Memphis Cash Flow Doesn't Seem to Be That Great! So Why Memphis?
CA · Member since 2018 · 124 posts · 33 votes
Memphis Cash Flow Doesn't Seem to Be That Great! So Why Memphis?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesOriginally posted by @Matthew Swearingen:
You invested in rentals...so my question is why did you? I'm not saying your discouraging me (I do appreciate the honest advice though).
I've heard of crowd funding but not sure exactly how to go about it and what companies to invest in? Any suggestions?
How would I calculate my return on a $50k investment at 6%? Is there a on line calculator?
Yup i had 350 C class SFRs which is what your talking about.. I had a partner buy me out almost 5 years ago.. and i had another 20 or so A class 150 to 250k each homes.. have sold all of those and have exactly one left.. on the A class I was able to sell half of them to my tenants thats why i like A class they can actually qualify to buy a home.. and you save THOUSANDS in fix up costs and sales cost when you dont have a vacancy and or any updating.. any rental that is going to be sold retail unless its in the Bay area or other very high priced areas will need extensive updating to get Fair market value.
I am not trying to be discouraging just stating facts.. buying one home 5 states away in the C class which is what your describing takes on a level of risk.. buying 10 gives you the chance to average them out.. And buying anything cheaper than what you describing in a major metro MSA brings on a high degree of risk for the out of area investor.
If you want a rental I like to advise this one little formula.. at the end of the day making 200 a month on a rental will just get spent on something.. you wont really see it.. so what is the play.. the play is some tax benefits although small on low priced homes. but its the tenant paying for your home getting that sucker paid for so you cash flow goes way up and you have a true asset.. putting 20% down on these homes Is NO equity.. you would never see that money back if you needed to sell in the next 5 to 10 years.. becasue we know those areas dont appreciate.. as well as you ONLY have one buyer and that is another investor.. who is going to drive a hard bargain.. That investor is going to back into the numbers the same way you are.. the value is simply what an investor will pay for a given cash flow. So if rents remain stable and in those markets they are incredibly stable.. you values pretty much stay the same.
So I would look at what is the median price point in an MSA take Indy its about 130k that means half are under half are over.. also means that homeowners are generally buying 130k and up.. you want to own a rental that can have an exit to an investor or be dragged up in value becasue homeowners want to live there.. in areas of high density rentals the only way values get pushed is by the wholesaler and then by the turn key or investment company buying them and reselling them.. but there is a ceiling.. and that ceiling is basically the 1% rule for most folks. So take your 50k use 35k of it and buy a 130k house that rents for 1200 to 1400 in Memphis.. thats much safer. Run the numbers on that one.. Also keep in mind the stability of the tenant.
Tenant stability is important. The 700 to 850 tenant needs 3X to qualify for the rental you will see that universally.. so a 700 rent tenant will make 2100 a month. and not much more other wise they will rent something higher.. take the rent Utls phone and your at 1000 a month that leaves that tenant 1100 a month to live their life.. do they have kids.. ? do they own a car ? if they own a car and most will thats another lets say 200 month for car note and gas and insurance.. so down to 900 a month less than 250 a week to feed cloth and do some other things.. this is why most have very little savings if any and one speed bump and you dont get your rent.. just remember when the federal govmit shut down what stress that put on workers who went one month with out a check.
Now do the math and that 1400 dollar rental to get in the door your at 4200 a month combined. your net after rent is 2800.. and say you have another 800 in fixed expenses now you have 500 a week to live on .. big difference and you might even be able to put a few bucks in an emergency fund.. you will find credit to be better etc.
Now as for the 6% fund I mentioned thats simple is interest only 50k for a year would net you 3k / 12 = or 250 a month.. you can buy first position notes that are pretty solid to that will pay 7 to 10% let the landlord take the risk and you become the bank.. so there are many ways to make money in this game.. of course the rental is the most talked about and easiest concept to understand..
Having been a HML in the mid west for going on 20 years.. having owned more than 350 of the C class.. these are my experiences.. those A class homes I owned for instance.. My secretary managed those from our Oregon office.. I hire agent to place tenant pay them their fee. and we had a good handy man on speed dial.. but since they were brand new and we had full blown top of the market tenants we had very little calls for maintenance. Cash flow was something i did not even look at it was so inconsequential.. And any extra i got I just paid more on the mortgage I made my money when i bought them for GOZONE tax benefits and equity build up when I sold.. I cant stress enough that even though people thinks your going to buy these rentals for ever .. things happen and you must think about how your going to exit.. IE liquidity..
33 Replies
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
those are normal numbers all around the US rental home market.. for stuff that is not in a war zone.. and only pays you in your imagination not in reality. some will say your insurance is a little high. and you have to put in re lease fee when tenant leaves and 60 a month unless its a basically all new mechanicals and such is way low
if your going that route you need to get to 10 doors ASAP.. to make this realistic.. otherwise in my mind if you cant scale owning one rental house and hoping to make 200 a month in any of these markets you take on some pretty good risk.
when you have 10 houses you will have cash flow every month.. and easier to deal with it plus your bringing in measurable income IE 2k a month or so.
- CA · Member since 2018 · 124 posts · 33 votes7y
Thank you Jay.
So when you say scale what do you mean? I have about $50K to invest now.
I hear its gets harder and harder to invest in homes as far as qualifying when you start getting over 4 to 6 homes...so how do you buy several homes with the various constraints with qualifying for more homes?
How would I buy multiple homes ASAP?
Would it be spread out over a years time?
Can I do it in 6 months or sooner?
Matthew
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
really depends on your goal though.. you can just put those funds in one of the crowdfunders that allows small denomination investments and non accredited .. spread it around can make 6 to 10% per annum there.
dont risk your good credit borrowing money for an asset far away from you.. and more liquidity.
some folks are trying the BRRRR these days with some doing fine others losing a ton of money when they cant pull it off like is written about in books LOL..
There is a fund IN Oregon i am familiar with 50k minimum and only 60 day lock up pays 6% and your investing at the bottom of their capital stack. thats a nice alternative to get you in the game while you keep exploring.
I am pretty conservative by nature .. and I dont think I would risk my nest egg in the manner your talking about.
so many things can go wrong.. Bad tenant and you have 5k turn over or worse. eviction taking months.. etc etc.
You may want to drive up 5 and hook a left on hwy 20 and check out lake county you can buy starter investments there for about the same numbers.. but at least you dont have to fly there. Nice,, Lucerne Clear Lake Oaks.. city of clearlake is a little too rough.. and Lake Port Kelsyville probably to high priced.. lots of new building going on there you may want to look at that.. in the areas were houses burned down.. Cobb mtn. specifically
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Also keep in mind I am not singling out Memphis.. all the mid west cities the numbers are virtually interchangeable.
- CA · Member since 2018 · 124 posts · 33 votes7y
You invested in rentals...so my question is why did you? I'm not saying your discouraging me (I do appreciate the honest advice though).
I've heard of crowd funding but not sure exactly how to go about it and what companies to invest in? Any suggestions?
How would I calculate my return on a $50k investment at 6%? Is there a on line calculator?
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes7y
@Matthew Swearingen I pay insurance of I’d say closer to 600 a year for an average house in memphis. Taxes should be 1100-1200 a year so you may be a bit high but you’re not to far off.
If you’re financing you won’t get 400 a month.
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes7y
@Matthew Swearingen 50k @ 6% = 3,000 a YEAR. Since you are only going for 60 days, it's 2/12 of $3000 or about $500. Try the free calculator that comes on your phone. That's what I used. ;-)
- CA · Member since 2018 · 124 posts · 33 votes7y
Thank you guys. Ya I'd be putting 20% down. Ok so just basic math. Is that dispersed monthly or yearly?
Is a 30 year fixed rate best option as opposed to ARM initially?
Also can you recommend an app?
- Specialist · Huntsville, UT · Member since 2015 · 458 posts · 249 votes7y
Your initial question was, Why is Memphis a good place to invest?
Though cash flow in Memphis seems typical, cash flow isn't the only thing that makes a market a good one. Job growth and house appreciation is pretty good there. And it's also an affordable place to live which is attractive to buyers and renters.
- CA · Member since 2018 · 124 posts · 33 votes7y
Thanks Lori
I hear that appreciation I'm,Memphis has never been the best and then I read that it is. I'm having a hard time deciphering all the info. I would think there's a website that gives this data. Either appreciation is up or not sitting a specific time frame. Are you aware of any websites that offer such data?
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Matthew Swearingen:
You invested in rentals...so my question is why did you? I'm not saying your discouraging me (I do appreciate the honest advice though).
I've heard of crowd funding but not sure exactly how to go about it and what companies to invest in? Any suggestions?
How would I calculate my return on a $50k investment at 6%? Is there a on line calculator?
Yup i had 350 C class SFRs which is what your talking about.. I had a partner buy me out almost 5 years ago.. and i had another 20 or so A class 150 to 250k each homes.. have sold all of those and have exactly one left.. on the A class I was able to sell half of them to my tenants thats why i like A class they can actually qualify to buy a home.. and you save THOUSANDS in fix up costs and sales cost when you dont have a vacancy and or any updating.. any rental that is going to be sold retail unless its in the Bay area or other very high priced areas will need extensive updating to get Fair market value.
I am not trying to be discouraging just stating facts.. buying one home 5 states away in the C class which is what your describing takes on a level of risk.. buying 10 gives you the chance to average them out.. And buying anything cheaper than what you describing in a major metro MSA brings on a high degree of risk for the out of area investor.
If you want a rental I like to advise this one little formula.. at the end of the day making 200 a month on a rental will just get spent on something.. you wont really see it.. so what is the play.. the play is some tax benefits although small on low priced homes. but its the tenant paying for your home getting that sucker paid for so you cash flow goes way up and you have a true asset.. putting 20% down on these homes Is NO equity.. you would never see that money back if you needed to sell in the next 5 to 10 years.. becasue we know those areas dont appreciate.. as well as you ONLY have one buyer and that is another investor.. who is going to drive a hard bargain.. That investor is going to back into the numbers the same way you are.. the value is simply what an investor will pay for a given cash flow. So if rents remain stable and in those markets they are incredibly stable.. you values pretty much stay the same.
So I would look at what is the median price point in an MSA take Indy its about 130k that means half are under half are over.. also means that homeowners are generally buying 130k and up.. you want to own a rental that can have an exit to an investor or be dragged up in value becasue homeowners want to live there.. in areas of high density rentals the only way values get pushed is by the wholesaler and then by the turn key or investment company buying them and reselling them.. but there is a ceiling.. and that ceiling is basically the 1% rule for most folks. So take your 50k use 35k of it and buy a 130k house that rents for 1200 to 1400 in Memphis.. thats much safer. Run the numbers on that one.. Also keep in mind the stability of the tenant.
Tenant stability is important. The 700 to 850 tenant needs 3X to qualify for the rental you will see that universally.. so a 700 rent tenant will make 2100 a month. and not much more other wise they will rent something higher.. take the rent Utls phone and your at 1000 a month that leaves that tenant 1100 a month to live their life.. do they have kids.. ? do they own a car ? if they own a car and most will thats another lets say 200 month for car note and gas and insurance.. so down to 900 a month less than 250 a week to feed cloth and do some other things.. this is why most have very little savings if any and one speed bump and you dont get your rent.. just remember when the federal govmit shut down what stress that put on workers who went one month with out a check.
Now do the math and that 1400 dollar rental to get in the door your at 4200 a month combined. your net after rent is 2800.. and say you have another 800 in fixed expenses now you have 500 a week to live on .. big difference and you might even be able to put a few bucks in an emergency fund.. you will find credit to be better etc.
Now as for the 6% fund I mentioned thats simple is interest only 50k for a year would net you 3k / 12 = or 250 a month.. you can buy first position notes that are pretty solid to that will pay 7 to 10% let the landlord take the risk and you become the bank.. so there are many ways to make money in this game.. of course the rental is the most talked about and easiest concept to understand..
Having been a HML in the mid west for going on 20 years.. having owned more than 350 of the C class.. these are my experiences.. those A class homes I owned for instance.. My secretary managed those from our Oregon office.. I hire agent to place tenant pay them their fee. and we had a good handy man on speed dial.. but since they were brand new and we had full blown top of the market tenants we had very little calls for maintenance. Cash flow was something i did not even look at it was so inconsequential.. And any extra i got I just paid more on the mortgage I made my money when i bought them for GOZONE tax benefits and equity build up when I sold.. I cant stress enough that even though people thinks your going to buy these rentals for ever .. things happen and you must think about how your going to exit.. IE liquidity..
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes7y
@Matthew Swearingen An average deal in Memphis will cash flow better than the best deal you can find in CA.
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes7y
@Matthew Swearingen you just got some very valuable and free advice from @Jay Hinrichs. Instead of brushing it off and doubting, you would be wise to follow this advice as Jay has lost more money on real estate than most will ever make, and he is still crushing it.
- CA · Member since 2018 · 124 posts · 33 votes7y
Thank you so much Jay for the detailed information. I guess im trying to figure how best to invest approximately $40k to 50k, whether it be in rentals or fix and flips in Mephis or any other area. It just seems theres a lot of discussion on the forum about Memphis. At the same time I would think,it's saturated with investors and dried up. So I question some of the agents I'm speaking with if there really is viable deals or are they just trying to make there commission and when I figure out it wasn't the best investment, they are off to the next deal.
Your advice really helps me to understand more of my goals and how I need to reach them and being smart about it. Very much appreciated....thank you.
- CA · Member since 2018 · 124 posts · 33 votes7y
When I say invest im open to funds as well that can give a 6 to 10 annual return that as you said, let the landlord take the risks. I'm,not to familiar where I would search out a fund. Can you point me in the right direction? I'm just a blue collar worker and don't have any real background in funds of this nature. Is this something I can call Fidelity or Charles Schwab about.
And what is Indy, MSA and GOZONE?
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Matthew Swearingen:
When I say invest im open to funds as well that can give a 6 to 10 annual return that as you said, let the landlord take the risks. I'm,not to familiar where I would search out a fund. Can you point me in the right direction? I'm just a blue collar worker and don't have any real background in funds of this nature. Is this something I can call Fidelity or Charles Schwab about.
And what is Indy, MSA and GOZONE?
Indy = Indianapolis MSA = major metro area.. GoZone was the gulf opportunities act post Katrina. these were tax advantages to stimulate rebuilding In the affected areas. in a nut shell any business in the Zone if they rebuilt new construction or facility got to write off 50% year one.. so you saw hotels casinos car dealers medical plazas shopping centers.. go up all over the place.
And for full time investors like myself.. IE 750 hours a year or more as a full time broker or investor I qualified for new construction SFRS.
So I bought 14 of them for just under 3 million over two years and took a 1.2 million dollar deduction or 600k a year for those two years which sheltered a good portion of my yearly income in those years. PRE GFC when I had income. LOL
Just google crowdfunding that accepts non accredited.. the stock brokers will not have these investments..
- CA · Member since 2018 · 124 posts · 33 votes7y
Thank you Jay. I appreciate your advice very much.
Those numbers look like numbers for a C or D class property. The last time I ran the numbers for a good quality property in Memphis with 20% down non recourse, cash flow was minimal...significantly less than your numbers.
Also, keep in mind that if you truly are able to get 260 per month, then that is actually a pretty decent return on your investment (3,120 ÷ 18,000 = 17.3%). However, like @Jay hinrichs alluded to above, you'll be taking on some significant risk due to the inherent volatility of cash flow from maintenance items and tenant turnover/vacancy. Properties in the Midwest that rent for well under 1,000 tend to be more volatile.
- CA · Member since 2018 · 124 posts · 33 votes7y
Thanks Tony. Quick question. The numbers you gave are derived from?
In response to Jay, just so I understand. When you have a market such as Memphis where they are C properties and given majority are tenants you are not going to see the home appreciation that one would like to see in 10 years that you would with an A or B. In addition, to get a cash flow of say $200 from a few houses may not be nearly as beneficial as buying 1 home that is a class A or B due to the fact that your have a nicer area that will bring higher rent but also a higher mortgage to cover the rent BUT I would have the home appreciation equity over time. It seems that these home prices of say 50 to 80k with renters are going to give the same difficulties or risk no matter what state. It's makes home sppreciation stagnent.
Any thoughts on fix and flip in Memphis? Saw a company called HouseGuys....i think that's the name. They attempt to answer the obvious question which is.....Why would they sell a discounted home to me instead of flipping it themselves. Their answer seemed to be they make their fee and it's quicker and they xan only flip so many homes so they pass advantage on to me. Any thoughts on guys.
I was also told getting a decent home in Nashville and putting it on Airbnb will generate more income that putting a tenant in?
Thank you again everyone. Just a single dad trying to get a change in career to spend more time with my son's but have been taken advantage of in the past and lost money. So thanks everyone!!
- HIGHLAND, MD · Member since 2011 · 160 posts · 141 votes7y
@Matthew Swearingen
Your not really making any money on houses like this....ask me how I know. If this is your first SF rental then you have no history of actual #s to base your underwriting on and can only go on educated guesses or your management companies best estimates.
You have only figured 5% to vacancy which equates to only 2.5 weeks of vacancy per year. Realistically unless you have a speedy, crack team in place that can get the place rent ready and re-rented in only 2.5 weeks, it’s not enough vacancy as a %. I would count on at least 1 month vacancy in your underwriting. As have been pointed out by others there will be a Larger initial cost to rent and then turnover cost when using 3rd party management due to the way most nickel and dime you and add their markup to the cost to ready property to re-rent.
Also see no mention of a monthly Cap Ex figure. If you plan to pay these items from cashflow or from your deep pocket, I hope you have a decent cash reserve because the major items don’t last forever and are expensive to fix/change out when their useful life it over.
Do yourself a favor and buy only 2-4 unit deals to start. They will cash flow way better based on the per unit cost vs the cashflow from rents.
It’s like the cost of six pack of soda vs buying six individual sodas.... the cost can be 2-4 times more when you buy the soda individually. It’s a simplified example but it it’s easy to comprehend.
- CA · Member since 2018 · 124 posts · 33 votes7y
Makes sense. Love the analogy. Totally correct. I will look into that.
Thank you.
- Rental Property Investor · Chicago, IL · Member since 2017 · 14 posts · 1 vote7y
@Matthew Swearingen your maintenance reserve seems a bit low. I’m assuming this is an older property. But $250 pm Net for a $70k property seems ok.
- CA · Member since 2018 · 124 posts · 33 votes7y
yeah I just used the rent calculator that had those values auto-populated in. Such as 8% for management fee vacancy 5% excetera
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes7y
I wouldn't try an Airbnb in Nashville unless it's in commercial zoning.
- Investor · Parrish, FL · Member since 2014 · 120 posts · 115 votes7y
@Jay Hinrichs nailed it in his posts. His logic and possibly his words convinced me that I didn't want to deal with out of state investing in this type of asset class.
But I'm sure it works for some people and everybody's situation and risk tolerance is different.
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