Analyze this deal - Memphis TN

13 Replies

Hello Folks - I am being offered a turnkey property in the following neighborhood on Scottsdale Ave zip 38115 for $120,000. It is classified as a B+ neighborhood. The house in question is a 4/2 with projected rental income of $1295. I have run the calculations using the following forecasts - 10% management fee, 4.5% 30 year fixed with 25% down and vacancy allowance of 12.5% (assuming an average tenant would stay 2 years with 2 months to acquire the tenant and 1 month of rent as commission. So close to 1.5 months on an average in a 12 month period leading to 12.5%). I have also used 10% as a maintenance and CAPEX reserve. Using all this, it comes to $227 per month on a free cash flow basis. Is this a good deal? Do my numbers above look good including the confidence factor on rental estimate? Also, is this truly a B+ neighborhood or are there other factors to look at?

I certainly wouldn't call it B plus. Used to be maybe.  Without an address it's impossible to really comment. Assuming it's close to the map pic you posted there isn't one comp that high and the only recent sale I can see was 57K for a 4 bed home. 120K for there is a LOT of money.

A friend of ours from reedys, J.P Shelley, was murdered on the same street. I understand it has gotten pretty rough depending on which block you are in. I am sure @Alex Craig will be able to comment further but we need an address really.

(901) 264-8674

its one of the houses on the right or left side on Scottsdale avenue in the narrow area I have pasted in the picture. Why do we need more than this? I see only a handful of homes on either side in the pic. Do i need to narrow down more?

I believe this area of Scottsdale is in the Fox Meadows area which I would say is an average B area.  I personally own a 4 bed 2.5 bath home with a 2car attached garage on Foxbriar and it only rents for around $1,095 and my home is 2,400 sqft. 

The rent you state seems to be on the high side unless it is already rented out or if you can verify other rental  comps for the area. We also just sold a 3  bed 2 bath 2 car garage on Foxbriar for $95k withexpected rent of $1,050 range.  

@dean Letfus  JP was killed on Scottsdale but was over by Perkins area of parkway village, big diffference in area.  

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

We just sold one on Scottsdale  in that area for 96,900.  New roof, HVAC, ceramic tile in kitchen and baths, vinyl plank flooring and made every repair on the inspection report. Rented for $1,095 on 18 month lease.  It was a four bedroom two bath home about 2000 ft.²   $1295  is very high for the area and you would not get that consistently.  I think 1095 is about the ceiling for that area.  Certainly not a B+ area but definitely a B area.  I cannot imagine any scenario of paying that much for a house over there.  It would take you at least 10 years of ownership with conventional financing to be able to sell breakeven. 0 to 1%  appreciation  for the area.  This will always be a very solid cash flow neighborhood and will always be very easy to rent. 

 JP was murdered in Parkway Village.

@Alex Craig @Curt Davis

Thanks for your feedback. Running the calcs with a $1050 monthly rent results in a dismal $62 per month cash flow.

@Abdul Azeez To help you save some time, the market in Memphis still supports Turn Key properties that meet roughly 1.2% gross rent vs. price in the 70k-90k range. The one you listed is just shy of that. That said, in my limited experience, and conversations with others in Memphis, as you start to crest over the 100k mark the gross rent per cost starts to dip. Your vacancy will also start to dip. My point is before dealing with the analysis, use a quick bench marking tool to save yourself some time.

Also, as @Dean Letfus mentioned, the experts really need an address to help you. Specifically, @Alex Craig , @Curt Davis and Dean have helped me before. Honesty sucks sometimes, but it could potentially save you money. 

@Abdul Azeez ,

Here are my thoughts:

  • Location - I’m out of state as well, but from what I’ve learned there is a B+ neighborhood in that area that is basically visualized as a box between Mt. Moriah Rd, Newberry Avenue, Mendenhall Road, and Hickory Hill Road. From what I understand the closer you get to the center of that box the better. Scottsdale Avenue runs between Mendenhall Road and Hickory Hill Road and is North of Newberry Avenue so it does fall within that zone (though towards the bottom end). Look at the address and see if it’s towards the middle or farther ends (East and West) to evaluate where it’s nestled within the zone.
  • Rent – Even if it falls near the perfect area of that location I haven’t seen any houses in that area bring in $1,295. As a gut-check I would look at the expected rents on Zillow and Rentometer. Then I would jump onto Rent.com and see what is actively listed in the area. I usually like to take the lowest number from these sources when I’m first running my analysis. It’s by no means a perfect estimate, but it does get pretty close. If you get serious about the property I would ask your property management company (not the one connected to the turnkey company) to tell you what it will rent for (if you’ve picked a company with a good size portfolio they can look at their own rentals in the area and give you a very good estimate).
  • Maintenance - I imagine when you say 10% as a maintenance and capex reserve you mean 10% of rent. I would caution you to use a percentage of the cost to rebuild (or to keep it simple the market value of the property) with the location and age of the building instead. I use 1-3%, 1% if it is in a good (B+ to A) area and built within the last 20 years, then I slide the scale up to 3% as it gets into a bad area and the property ages. The reason for this is that property values are tied much more closely to the cost to rebuild than rent values. I personally don’t let this number drop beneath $1200 per year since I’m a bit conservative, but if it's turnkey and everything is in perfect condition with all new systems I could be convinced to reduce this number a bit.
  • Capex – Since you include your capex within your maintenance estimate of 10% I think it's probably too low. Here is a good article describing the breakdown of Capex and how much to estimate for it (https://www.biggerpockets.com/renewsblog/2015/10/1...).
  • Property Taxes – I didn’t see you mention this in your breakdown. Memphis has both county and city taxes – this area of Memphis has both. A good rule of thumb is to estimate that taxes within Memphis will be 1.94% of the total value of the property. Bear in mind that certain areas of Shelby County are unincorporated so you aren’t stuck with city taxes (such as Cordova, Barretville, etc.). Just to keep things simple on your initial screening I’d use the 1.94% number and then anything you can save is gravy.
  • Insurance - I also didn’t see you mention insurance. A good rule of thumb is $65 per year for every $10k of coverage for a catastrophic fire policy in the area.
  • Initial Equity – As an out of state buyer I know that I have greater risk for something to go wrong (and a limited ability to successfully handle it) than somebody who is buying in their backyard. Even if you have a strong team in the area something could always go wrong so buying at a distance presents its own unique set of problems. Thus, you need an exit strategy you can employ without breaking the bank and wiping out whatever earnings you gained while you held the property. Because of this I always look to enter a property with at least 10-15% in equity so I can cover my sales and closing expenses and possibly a bit extra in case I have to provide the buyer an incentive because of the market cycle. I have not yet met a traditional turnkey company that fits this requirement (and based on what I know about this area, this property is marked up and won't provide that).

If you apply the above criteria to this deal you'll likely see your cash flow drop into the red. I'd walk away from this one.

@Joseph S. there are no B+ homes in the area.  The area you speak of is B. Scottsdale runs further West then what you have laid out. Once Scottsdale crosses over Castleman, it is mostly C+. Once you get to Knight Rd, you are C. I grew up here and back in the 80's this was an A class area as i used to play Fox Meadow Golf Course and frequent the Mall of Memphis.  Once housing projects started being torn down and section 8 vouchers handed out (many blame Bill Clinton, but not sure on that), the neighborhood values dropped.  Since the mid 90's, this areas has pretty much stayed the same and I don't see that changing.  It is a good area and one of our easier areas to rent because it is close to East Memphis, 240, airport, Winchester Rd, etc.

The rest of what you have laid out is a good overview.  The rents are no doubt not going to hit $1,295.  Just like any property, every so often you get lucky and hit a way over market rent, but this is area tops out at $1,095 and that is likely a 4 bedroom house close to 2,000 sq ft with garage.  3/2 are going to be around $950 to $995.

@Alex Craig , you're right! I misread the map in regards to Scottsdale - good catch. Either way, the difference between B and B+ is more of a matter of perspective, but since you're the local I'll take your word for it. Live and learn =)

@Alex Craig @Joseph S. Thanks for your input. Just by putting the property value at $1095 in and of itself helped rule this out without doing the other manipulations. I appreciate your help.

@Abdul Azeez

You've got some great feedback and advice on here so far.  I had our management company pull some records real quick as we are managing six properties on that street.  Most are close  to the cross section of Clarke rd but we also have one within a few houses of Hickory Hill and one that is just west of Mendenhall.  

Either way, three of the six are rented at $1065.  One is rented at $950 and two are rented at $895.  

As others have already said, $1295 is probably too much of a stretch.  As @Alex Craig noted, when the renovation is done at the highest level and with an intent to try and address maintenance that is usually deferred, rents are still going to be capped in this area and held below the $1100 ceiling.

Best of luck as you keep working toward getting going.

Chris

@Chris Clothier Thanks so much for your input. I am really grateful to BP for all the valuable input I am getting.

@Joseph S. since property rating is anything but scientific the whole rating scale is subject to ones interpretation. I see people call "C" class properties that I would consider "D" class war zones, but since I rarely do "C" class, my view of C is going to be different from someone who has a large portfolio of homes in these areas or TK providers who operate exclusive in this space. I see people calling "A" class properties that are really B or B+.  My opinion in Memphis is the only A class homes (that investors actively invest) are East Memphis North of Quince to Poplar, East of Cherry all the way to Ridgeway, North of 385. This area is referred to as Colonial Acres and Balmoral. Confusing huh? That is why Memphis present challenges for out of state investors trying to figure out the market.  Many locals not in the biz have a hard time identifying the niches here.

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