San Angelo Landlords Defend Higher Rental Rates

In September, San Angelo LIVE! wrote a story about rental rate increases, and how those increases are affecting people who live check to check. After that story came out, one rental investor and an official from a property management company who oversees Sunset Apartments wanted to share their side of the story to help put into perspective why increases have occurred the past few years.

Rental Rate Increases from a Home Rental Property Perspective

Gregory Smith and his family started investing in real estate in the early 1970s, and his company, Diversified Properties, LP/Vision Resources, LP, rents out on average 80 units at any given time and has been around since 1989. Additionally, Smith is the director of Worship Ministries at Gospel Vision Foundation and executive director of Gregory Smith Ministries. Not to mention, his family has lived in San Angelo for over 50 years, and his father started a pharmacy business in the 1960s.

“When you’re in business for yourself, you have to build your own retirement plan,” Smith said about the goal for the family businesses. Another goal for Smith is to provide rental housing to San Angelo residents at a reasonable price, and he has managed to do so since becoming a real estate investor.

“We try to look at the quality of people,” Smith stated. “We don’t do credit checks, and everybody has had problems at times. We’re looking for quality people who will take care of the property and pay the rent.”

Although Smith said his properties aren’t the luxurious homes found in Bentwood or Southland, they're decent for families and Smith fights hard to keep rental rates affordable.

Because of his approach, one woman who started renting a house his family bought in the 1970s remains there after all these years.

“She’s family,” Smith explained. “We try to take care of people. We try to work with people. We try to provide a nice clean safe house for a fair price."

By working with people, Smith said if someone has a problem with a paycheck, he allows them to pay late as long as they stay in communication. However, remaining fair and keeping rents low are no easy tasks.

For a time, Smith’s rental properties remained fairly steady. Sometimes, they would go up and down, but things changed when he noticed a 20 percent tax increase on his rental properties a few years ago. As a result, he did have to raise the rent.

“We saw big increases, and it wasn’t just on one property. It was on every single property,” he noted.

Although Smith said rental increases weren’t a direct effect of the oil boom, the so-called boom caused an increase in property valuations, so that increase did play a role.

Taxes!

In June of 2014, Brad Wells of the Tom Green County Appraisal District spoke at the San Angelo Rotary Club regular meeting, and said before the reappraisals on property values started in 2013, the total value of taxable property in the county was $3.8 billion, and after the census reappraisal on all properties in 2014, property valuations increased between 20 and 28 percent, rising as much as $4.8 billion. This number included commercial, industrial, raw land, and agricultural properties and residential properties increased 14 percent on average.

“Based upon what is taking place, primarily due to the oil field activity, property values are going up--and going up significantly,” Wells said at the time. “We have 60,000 parcels [of property], of which 30,000 are single family residences. Ninety percent of these have homestead exemptions.”

Of course, homestead exemptions protect homeowners from enduring massive property tax increases because of rapid economic growth, and homeowners witness on average a 10 percent increase. Rental homes, however, are not protected under homestead, and Smith said he’s okay with that; that’s how things should be. Smith wasn’t at that meeting, however, so when he requested the Appraisal District show the reasoning behind the increases, no one could provide him that information.

“I wanted to see comps. I wanted to see what they were basing this on,” Smith explained.

San Angelo LIVE! attempted to contact Wells a few times at the TGCAD for a response and to find out why this was the case, but received no return call.

Smith said overall his rental houses are near the base and in north San Angelo, and although they’re nice and clean, they’re not worth the increase he witnessed. Smith added that he originally noticed the first big jump in his tax evaluations from 2013 to 2014. On one property, the value went from $49,900 to $57,700, and in 2015, it would have gone up more, but he grabbed all his property valuations and went to TGCAD to contest the increases.

Luckily for Smith, he and his family have been in San Angelo long enough, so they have established good relationships with people. Those relationships paid off when he visited the TGCAD.

“They were very sympathetic to what we were dealing with, and because of that, they rolled back all of our rates for last year. No one could ever explain though why they felt the need for a 20 percent increase across the board,” Smith stated. 

Costs of Aggressive City Code Compliance

In addition to the hikes in valuations, Smith has to deal with continual code violations and fines issued by the city. The investor said he has two or three houses that he rents out where the tenants have never done anything to take care of the yards. Some of them don’t understand the importance of keeping up with them, or they have busy schedules. Smith said he gets two code violations a week on average, and that number used to be higher.

Smith, however, doesn’t completely blame the tenants because there are residents in the same areas as his rental houses who don’t touch their yards either, but they’re not plagued with constant violations. Smith believes the city knows his company and his houses are flagged.

"They know if they send a crew out and charge me a $150 administration fee, plus an exorbitant rate of $300 to cut an alley and a backyard, that they can charge me that and I will have no choice but to pay."

Protecting Assets

The other factor in rental rate increases has to do with the tenants today and maintaining the rental properties as well, Smith added.

“There’s a lot that plays into it other than the market,” he continued. “We saw a change in the quality and the class of people, and because it’s a rental property, they don’t have any skin in the game.”

Smith explained that when he rents someone a house, he’s loaning them between $30,000 to $100,000.

“I’ve handed over that much of an asset for someone to take care of, but the people taking care of them aren’t quite like they used to be," stated Smith.

Therefore, evaluations are up, quality of renters are down and maintenance costs remain a big issue. The investor might have a rental property that brings in $550 or $600, but when tenants tear the house up, he spends more money fixing things up.

“I have to redo floors, tile, carpet, and I’m going to spend close to $1,000 to $2,000 by the time I repaint it and replace appliances that have been stolen or destroyed,” Smith explained. “Recently, I lost 18 refrigerators in 18 months. Stoves are about the same, and they’re also stealing water heaters and ac units. If you do the math, I’m five months away from ever seeing a dime again of income."

Regardless of these problems, Smith continues, as part of his ministry, to provide housing to people who really need it, and who appreciate getting an affordable rate. Despite his efforts though, there are downsides.

“There are always the people who want a house like those in Bentwood for a $500 price. Those are the exceptions too," Smith noted.

Rental Rate Increases from an Apartment Property Management Perspective

One thing Smith mentioned is the ridiculous rates of apartment rentals, and how he has had a flood of people contacting him after prices soared with the so-called oil boom. He said with all the apartments being built, he thought the rates would drop, but they didn’t because people thought the “boom” would be a big thing.

A representative with First Choice Management Group in San Antonio, the property management company that oversees Sunset Apartments in south San Angelo, and who wished not to be named, said the oil field did indeed play a role in price increases, including the one bedroom for $800 price that placed San Angelo in the top 10 cities for rental growth in Texas. However, things are changing.

“I think what you’re looking at are two things: one is a timing issue because actually our rates are going down, and have gone down over the last six months quite a bit,” the representative said. “We’re probably down 6 to 8 percent from where we were because of supply and demand reasons; and I say two because the higher paying oil field jobs have declined.”

Additionally, three new apartment communities in San Angelo are causing the decline. One of them, Cameron Place, is well-leased, but the other two have open leases.

“Because they’re brand new and cost a lot more to build, and nothing really brand new has been built in San Angelo for 15 or 20 years, the pricing mechanism for those are substantially higher," the representative said.

There’s also a gap between the pricing of the new properties versus the next tier down, and those prices are $1.40 a square foot versus a $1 per square foot.

"That has a pretty significant effect on the overall rates and the increases, and they pretty much held their rates,” stated the representative.

The competition from these new properties are also significant, and there’s a minus in a sense that the typical apartment community with less turnover, less volume in terms of traffic (new people coming to rent), and the income level of those people aren’t as high as the people coming in a couple of years ago or even a year ago, the representative stated.

“If the market was really strong that would help you, but because it isn’t strong, it doesn’t give you the boost it otherwise did," he added.

Regardless of rates now going down, those numbers did increase to a point where the average San Angelo resident has struggled the past few years. The property manager said that during times of economic growth, in this case with the oil boom, companies get brave and they tend to try things out more aggressively. So if an apartment complex is at full capacity, the property management company can try raising the rent from $600 to $620, or even $640. One or two people might come in and complain about the rate increase, but someone off the street can say okay to the price, so everything works out.

“You can have a lot more people afford not to rent in a full capacity situation rather than in a not-full-capacity situation,” noted the representative. 

In addition, he said it’s easier to get the money to do that when the property is making money and when it’s increasing its revenue. Now, however, First Choice Management is going back the other way.

The representative stated, “In the last few months, we’re still profitable where that’s concerned because we don’t have a lot of debt and we’re not over-leveraged, but still the revenue is less than what it was projected to be, and it will probably be less than what it was last year, which is not the way you want it to go. The market is the market. You can’t fight the market particularly.” 

The representative also noted that he doesn’t think the rents are going to get back to what they were five years ago, but the oil boom created a situation where Sunset Apartments were able to raise the rents a little more than they ordinarily would. There were a bunch of prices that went up, however, and this happened all over Texas.

“There were some winners and some losers,” the representative noted as a result.

The man, who has dealt with the San Angelo market for over a decade, said people have to understand Sunset Apartments are ran by a management company, and property managers get paid a fee to run a property according to the owner’s wishes. Most owners want to generate as much revenue as they can, which means “striking the iron while it’s hot;” but at the same time, they’re intelligent enough to know that they can’t go too far, and they need to put money back into the product, which the representative said his company has done.

Since things are going back the other way, the value of the product will be better for the cost, and people aren’t going to see as much rental increases in renewals and will experience lower starting prices, the man stated.

As for the types of people renting, the representative said he hasn’t noticed a difference like Smith mentioned, but they have noticed some minor changes.

“We haven’t had those kind of problems,” the representative added. “However, there is a small change in the credit score and income qualification.”

The biggest problem apartment managers face overall are skips. Many people who can’t pay the rent leave, or they don’t fulfill their lease.

“With that, you have more turnover, which is costly,” the representative stated.

Despite the Perspectives, Some Investors Price Gouged

Smith said that he did get more calls from renters when the so-called oil boom hit because of drastic rental rate increases by gougers. In fact, he knew a few smaller investors who said they were going to make tons of money with the oil boom.

“We all have to live here, and all you’re going to do is cause people to be looking for a new place to live when they move in,” Smith said in response to gougers. “The oil thing was much to do about nothing. I didn’t look at things the way they did, or expect a big increase.”

Smith also added that the people who gouge are lower end investors who probably own 10 or 15 houses and think they want to get big at it. The also think they’re going to get rich.

San Angelo has always been a low-wage town, Smith stated, but the cost of living has always been lower as well; so he couldn’t believe when he noticed people buying $50,000 and $60,000 houses and they were wanting over $1,000 a month.

“I just laughed at some of them like what were they doing,” Smith said.

Gouging, however, is not the rule, Smith claimed. It’s strictly an anomaly, and with the oil field bust, these investors more than likely have paid the price. Also, minus the increases explained here, he has not, nor have many other investors in San Angelo, have gouged rental prices. Some of his renters haven’t seen an increase in 15 to 18 years.

He said, “I don’t have time to do that, and most are like I am. We have to get up every day and see what we have to fix, where and what crew we’re going to send where. We’ve got more to do than figure out how much we’re going to go up on someone’s rent. It’s the hardest retirement job you could ever want.”