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
Originally posted by @Greg Junge:
@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.
we always have those debates of appreciation BAD cash flow GOOD.. when in reality its IRR over the long haul.. And having a valuable asset that has ability to be listed on MLS and sold at top of the market.. this is important. And so over looked. everyone is focused on buying with virtually no thought to how to exit. And what does an exit look like,
For instance on my newer homes that I sold retail ( owner occ) these i bought mid 2000s when tile counters were fine.. now U need slab granite to be relevant and you need stainless appliances and of course all walls and floors redone etc etc.. U can spend an easy 20k getting ready for market.. if the house has not gone up in value.. then your digesting your cash flow at the end of the cycle.
Its why the MULTI players all look at higher rents lower cap rate drive significant appreciation which is what they are looking for.
- Specialist · Nashville, TN · Member since 2014 · 24 posts · 0 votes7y
Jay: You mentioned an important point in letting the landlord take the risk when you deal with the note.
- 7yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
@Matthew Swearingen I don't know if your numbers are right for Memphis but if they are, that's actually very good, especially off $800 rent. There is no possible way that you are going to find any SFR in any market that cash flows $400 in any market. You can only squeeze so much out of $800, especially with taxes that are over 2% of the value. That's like looking for unicorns. In that $60K to $70K asset class, I think $261 is optimistic. In Memphis, that's going to put you in a pretty low end neighborhood which is going to have higher vacancies, maintenance and turn over costs.
- Everett, WA · Member since 2019 · 20 posts · 5 votes7y
Matthew, Fannie does add a few additional requirements on properties 7 thru 10, Credit score of 720 or above and reserves are calculated differently, nothing earth shattering. As Fannie Mae allows the utilization of rental income from day one on the new purchase, vacant or occupied qualifying is not any more difficult. To maximize your cash Fannie Mae now allows a 20% down payment up to 10 financed properties on a single family residence.
- Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes7y
Those numbers are good. I see a lot of investors shoot for $150/$200 a door.
- Jerusalem, none · Member since 2017 · 36 posts · 8 votes7y
Originally posted by @Jay Hinrichs:
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..
- Jerusalem, none · Member since 2017 · 36 posts · 8 votes7y
Jay that is a new point of view I didn't think on before. I was wondering, rental rates do rise with time so tge appreciation will come from that. I am from Israel and here there is a constant rise in rates and I assume it is the same is Memphis.
The point about selling an A class property to the tenant is an awesome idea, kind of a lease option.
If I was to look for distressed A-B class properties in Memphis to fix rent and maybe sell in the future where and with whom would your suggest me to look?
Please PM me
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Isaac Geller:
Jay that is a new point of view I didn't think on before. I was wondering, rental rates do rise with time so tge appreciation will come from that. I am from Israel and here there is a constant rise in rates and I assume it is the same is Memphis.
The point about selling an A class property to the tenant is an awesome idea, kind of a lease option.
If I was to look for distressed A-B class properties in Memphis to fix rent and maybe sell in the future where and with whom would your suggest me to look?
Please PM me
for A and B properties Memphis Invest Chris Clothier is on this site. .. Kind of a funny story.. I was in Israel 16 months ago .. my step son had his Bar Mitzvah at the wailing wall. I had this pre conceived notion that Jerusalem Was going to look like one of the hill towns in Italy surrounded by a big wall and such.. so to my surprise when in fact its a big modern city that surrounds the old city.. still very cool..
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