Cashing Out Equity Now vs. Five Years of Rental Income: The San Antonio Math

You have a San Antonio home with real equity. You're moving, upgrading, or tired of the yard. The question isn't whether renting it out "builds wealth" in the abstract — it's whether five years of rental income beats the check you'd walk away with at the closing table this quarter. The answer in Bexar County right now usually comes down to four numbers: your remaining mortgage rate, the tax bill after you lose homestead, your realistic monthly cash flow, and the IRS Section 121 clock.

Here is the actual math, with the traps that eat most owners' projected returns.

The numbers we're comparing

Assume a fairly typical recent-cycle San Antonio scenario: a 3-bed, 2-bath in Converse (78109) or far-north NEISD territory (78247) purchased in 2019 for roughly $235,000, now worth roughly $325,000, with a mortgage balance around $180,000 at a 3.25–3.75% rate. Replace these with your own figures — the structure is what matters.

Sell today, net proceeds:

• Sale price: $325,000
• Agent commissions + title + seller concessions (realistic Bexar range: 6–8%): ~$22,750
• Mortgage payoff: $180,000
• Net cash at closing: ~$122,250
• Federal tax: $0 if this has been your principal residence for 2 of the last 5 years, under IRC § 121 ($250K single / $500K married exclusion).

That's the benchmark. Renting has to beat it on a risk-adjusted basis.

Scenario B: rent it for five years

Monthly cash flow, honestly calculated

At $325K value in the northeast-Bexar submarket, a realistic rent is $2,050–$2,200. Use $2,100.

Monthly expenses on a non-owner-occupied property:

• P&I on $180K at 3.5%, 30-year: ~$808
• Property tax without homestead cap: see below
• Landlord insurance (DP-3): ~$160
• HOA (if any): $40–$80
• Vacancy reserve at 6%: ~$126
• Repairs/maintenance at 1.25% of value annually: ~$340/mo
• Property management at 9% of collected rent (if you hire one): ~$189

The homestead exemption disappears the year you move out

This is the line item most owners under-budget. Once the home is no longer your principal residence, you lose the Texas Property Code § 11.13 homestead exemption and — critically — the 10% annual appraisal cap that comes with it. BCAD can reset the assessed value to full market value the next cycle. On a $325K home in a mid-2% total tax-rate area (city + county + NEISD or Judson ISD + SAWS/river authority), you're looking at roughly $7,000–$7,500/year in property tax, up from whatever your capped homestead bill was. Budget $600/month for taxes, not the $380 you were paying.

All-in monthly carry: roughly $2,270. Against $2,100 rent, you're slightly negative on cash before you've turned a wrench. Self-manage and skip the 9% PM fee and you're around break-even to $50/month positive.

Where the return actually comes from

On a house like this, cash flow is not the return. The return is three other things:

1. Principal paydown. Years 6–10 of a 30-year amortization on $180K at 3.5% pay down roughly $20,000–$22,000 in principal over five years.
2. Appreciation. San Antonio appreciated sharply 2020–2022, then went flat-to-negative 2023–2024. A defensible 5-year planning assumption is 2–3% annually, not the 8% headlines from the boom. At 2.5% compounded, $325K becomes ~$368K.
3. Depreciation shelter. You can depreciate the building (not the land) over 27.5 years. On a $325K property with, say, $65K allocated to land, that's ~$9,450/year of paper loss that shelters rental income — and, if you qualify as a real estate professional or meet the $25K active-participation allowance under IRC § 469, can offset other income.

The Section 121 clock — the trap that rewrites the math

Here is the decision point most owners miss, and the reason "rent it for five years" is rarely the right plan if you were otherwise going to sell.

IRC § 121 lets you exclude up to $250,000 of gain ($500,000 married filing jointly) on your principal residence if you owned and used it as your primary home for 2 of the 5 years before sale. The moment you rent it out, the 5-year window starts running against you.

• Rent it 1–2 years, then sell: you still qualify. Full exclusion (minus depreciation recapture — see below).
• Rent it 3 years or more, then sell: you fail the 2-of-5 use test. The entire gain becomes taxable at long-term capital gains rates (0/15/20% federal) plus potential 3.8% NIIT.

On a $90K gain, losing the exclusion at 15% costs you ~$13,500. At 20% plus NIIT, ~$21,400. Texas has no state income tax, which helps, but that federal hit wipes out a meaningful chunk of five years of appreciation.

Depreciation recapture applies either way. Any depreciation you took (or should have taken) gets recaptured at a flat 25% federal rate when you sell — whether or not you qualify for § 121 on the rest of the gain. Five years of $9,450/year depreciation = $47,250 recaptured at 25% = ~$11,800 of tax, locked in the day you convert to a rental.

Talk to a Texas-licensed CPA before you sign a lease. This is not a DIY calculation.

Side-by-side on the example

Line item	Sell now	Rent 5 years, then sell
Net proceeds today	$122,250	$0
5-yr cumulative cash flow (self-managed)	—	~$3,000
Principal paydown over 5 yrs	—	~$21,000
Appreciation at 2.5%/yr	—	~$43,000
Gross equity at sale (yr 5)	—	~$208,000 before tax/costs
Selling costs year 5 (7%)	—	–$25,760
Depreciation recapture (25% of ~$47K)	—	–$11,800
Capital gains tax (§ 121 lost, 15% of ~$133K gain)	—	–$19,950
Net at year 5	$122,250 + 5 yrs of market returns	~$150,500

Now ask: can $122,250 earn the ~$28,000 gap over five years in a boring index fund or T-bills? At 5% compounded, yes — it becomes ~$156,000 with zero tenant phone calls, no AC compressor replacement at 11pm in August, and no insurance claim after a hail event off US-281.

The rental beats the sale cleanly only if you assume appreciation above ~3.5%/year and you can hold past year 5 to outrun the § 121 loss, or you sell inside 2 years to preserve the exclusion.

What most people get wrong

• Budgeting the old homestead-capped tax bill. Your escrow statement from when you lived there is not your landlord tax bill. Pull the market value from BCAD's public search and multiply by your combined rate. Correct move: rebuild the pro forma with uncapped market value.
• Skipping depreciation to "avoid" recapture. The IRS recaptures depreciation "allowed or allowable" — you owe the tax whether you claimed it or not. Correct move: claim it every year and use the shelter.
• Assuming the 3.5% mortgage makes it a no-brainer. A low rate makes the carry easier; it does not make appreciation appear. Run the math with 2% appreciation, not 6%.
• Ignoring the § 121 two-year window. If you're going to sell eventually, renting for exactly 24 months preserves the exclusion and captures some cash flow. Renting for 36 destroys it.
• Pricing rent from what the neighbor "got." Pull actual SABOR MLS leased comps from the last 90 days in your subdivision. Listing rents and leased rents diverge by 5–10% in soft markets.
• Forgetting the insurance product changes. An HO-3 policy does not cover a tenant-occupied property the way a DP-3 landlord policy does. A denied claim mid-tenancy is not the time to find out.

How to decide in one sitting

Run your own version of the table above with your actual mortgage balance, rate, BCAD market value, and a rent pulled from real MLS leased comps. Apply three appreciation scenarios (1%, 2.5%, 4%). If the rental path doesn't clearly beat the sale + passive investment path by at least 15–20% — enough margin to cover the hassle and the vacancy risk — sell.

If it does beat it, decide up front whether you're a 2-year landlord (preserve § 121) or a 10+ year landlord (let compounding and paydown do the work). The in-between — 3 to 7 years — is the tax-inefficient no-man's land.

When you're ready to move: if you're selling, you can list FSBO free at /list-your-home or find a Bexar-County agent at /agents. If you're converting to a rental, post the listing at /list-your-home and scan current comparable rents at /rentals. More owner-side breakdowns live at /resources.