Safe and stable investment: Do I buy rental properties or keep money in a HYSA?

OP

Member since 2020 · 52 posts · 14 votes

1y

I completely get where you’re coming from, and it sounds like you’ve done a lot of thoughtful research. Memphis can actually be a great choice for real estate investing, especially for someone with your situation.

First off, property prices in Memphis are much more affordable compared to markets like CA, so with $50k, you can actually make a bigger impact. You can potentially purchase multiple properties, which is a huge plus for spreading out risk. Memphis has a relatively low cost of living, and that’s reflected in the property prices. For example, you can buy properties in the low $100k range that are already cash-flow positive or close to break-even with good tenants in place. Plus, the property taxes are typically lower than in California, which can be a huge cost-saver in the long run.

Another benefit is Memphis’s strong rental demand. With a large and diverse population, there’s a steady demand for rental properties, particularly in the affordable price range. With tenants in place and a property management company handling everything, you’re not having to worry about much hands-on work. A good turnkey company can make things smooth for you, even if you’re out of state.

Regarding the price premium from turnkey providers, you’re right in noticing the markup. But when you factor in the convenience of having everything done for you, it’s sometimes worth the extra cost, especially when you don’t have the time or resources to manage it yourself. That said, if you’re open to putting in some work to build your team and find properties yourself, you might be able to save some money and find deals directly. It just depends on how much time you’re willing to commit.

As for your concern about the economy, it’s understandable. Real estate does have risks, but in Memphis, you’re dealing with more affordable properties, which can help you weather potential downturns. A smaller mortgage means lower overhead, which is crucial if you’re worried about vacancies. Plus, with the relatively stable rental market in Memphis, it’s less likely you’ll face extended vacancies compared to more volatile areas.

Overall, option 2 (buying a few out-of-state properties) seems like a solid choice. It allows you to spread your risk and grow your portfolio without overextending yourself. Memphis offers solid rental returns with less of the volatility you might face in California or other high-priced areas.

Hope that helps! Let me know if you have more questions or want to dive deeper into any part of this.

Cheers!

Thank you James.

I'm trying to really understand how much time the turkey companies are saving me, and it's hard to say.

In theory, if I find a great broker that can source good deals for me, and a great property manager that can take care of tenants, then isn't that essentially what the turnkey company offers? Outside of the fact that most would sell the house tenanted, and it may take me a few weeks to get it ready and tenanted, wouldn't a good property manager essentially do the same as the turnkey company, after the property is acquired?

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Tim DelaneyPro Member

Buffalo, NY · Member since 2018 · 790 posts · 530 votes

1y

Quote from @Rafael Ro:

Quote from @Tim Delaney:

Quote from @Rafael Ro:

Quote from @Tim Delaney:

A lot going on in your question. As someone that over analyzes things as well, I’d suggest you step back and think about what your goals are in order to help determine what path to take.

I like JD’s suggestion about reinvesting in your business. Can $25k in more marketing or equipment or staff increase your profitability even more? Or free up more of your time depending on your goals? Or can you acquire another business in an adjacent field that increases profitability?

I also noticed you left out an option to park that money in index funds and let it grow. I’m guessing that is because of your pessimistic view on the economy right now, but even if the markets dip temporarily, based on history, they will rebound to even higher points (I know just cause it’s happened before doesn’t guarantee it will happen again).

Personally I have a successful business, but opted to diversify into real estate because my industry is heavily regulated and one change of a law could make me MUCH less profitable. However, I got into real estate mostly relying on OPM - private lenders, seller financing, and business lines of credit.

I also don’t like the idea of buying turnkey properties at a premium. I don’t know the Memphis market, but I’m guessing there is not crazy appreciation. So if you are not cash flowing and there isn’t appreciation then the only advantage you are getting is debt pay down. If you are going into a moderate appreciation area I’d be looking for great cash flow.

That makes sense and it is sort of what I was leaning towards.

I was thinking that if Memphis (and the sort) have cash flow but no appreciation... And if CA and such has negative cash flow but good appreciation.. then maybe I can find a place that has a balance of both.

Memphis can totally cash flow - I just don't think the turnkey properties would, due to the premium.. They would offer a more hands free approach, but eat up the profit in return. But if I bought their 120k property for 95k by buying it direct, then the numbers seem to pencil out.

Through some research I started looking at Greenville or San Antonio... I'm completely open.. I think it's more about the people honestly - if I decide that I'm going that route than I'd narrow it down to 4 or 5 cities and I'd try to meet some agents and property management companies from there.

And if I find a reliable agent and reliable property management company in one of those cities, then I'd start there. Obviously I'll never know if they're reliable until I actually work with them, but I'd do my best to vet them thoroughly..

Do you think that sounds like a good plan?

It makes sense, but you are giving yourself another job/business. Nothing wrong with that as long as you understand and are ok with it. Another option that is more passive would be to invest in a syndication as an LP.

Am I giving myself another job/business? In my mind I'm not. If I am able to source properties in markets with potential appreciation and (even if minimal) cash flow, after all expenses are covered and with a property manager, then it sounds like it wouldn't take up much of my time. I'm thinking the agent/broker would find the deals for me and the property manager would deal with tenants and their requests. Am I wrong?

I don't mean to make it sound super easy... I know a lot of things can go wrong and I can lose money. But would it take up a lot of time, as a job/business would?

Depending on your goals and how many properties you plan to acquire it could be a decent amount of work. A good agent will vet a deal to some extent, but you will still have to underwrite it yourself to verify numbers. And a good property manager will take care of day to day, but you will still have work to do. Again, that’s all fine just so long as you know what you are getting into. Real Estate is pitched as this “passive” income generator, but even with a team it is never completely passive.

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Drew SygitBusiness Member

Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes

1y

@Rafael Ro Traditionally, investors have targeted Class B properties.

A lot of flippers and turnkey companies taking advantage of "hyped up investors" and selling them Class C & D rentals without telling them the whole story.

Not sure there's anything wrong with the Memphis market, but did hear Nashville is slowing.

Detroit is still growing and we've helped a lot of investors with "BRRR Turnkeys":
1) We help source a "fixer-upper", but don't really care who you buy it with
2) We handle the renovations, providing bids & video completion updates
3) We find a tenant
4) We manage the property

It's cheaper than buying a Retail Turnkey AND you know exactly what rehab was done and the quality of all the work that gets hidden behind drywall:)

DM us if we can help with anything else.

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Taz Zettergren

Real Estate Agent · Memphis, TN · Member since 2019 · 365 posts · 264 votes

1y

@Rafael Ro

There are cash flowing deals on the open market, I'm helping clients find them daily but in some situations it makes sense to go with the turnkeys to minimize your risk. It's just a matter of choosing the right company to work with. Some are offering 5.38% interest rates on a 30 yr fixed rate at no cost to you, couple that with a 1 year maintenance free guarantee and a resident in place at closing and it can be a slam dunk of a deal

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Account Closed

Realtor · Cleveland, OH · Member since 2023 · 340 posts · 215 votes

1y

Hi, definitely check out Ohio's real estate market and please feel free to reach out if you have any questions. Best Wishes!

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Alex Olson

Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes

1y

@Rafael Ro For out of state investors I recommend class A or B areas for first time investment. Still good cash flow.

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Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

1y

Quote from @Rafael Ro:

Quote from @Drew Sygit:

@Rafael Ro some great advice already here!

IF you decide to move forward in Memphis, recommend buying the first one turnkey to get you going.

You'll learn a lot about rentals and the market with the first one.

THEN, if you like results you can look for agents & PMCs to help you buy more and save the 20-30% markup you mentioned.

Recommend you also read below info to set your expectations correctly:

_________________________________________________________________________

We think the Midwest is a GREAT place for OOS investors to consider!

Check out some of things happening in Detroit in 2024:

https://michiganchronicle.com/2024/01/03/major-developments-that-will-define-detroit-in-2024/

Your first question shouldn't be WHERE to invest (that is #2 question), but HOW you will invest!

Many OOS investors set themselves up for failure because they don't invest the time to ACTUALLY understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Let us know if we can help in any other way.😊

This is very helpful - thank you.

It is also what I am starting to realize.

Class C and D areas/properties will always cash flow better on paper, but on paper things like extra repairs, turnover, evictions and such are often not taken into account.

I am leaning towards Class B. Not the nicest areas, but nice enough.. and I would be looking for minimal cashflow, banking on appreciation.

The reason is that I'm looking at this as a long term investment where my goal is to grow my money with minimal headaches (even if that means slower growth).

With that in mind, maybe Memphis is not the place to invest. Would you agree?

The Midwest is probably your best bet for a number of reasons. Home prices are one, cost of living and relatively disaster-free weather keeps insurance costs down.

You can look up the median home price for every city or metro area. Class A and B neighborhoods are above median price and C and D are below. It's tough to cash flow in a B neighborhood when you are only putting 25% down and paying a PM.

My strategy as an investor has changed over the years, today I look at real estate more like a collection of properties and less through the cash flow lens. My main question is will I be happy in 10 years that I bought this property? I also never had to worry about vacancies: if you own a desirable property, you will always have people lined up to rent from you. The same is true if you would want to sell it at some point. This can not be said about many 100k properties.

Turnkey providers made sense IMO back in 2010-2015 when it was easy to find deals, but hard to get funding, so you'd sell the ones you could not get funding for. Today you can get funding for a good deal without an issue, so the business model is kind of obsolete.

I used to buy BRRRR deals, but over the last years, we switched to buying homes that are in move-in ready condition. We still end up doing a few things like upgrading appliances or installing recessed LED lighting and dimmer switches and other life-style upgrades to attract top-notch tenants. Milwaukee inventory has just been so low, that even very distressed properties sell to first-time home buyers without a significant discount, so in the end it's cheaper for me to buy properties that already have a new roof, windows, kitchen, HVAC etc

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Robert EllisBusiness Member

Developer · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes

1y

Quote from @Rafael Ro:

Hello all,

I would really appreciate your insights here.

I live in CA and have a family with 2 kids - we're not moving anywhere. Have about 50k I would invest (access to more), with excellent credit and good income too, from my full time job. I'm the sole breadwinner.

I tend to overanalyze things, often leading to inaction, mainly because I have a somewhat pessimistic outlook on the economy and I'm trying to avoid getting overexposed.

Realistically, BRRR or wholesaling or other ideas that require a bigger time investment are not good for me - I run my business so I don't have much time left.

With that in mind, my first idea was to buy a condo or a house in my local area (Palm Springs, CA) and use it as a long term rental.

The issue there is the current prices and CA laws - for the past year I've been struggling to find a property that's somewhat turnkey and that would at least break even... And CA is extremely tenant friendly so it's not a great place for a rental.

That's why I started looking out of state. I found a good turnkey property company out in Memphis. Everything about them seems to check out, and their properties (which they sell already tenanted, and they manage) seem to break even with 25% down. They claim a small cash flow, and while that looks too optimistic, I believe that they can at least break even, so the tenants would be paying it off which is great.

Another cool thing about that is that most their properties are in the low 100s, which means that I can buy 2 of them, and then buy another every time I can gather 25k more. It's scalable. And they sell lots of them.

My issue with them is that from a quick look it looks like they're selling everything at a 20-30% premium (which I understand and respect). At the same time, I can't help but think that if I could get connected with a great agent and property manager, then I could do the same and save a great deal of money.

Then again this would also mean that I'd need to build a small team, and I'd need everyone to perform whereas they're bringing it all in one.

Another big thing here is the risk - as I said above I have a fairly pessimistic view about the economy in the next couple of years.. If I own a property with a 1k mortgage per month and it stays empty (or I'm trying to evict) for a couple of months then I'll be ok. But if the mortgage is 2k or 3k then I'll be in a tough spot.

I would love to make a move before the end of the year and so I keep trying to decide which of the following is best for me:

1) Buy 1 more expensive CA property near here, and thus a better tenant (less likely to cause issues), but lose a little bit of money every month due to the current numbers, while hoping for future appreciation?

2) Buy a few out of state properties over the next few years, through a well vetted turnkey provider like the one I mentioned above, which should more or less break even or give me a little bit of cash flow, and since I'd end up with a few doors my risk would be a little more spread out?

3) Buy a few out of state properties directly through an agent and work with a property manager to manage them?

4) Keep my money in a guaranteed savings account making 4.5%, until rates drop more or something changes, and the numbers are better to make a move?

Thank you in advance to everyone who read this, and moreso to those who respond with their thoughts.

Investing in out-of-state properties can be a great strategy if approached thoughtfully. The key to success lies in ensuring you're entering the market at the right value. Whether you’re buying or building, focus on doing so below market value to secure immediate equity or strong cash flow potential.

It's also important to thoroughly research the local market—pay attention to trends like rent potential, job growth, and population increases. Partnering with local experts who understand zoning, permitting, and market nuances can help you avoid costly mistakes and maximize returns.

If you're in a high-cost area, out-of-state investing can provide access to markets with better entry points and higher ROI potential. Cities like Memphis and Columbus often have more affordable properties and good cash flow opportunities, making them popular choices for investors. Ultimately, it's about aligning your goals with the right strategy.

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

1y

@Marcus Auerbach

I think we need to help OP distinguish between "cash flow" and "a good investment."

As you have pointed out in other threads, paper cash flow on old midwest properties is illusory. But everyone in this thread keeps saying cash flow over and over.

To summarize:

-Old/older midwest properties in good neighborhoods that you will hold for 25+ years: good investments

-Cash flow on such properties: non-existent for the first 5-10-15 years

Yes?!

1 Reply

Allie McAlister

Memphis, TN · Member since 2024 · 180 posts · 223 votes

1y

Hi, Rafael.

I've worked with many investors who began their journeys with turnkey providers. As a first time out-of-state investor, I completely understand how the upside looks on paper when it comes to working with these companies. It's easy- often the properties are already rented and managed, and you can be arms reach away from the property while someone else takes care of it.

However, it's not uncommon for these providers to charge a 20-30% property premium, considering the services they provide. You may be willing to pay that extra percentage off of the top, but at the end of the day, you do not have to go through a turnkey provider to find a rent-ready ( and oftentimes, already tenant-occupied ) property, and a good property management team to manage the property for you.

My advice to you would be to find and develop a relationship with a knowledgable realtor in the market(s) you're taking a look into. They'll be able to find you turnkey deals in the open market, and help you stay in those A and B class neighborhoods it seems that you're looking for. And, if you're working with an investment-focused Realtor, they'll most likely be looking to keep you as a long-time client and not just sell you an "ok" house to make a quick commission off of you.

If you're seriously considering Memphis as a market you'd be interested in, I'd be happy to connect with you and discuss the turnkey options I see in this market, and see if those could be a good fit for you. I also have connections with a couple of great property management teams that would alleviate that out-of-state management anxiety.

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James WachobBusiness Member

Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 888 votes

1y

Hello @Rafael Ro,

Thanks for sharing your situation—it's really helpful to understand where you're coming from. I can definitely see why you're cautious, especially with the real estate landscape in California and concerns about the economy.

When it comes to Memphis, I think it’s a great option for your out-of-state investment. The city offers affordable property prices, which can provide solid cash flow potential compared to the high prices in California. Homes in the low $100k range are pretty common, and that’s an attractive price point for real estate investors, especially when you’re looking for properties that can break even or provide positive cash flow. With your $50k to invest (and access to more), you could quickly scale your portfolio without stretching yourself too thin financially.

Memphis also has a steady rental market, which is driven by factors like population growth, job opportunities, and a strong economy. The demand for rentals remains strong, and with tenant-occupied properties, the risk of vacancies is relatively low. You’re looking at a market where cash flow is more predictable, and that's something you can count on in the long run.

Another reason Memphis is popular with out-of-state investors is the city's history of solid returns. Many people choose Memphis because the market offers a good balance of cash flow and long-term appreciation. It’s a market with low risk and high potential, which makes it an attractive option for those looking to diversify outside of expensive markets like California.

Regarding turnkey properties, it sounds like you’ve already found a good provider. The advantage of buying through a turnkey company is that they’ve done most of the work for you—finding the property, getting tenants in place, and handling property management. This can be a great option if you don’t have the time or desire to deal with the day-to-day operations of managing a property. Sure, the premium they add (20-30%) is something to consider, but you’re paying for the convenience of having everything handled. Plus, if you want to scale quickly, turnkey providers make it easier to buy multiple properties without worrying about finding each one individually.

If you’re feeling comfortable with taking on a little more responsibility, you could also buy directly through an agent and work with a property manager to handle everything. That route might save you some money, but it would require a bit more of your time to find the right team and manage the process. Luckily, Memphis has a strong network of real estate professionals who are used to working with out-of-state investors, so you'd have plenty of support.

In terms of risk, I think buying in Memphis is a good way to manage that. The more affordable price points, combined with a steady rental market, provide some peace of mind. If you buy multiple properties, you can spread out your risk and avoid putting too much pressure on a single investment. Even with potential vacancies or slow periods, the demand for rentals should keep things stable enough to cover expenses.

Ultimately, I think Memphis is a great place for your real estate investments. You can grow your portfolio, maintain manageable risks, and still see some solid returns. Whether you go with a turnkey provider or build your own team, I’m confident it’s a solid market that will work well for your goals.

Please reach out to me if you'd like to learn more about our city.

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Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

1y

Quote from @Nicholas L.:

@Marcus Auerbach

I think we need to help OP distinguish between "cash flow" and "a good investment."

As you have pointed out in other threads, paper cash flow on old midwest properties is illusory. But everyone in this thread keeps saying cash flow over and over.

To summarize:

-Old/older midwest properties in good neighborhoods that you will hold for 25+ years: good investments

-Cash flow on such properties: non-existent for the first 5-10-15 years

Yes?!

I am joking with this comment, but I was going to ask if you were new to Biggerpockets with your cash flow comment. It is pushed over and over and over, especially on social channels and from service providers, and often interchanged with other terms and defined differently constantly, but mentioned again and again. To the point where a new investor can be forgiven for not knowing there is any other reason to invest in real estate. It's super frustrating when you work with investors every day, and the common refrain is I want to buy a passive turnkey property, but it must cash flow. No discussion about why. There is no consideration for risks, areas, quality of the house, renovation, or management. Just make sure it cashflows on paper according to how I read in some thread to run my numbers!

End of rant - continue!

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Rafael Ro