I could really use the knowledge of experienced investors here.
I live in San Antonio, TX. I have yet to invest in the real estate market (I'm a newbie who hasn't gotten their feet wet yet) and have so far been doing some rough estimate number-crunching. I scan sites like Trulia to check out rents based off sq ft and throw in 50% expenses, 10% PM, 8% vacancy, 3.5% mortgage, and 5% down-payment. I utilize a couple spreadsheets I found here on BP.
A lot of the properties I see appear to be overpriced. It looks like the investor would be lucky to even meet the 1% rule (if you were to buy at the current market) with market rents, and the cap-on-cap rate would be about 4-8%. The cash-on-cash return would also be pitiful until the mortgage starts getting paid off.
Scenario example:
$150,000 house
$7,500 downpayment
3.5% mortgage
8% vacancy rate
$1300 rent
Roughly 57.47% expense projections
Based off my calculations, I wouldn't even get positive cash flow from this property until about year 9. The rent, at this price, is realistic though. The market here in SA is booming. The inventory rate is roughly 3.6-3.8, and it is an apparent seller's market based off my market research and in conversation with a mortgage loan officer I know.
I can live with a few hundred dollars annual negative cash-flow as I work full-time and don't plan on quitting anytime soon. This does mean that I would be getting negative cash-flow where I could get positive if I didn't add 10% to a Property Manager. I also do understand that a bigger down-payment would help generate cash-flow, but I'm then depriving myself of lump-sum cash that I could use for contingency expenses.
Q1: Would it be worth investing in this hot market? I'm afraid we might be in a bubble, and I might come to experience negative equity if I purchase property that will end up depreciating in value.
However, my research indicates that the population is growing about 5-10% per year. SA is bringing in sizable business and economic growth is probably situated around 3.5% per quarter. The federal reserve bank of Dallas has data showing that SA is experiencing a boom within the business cycle.
Q2: Is it better to put down a sizable down-payment, or to save it for other purposes? Cash is king, and present cash is better than future cash.
Any advice would be appreciated! If any investors here live in SA, I'd also love to pick your brain on the local market.
Edit - If anyone wonders about the 5% down-payment - I'm looking at living in a house with a VA loan for a couple years before I move on to another property and rent it out. A 5% down-payment isn't necessary, but every little bit helps reduce the mortgage.
