar. You'll get many tenants who are families just moving into San Antonio due to PCSing or a job transfer and looking for an affordable option while they get rooted. Many tenants are drawn to small MF due to the affordability, employer proximity and lack of high-density as you will see with larger apartment complexes.

The answer to your question is yes, once the market is completely rented out and stabilized, those units will rent @ $1,250 per month during the spring and summer months, however, you'll likely see a dip in the fall and winter months if you're having to fill a vacancy. The issue with new development MF communities is that the first couple of MF properties to be finished and rented out will likely achieve rents suggested on the proforma. Where the drop-off occurs is when multiple properties are completed at the same time and you have multiple vacant units sitting on the market. In this situation, it becomes a game of chicken to see who drops rent first and it's likely the 1031 investor who came in at 40-50% down.

I would certainly stress to you to fly into San Antonio and tour the multifamily market before pulling the trigger.

Good luck and thank you for your service!

Sterling Williams · Answer

I think in large part the tenant who rents small multifamily is looking at the unit for its utility. They are not looking for a single-family home where they are responsible for things such as lawn maintenance. Most of the fourplexes within MF subdivisions have scheduled lawn maintenance paid for by the landlord. This also creates conformity. Many of the fourplexes are also on a common water meter paid for by the landlord. If purchasing as new construction, you could implement a Ratio Utility Billing System (RUBS) immediately to circumvent that expense.

Rick Pozos · Answer

Hey Account Closed the why is as varied as there are people in this world. Why would you go into the Navy? I wouldn't. But many people do and have a great experience. Why would people rent a townhouse? Maybe they dont need 2000sf. My wife and I just remodeled our 85 year old house. Some people have asked, "Why would you put 125k into a house so old."

The point is that everyone has a different outlook and a different situation. I gave up long ago wondering WHY would someone do something. As long as you have done your due dilligence and your own people are telling you that people will rent at that price, go for it.

Account Closed · Answer

@Sterling Williams and @Jaime Sepulveda ...I personally thanked you both, because both your responses were as useful as they were appreciated!!

@Rick Pozos ...I agree 100%; but as the two gentlemen above mentioned, it was that type of insight I was looking to hear back. The general aspect as to questioning 'why' to anything, I agree with you all the way...certainly as to my Military experiences reflecting back on 'why' certain outcomes  occur or don't occur as well. Thanks for the response and congratulations to you and your wife in what I'm sure is to be a beautiful piece of history you just updated!

Account Closed · Answer

@Sterling Williams

Sterling...

First and foremost, I would like to say thank you for taking the time to respond and especially for such a thorough one! I thank you.

I'm still curious though as to why...you answered the who candidly. Why would tenants choose one of those new 4-unit townhomes (...going for $550K) to rent for about $,1250/mth when I see many SFH's being rented for $1,200-1,400?

For me, I like the idea of those "new" 4 unit's to be my first purchase because for the next 5 year's my maintenance will be minimal due to it being brand new. However; it seems my competition will be SFH's and that's why I'm wondering why one would choose a lease in one of those over a SFH? My alternative is to purchase your typical 4 unit upper and lower BUT now you're into 'C' & 'D' class properties. I suppose like you said you could always be the 1st to undercut the market and advertise lower monthly or offer concessions.

San Antonio, TX - SFH vs townhouse...who's your tenants?

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