Austin vs. San Antonio for Single Family Real Estate Investing

I work with prospective real estate investors from both San Antonio and Austin on a daily basis who want to know how our “bread and butter” model fits their specific market.

Two Very Different Markets

It’s important for people to realize how different these two markets are so they can position their resources in the real estate assets that most effectively fit their personality and style.

San Antonio

The reason we put the office in San Antonio is that overall market more closely matches our model. In fact, the deals are outstanding: better equity, better cashflow, less competition. Investors that live in San Antonio can find anything they need to become successful.

Austin

Investors that live in the Austin area are fiercely loyal to their city and want desperately to make the model work. While it doesn’t fit as nicely as San Antonio, those that are willing to put in either extra work or extra capital into deals can make it work.

..but Austinites: realize that the sooner you can let go of your emotional attachment to a city that everyone investor in the world wants to compete in, the faster you can create wealth in San Antonio.

The Bread and Butter Model

Before we go into the sub-markets, let’s define the “bread and butter” model:

We’re looking for homes that:

  • a. have 3 bedrooms, 2 baths, and a 2-car garage
  • b. are worth (after repair) $80k-$120k
  • c. rent for under $1000/mo.

Without going into the subject of an entire other article, the reason we choose the bread and butter model is twofold:

  • 1. it fits Del’s Rules for Investing, and
  • 2. supply and demand maximizes our profits

Austin

The first problem with Austin is finding properties that match b. and c. Austin has seen so much price appreciation over the last 20 years, it is very difficult to find homes in the $80 – $120k price range; and every year that passes pushes this price range further and further away from downtown.

That being said, these homes do exist if you go far enough. Communities like Pflugerville, Elgin, Manor, Bastrop, Kyle, and Buda are full of them with plenty of people to rent to. As an added bonus, most of these homes have been built in the last 10 years.

Newer Homes

60,000 people move into the Austin/Round Rock area each year, which means that home builders built about 18,000 new homes a year in these peripheral communities in the years leading up the the mortgage crisis. Most of these homes were sold under the extremely loose lending practices of the early 2000’s; which means that people were able to get brand new homes with no money down and no verifiable income.

These homes are now starting to foreclose, which means you can buy an almost-brand-new home for less than it originally sold for; and put very little money into it for rehab. It’s very hard to completely destroy a home in five years, so most of these houses just need carpet and paint.

I’ve been seeing homes that are worth $120k selling for $95. With $5k in transaction costs, you can get into the these properties for around $100k and have $20k in equity. With an 80% loan, you’d have monthly expenses of around $800
and be able to rent it for $1000.

Equity

    • ARV: $120k
    • Acquisition: $100k

20% Down Payment: $20k
Equity Capture: $20k
Return on Capital Gain: $100%

Cashflow
Income: $1000/mo
Expenses: $800/mo

Cashflow: $200/mo
Cash on Cash return: 12%

Pros

Easy to Finance
Easy to Fix Up
Easy to Put a Tenant into
Low Maintenance on Newer Home

Cons

Takes more Capital
Lower Cashflow
Lower Equity Gains

Summary

Overall, these newer properties provide a great opportunity for new investors to get started. Because they don’t require a big rehab, they are less intimidating to first-timers. The problem is they require more capital to get started. $20k out of pocket is a lot for most people. If you’re an Austinite who’s starting out with less money, it’s time to head south.

San Antonio

The Real Estate Investing market in San Antonio is a much different scene. Lower overall prices and less competition from investors means that you can find deals at fifty cents on the dollar.

I’ve been seeing deals all day long that are worth $100k, but are selling for as little as $50k. This opens up a whole new financing option for those with little capital to work with: hard money

Hard Money Loans

Hard money loans come from private lenders who act as a business partner in your deal. They put up the capital and you put up the sweat equity. Because they are putting up all the capital, they demand a larger cut than a traditional lender; and they are quite justified to do so… BUT, you can refinance out of these loans in three to six months and into something that is easier to digest.

Now, these numbers vary from lender to lender and day to day, so be sure to check with your mortgage broker for the specifics; but a hard money lender will typically lend around 70% of the after repaired value (or ARV). This means that if you can be “all in” for 70% or less, you can do a deal with no money out of pocket.

All In

“All in” means the purchase price plus the closing costs plus the rehab; or all the costs associated with acquiring the property.

If you buy one of these $100k homes for $50k and put $15k in repairs and $5k in closing costs; you’d be “all in” for $70k, or 70% of $100k.

Equity

    • ARV: $100k
    • Purchase Price: $50k
    • Rehab: $15k
    • Closing: $5k
    • Total Acquisition Costs: $70k

Total out of Pocket: $0
Equity Capture: $30k
Return on Capital Gain: Infinite

Cashflow
Income: $900/mo
Expense: $700/mo

Cashflow: $200/mo
Cash on Cash Return: Infinite

Because you don’t have any money out of pocket, you’re not limited by your own resources. You can do as many of these loans as your hard money lender will allow.

Pros:

Bigger Equity Gains
No loss of Capital

Cons:
More Rehab
Higher Closing Costs

Summary

Overall, hard money deals in San Antonio are much more attractive than conventional deals around Austin. The extremely low acquisition costs mean that you can get started with much less (if any) out of pocket.

Which is for You?

Austinites are going to have a hard time letting go of their favorite city, but many will find that there is more money to be made with less out of pocket in San Antonio. Throw in commuting time, and it’s going to come down to preference. People in Austin who prefer to be passive might consider partnering with an active lead investor in San Antonio.

Austinites with more capital might prefer the ease of investing in almost-new homes in the suburbs; but it’s a fine line, because if you have over $100,000 to invest, you’d be better off in multi-family anyway.

Either way, there’s tons of money to be made in Central Texas. The road bumps in Austin are miniscule compared to the rest of the country. Try cashflowing in Southern California.

Don’t do It Alone

Please, before you start buying investment real estate, it’s important to find a mentor. As forgiving as real estate investing can be, you can still get hurt pretty badly. It doesn’t make sense to trial and error it when you can simply go out and find someone who has already been successful and imitate them.

Go to the National REIA website to find a local investor group or attend one of our free investor workshops.

Comments

  1. Houston is very similar to San Antonio with the added benefit of having many brand new homes in foreclosure at steeper discounts than Austin. There is a lively debate about which is the better market: San Antonio or Houston.

  2. I think this is a good article. I lived in San antonio over 15 years, late 70’s through the 80’s. I spent a lot of time in Austin also.

    Your discussion on hard money was OK, BUT my experince has been higher closing costs than you decribe. Pay close attention to hard money, if you are not paying attention, a lot of your equity gets consumed by the 2 closings, when you cash out. It is still an effective way to go, esprcially if you have a rehab above $5000. You can usually finance the rehab in the hard money loan and that is the beauty.

    What do you think?

  3. Thank you guys for showing the blue print of your model, I think it sumarizes everything.

    Question is Houston identical or very close to San Antonio as far as Cons/Pros goes?

    Thanks,
    John

  4. As an addition to my last reply, there are a few Lifestyles members in California that are investing in multi-family. Also, a few members are partnering with leads in Texas to take advantage of the ideal market.

  5. Nicolas says

    Hey Brian,

    I relocate to Los Angeles, I think you used to live here, so what would you suggest is the best model here??

    Thanks

    • In my experience, the Lifestyles model doesn’t work in California… That being said, I’ve heard rumors that real estate in parts of California is getting so cheap that it’s starting to cashflow. If you or anyone can report back to me that you can cashflow to a large bread-and-butter renter pool, I’d love to investigate.

  6. Nicolas says

    I sure will,

    On paper, I have run some numbers and yes, they could cash flow, still, here in L.A.. we have not see a bottom and we are far from it…

    If I were to invest in a multifamily deal say in San Antonio as a passive investor, what’s the average commission?

  7. Fransisco says

    Brian,
    Can you explain for me how you structure a deal with passive and active investors? Who is responsible for what and how is the cash flow divided?
    Thanks

  8. Partnership arrangements (single-family) can be anything you want them to be. That being said, it’s typical for the lead to take 25%-50% of the equity and cashflow. Some arrangements treat equity different from cashflow.

    I like to give my passives some downside protection by offering not to take a cut until they reach a certain level of return.

    Remember, passive/lead deals are only good for the passive if the returns are pretty big, say 50-100%. It’s not a very good deal for the passive to split a 10% return.

    Bottom line is as a lead needs to under-promise and over-deliver.

    If you were referring to multi-family partnerships, I would have to refer you to one of our multi-family mentors.

  9. As long as your legal structure allows it. Talk to your lawyer and CPA to make sure you have an agreement that is transparent to the IRS.

  10. I need to clarify that my above responses were about single-family investing, as the topic of this article was about the single-family model.

    John and Francisco, if you were asking about multi-family partnerships; I would have to refer you to one of our multi-family mentors to answer your question.

  11. Can the passives take depreciation?

    Thanks,
    John

  12. I’m seeing the same that the guys at LU are. High equity capture, 30-40% discounts on purchase price and 100-200 a month cash flow.

    However, I don’t consider this true cash flow as the debt service is covered but the expenses, management, maintenance, etc.. are still dropping the cash flow to near break even.

    However.. This is the model that should be followed – if you are breaking even after accounting for maintenance, management, incidentals, debt service, marketing, 1-2x rent loss etc.. your actually doing even better than Del’s business model projects.

    teh_homepwnerer
    pwnhomes.com

  13. San Antonio is probably the best market, and San Antonio is probably growing just a fast if not faster than Austin. Houston a well.

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