What is a good 2018 cap rate / cash-on-cash for San Antonio, TX?

Question

Howdy all!

My business partner (also my spouse) and I are trying to determine what we should do with our one and only rental property.

It's a SFH in a "suburbia" neighborhood on the outskirts of San Antonio, TX (specifically the Converse/Live Oak border).  In late 2012, we had to move into town to be closer to our jobs and we rented out the old as we'd be upside down on mortgage if we sold. I think our current numbers are good but that's only because we don't actually take any money for ourselves (0% vacancy, 7.31 cap, 12.99 cash-on-cash, $189.00/mo 'flow'). Current figures include all expenses (repairs, mortgage principal, yard care, etc).

Lately, though, we find we don't have time to self-manage any longer (work, family, etc) and need to either:

• find a Property Manager; or
• sell (values have increased to where we would make a small amount of money after paying capital gains/depreciation/mortgage).

Our estimation is that a good PM will run around 10% of rent per month and both our vacancy and repair rates will probably also increase.

So with a PM, our new numbers would probably be: vacancy 5%, cap 5.85, cash-on-cash -0.45, -7.00 cash flow. (yes those are negative numbers...!) we could probably adjust these slightly to remove about 100.00/month on yard care and still charge the same, but I don't see how and extra 100 could significantly improve this for us...

Are these normal/average numbers for the San Antonio area?

Is this a property that has potential but only as part of a mixed, self-managed, portfolio?

Replies from folk with actual SA experience are encouraged!

We will use your answers to determine if we should hang in there (with help of a PM) or sell. (if we sell, we are NOT going to try for a 1031 exchange - just pay the depreciation back and invest the rest.)

Thanks in advance!

Seth Teel · Answer

@Terri Bedore

Without knowing all the info, there are a couple inferences that I will make.  The first, you paid too much for the home when you bought it.  Certainly not the end of the world, and definitely something that can't be changed now.  That being said, if you've owned the property since pre-2012, you should have some decent equity and can likely refinance to lower your monthly payment and increase your cash flow. 15-year mortgage would be optimal for this.

The second inference, you aren't charging enough in rent.  Rents have steadily increased in San Antonio since 2012, have you been increasing your rent?  We are in a unique market where we can charge a premium for monthly rents relative to what it would cost for the same property with a monthly mortgage.  A few months old, but this article discusses some of the reasons behind the rent increase in San Antonio and comparisons to other markets: https://www.expressnews.com/news/local/article/San....

If my inferences are off, I apologize.  Aside from that, less than $200/month net cash flow is not normal.  Most of my clients won't even look at a rental investment unless cash flow is net $300/month per door cash flow.   If using a capitalization rate for mutli-family my aggressive clients look for 15%, my slow and steady clients look for a minimum of 10%.

PM rates range from 7% to 10%.  There are varying levels of service, so make sure to vet your potential PMs.  I am happy to recommend a couple good ones.  Just shoot me a direct message.

Last comment.  You mentioned the possibility, maybe it's time to sell.  Converse/Live Oak is a really hot market right now.  Our listings in that area have been going under contract quickly.  You should have equity in the property, maybe it's time to cash out and find something that is a better investment.

Let me know if I can help in any way.

Terri B. · Answer

@Omar Khan , @Jim Robertson , @Kyle Zochert , @Seth Teel -

Thank you all for your input.   Most of you have been asking about our specific numbers; I've run them  again (and again since I came out with different than posted). The  corrected/actual figures are below.

I will note again that we never purchased this as a rental - it was meant to be my now-husband's home and he bought at height of the RE bubble in 2006; then he met me. I worked across town and no way was I going to commute over an hour each way so we split the difference, moved, and put this into service as a rental in late 2012.

Now that we know better (thanks @Brandon Turner!), we raise rent whenever we have new tenants (about 7-10%; based on other comps in area) and raise only slightly at each renewal period thereafter (about 3% annually).

Basics: 3/2/2; 1265sqft; fenced yard; they cover all utilities; we pay for lawn care (mostly so as to not have to deal with HOA); pets welcomed (we charge a fee upfront plus small amount of pet rent - per pet).

We also do not have breed  restrictions (our insurance does not  restrict; but we do require an  interview with dog) which is what has  kept us afloat for so long (and  with 0% vacancy!).

Curious as to what you all might think!

Monthly

Current System   (no PM)

Current System   (incl PM)

Gross Income (what we think it's worth using last 7 mos of comps)

1,400.00

Principal & Interest (we refi'd in 2012 when put into service at 4.5% interest)

578.10

Property Taxes (we debate these every year)

367.76

Property Insurance

38.35

Mortgage Total

984.21

Mortgage Total Less P&I

406.11

HOA (2018 was 111.30)

9.28

Grounds

70.42

Repairs (historically averages to 146.67/mo)

146.67

Vacancy (4%, even if actual is 0%)

56.00

Property Mgmt (0%, 10%)

0.00

140.00

Misc Expenses Total Less Vacancy and PM

226.37

Misc Expenses Total

282.37

422.37

Expenses Total, Monthly Less Vacancy and   PM

1,210.58

Expenses Total, Monthly

1,266.58

1,406.58

Cash Flow, Monthly

133.42

-6.58

Cash Flow, Annual

1,601.04

-78.96

Cash Flow, Monthly   (Less Vacancy and Property Management)

189.42

Cash Flow, Annual   (Less Vacancy and Property Management)

2,273.04

Monthly Expenses Total Less P&I

688.48

828.48

Net Operating Income (NOI), Monthly   (Net Monthly Income Less P&I)

711.52

571.52

Net Operating Income (NOI), Annual   (Net Annual Income Less P&I)

8,538.24

6,858.24

Omar Khan · Answer

@Terri Bedore If this is a residential property then cap rate calculations have little or no use. This is because the value of the property will be based on comps and not income.

It will be hard to offer proper advice without knowing more details about the neighborhood, rental comps and and your expense structure.

You are correct on the PM side. PM costs an arm and a leg in residential properties.

Alex Ireta · Answer

Terri I think you have plenty of options to consider. I too self-manage our properties, I try to stay in high traffic areas like Sea World, Broadway, Selma, Schertz/Universal City/Live Oak only because the potential for rental increases are doing well. Like others have mentioned San Antonio (and surrounding areas) are doing very well for rental properties and those properties appreciating in value.

If your goal is to get out of the real estate business selling the property might be your best bet, now is a great time to sell. If your goal is to build long term wealth keeping the property and letting it appreciate will pay off long term. Your doing the right thing by increasing rent as you see fit. I would focus more on your long term plans as a family, that will dictate your path. If you want to consider selling your rental property send me a direct message.

Alex

Jim Robertson · Answer

It's hard to find normal or average numbers. I look for 15% cash on cash in the central parts of San Antonio. Others may have a different qualifier for their deals.

Here are a couple of things to consider if you want to try to keep the property. You can find property management for 8% with some companies in San Antonio. Post a few test ads on craigslist or zillow and see if raising the rent is possible. Have you looked into other strategies to self-manage from a distance? Such as tenants mailing you rent, maintenance, or home warranty contracts to avoid doing work yourself?

What is the appreciation possibility of the property? If your personal financial situation allows you to have a break-even property, the loan paydown, tax benefits, and appreciation could be a nice payday in 10 years?

What is a good 2018 cap rate / cash-on-cash for San Antonio, TX?

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