Tennessee - Best investment areas

34 Replies

I know someone thinking of investing in Tennessee. Their daughter will be going to college there in a few years and they're thinking of buying a house to rent and hold. Nashville, Cleveland, Cattanooga or ? Thoughts? Student housing? 

Also, when buying in Tennessee, what differences are there that you know of from buying in California (other than pricing)? Process, etc.? 

@Michelle Watson  

You can make a good deal just about anywhere with the right strategy. Knoxville and Memphis are strong rental markets, but appreciation may be modest. Many parts of Nashville have good appreciation, but finding a strong rental property with cash flow is challenging, but can be done. Chattanooga can go either way depending on the part of town. Smaller towns have fewer buyers, so buying with value can be done more easily. 

Prices in TN are much lower than equivalent property in CA. Also purchasing is much easier and straight forward here than CA. Nobody submits a resume or essay with an offer. You send an offer (or a contract), along with proof of funds or credit letter, and you are done. Many offers expire in 2 or 3 days, so sellers have to make a decision quickly. If you are getting a bank loan, you can close in about 30 days. Cash buyers can get it done in 4 or 5 days if needed.

@Roger Poulin I agree the Memphis market and be linear for appreciation but the cashflow is what most of my serious investors are looking for. I am able to buy homes at the right price, fully renovate them with all hard-surface floors, new roofs, new HVAC, etc. and still have big ROI!

Another important factor to my investors is the demand for Quality rental properties, in the right areas. We have a shortage of rental homes available, for our tenants. That means that our homes stay rented and vacancies are not an issue! Thanks for the Memphis shout out!

@Karen Margrave Let me know if my team can assist you. We help investors from around the world buy, renovate and manage thousands of properties.

James 

@Karen Margrave I own 19 in Memphis and it has treated me well as I keep buying (3 this month). I just bought one in Knoxville too. That market is great, but seems to be very competitive. Rent ratios are not as good as Memphis, but property taxes are cheaper and the REIA meeting I went in Kville quoted 99% occupancy of rentals. I found out that rentals that get a 10% cash on cash never leave Knoxville, meaning, if that deal is found, locals snag them. That is what I mean by competitive. I am fortunate that I fell into an off market deal at 14% cash on cash.

@Karen Margrave You left out Knoxville in the places your friend's daughter is looking - hopefully she will consider buying here, the main campus for the University of Tennessee :-)

You will find TN is: 1. much easier to do business than in CA (we actually like private investors) and 2. everything appears to be "cheap" compared to CA. However, @Alex Craig pointed out the correct situation. In Knoxville, there is are multiple local buyers for every property with a true return of 10+ %. In Nashville, there are many "hobby investors" who buy because they want to have a TV show and Cleveland/Chattanooga are complicated markets because they are so close to the cheaper housing just across the GA line.

I will continue to pull for Knoxville.

Victor Jernigan

@Alex Craig isn't it the same in any market? That a Active local investors would most likely keep the best deals or pass it to their bast mates? I bet in Memphis there are great off market deals at 1.5%-2% in good areas that don't go to turn key. 

It's just the nature of the game, you have to be in it to win it. :-) 

2% is basically non existent and has been for some time, even for guys like us. 

@Hadar Orkibi to a certain extent yes, but not really in Memphis. Locals will accept closer to the 1% rule in the suburbs and certain areas of Midtown. My last deal I am all in at $170k and home rents for $1,495, but it is in Collierville. I just bought a deal near Crosstown where I am all in at $133,000 and rents for $1,395. I did my first C class home to keep in 8 years and I am all in at $38,000 and rents for $650.

I just found Knoxville more competitive as the market is smaller then Memphis and seems to be more local investors then out of state investor. I would assume because most out of state investors could not find Knoxville on a map, much less be interested in investing there. Little Rock offers really good returns, yet we do 2x the amount of business in Memphis then we do in LR.  Memphis tends to be the name brand for cash flow.

@Curt Davis agree with Curt. 2x is gone.

All of our properties are in Tennessee and as Curt & Alex already mentioned you're not getting 2% here. Our best properties come in at around 1.5% and less-profitable somewhere in the very low 1s, 1.1-1.2%. The markets you'd want to be in are ridiculously competitive right now and the comment about properties never leaving Kville is spot-on. 

Of course everything is perspective, and compared to California we probably look like a gold mine out here. I will say this: it's not a hard place to be a landlord. You can have deadbeats gone in a heartbeat and you don't need a lawyer to close a deal. I have done back-to-back closings on properties with my title company in less than an hour, as an example. 

Thanks for the comments @Curt Davis @Alex Craig and @JD Martin

I understand that the market is hot now and it sounds like the US housing market is potentially peaking. the last few years where great here in NZ and trading properties is easy when sentiment is good (anything to do with on-selling deals we call "trading") I'm keen to get in to your Market but not desperate to rush in with the crowds. 

I would like to diversify and build a cash-flow portfolio in the US, I have few friends who invest in Memphis (and used some of the TK providers here) so think it will be good place to start. im interested in B, B+ maybe areas where there are better tenants and possibility of some rent growth over the medium- long term. My plan is to buy few in the fist year ( 5 sounds like good number) and see how they preform, Buy with 20%-25% down and Refi to exit say 10%-15% out and buy more.

I wouldn't mined buying in A- areas where there is lower cash flow if we can have better capital appreciation and solid tenant demand.

Little Rock could be another options, but I will need to research it first.

Ideally I would like minimum $200 per door net after all costs.

How is that sound to you? Realistic? 

Thanks in Advance guys,

You can't get 20% down unless you're an American resident Hadar. Otherwise all sounds good.

@Hadar Orkibi $200 a month is a slam dunk. Little Rock works great as fits all the things one would look for in a potential market.  The big difference are the landlord laws, some of the most friendly in the US.  Check the procedure out. Really, this is a game changer for a landlord because the tenants know how quick and brutal the process is.

1. File a 3 day notice to pay rent or move. Can be done on the 2nd of the month since rent is due on the 1st. Normally they respond or move at this point. (I don't recommend this--you want to work with your tenant to keep them)
2. If they don't respond you file a lawsuit that cost about $180
3. Then you must serve the tenant with a summons and the complaint.  
4. If they don't respond to the lawsuit within 5 days you can file for a Writ of Garnishment. It costs 
5. Then you deliver the writ to the sheriff's office to have it served on the defendant. That costs He must serve it within 24 hours.
6. Finally you schedule to meet the sheriff or a deputy at the house to physically evict the defendant. That depends on their schedule but it doesn't take too long.
7. You also bring along a locksmith to change the locks. And, you tell the tenant he has 30 mins to get his belongings and get out. It's harsh but that's the law. 

Whole process is 2 weeks or less in most cases. That give you time to work with a tenant, decide it is time for them to go, evict, get the property ready and lease again.  If your lucky, all within 30 days.

Thanks @Dean Letfus , 25% down would do. 

@Alex Craig That sounds almost like commercial property eviction process which is great for landlords.

Big day coming up, lets see what happens and if there is any Knee jerk reaction to the stock market. at list we don't "gamble" there hey! 

Big day is tomorrow and Hilary will should win fairly easy.  But the idiot wing of my party will claim the election is rigged and big baby sore loser Donald Trump will continue this madness.  The rest of the normal people will continue on to work and make money like one is supposed to do.

You're such a dream stealer Alex.  Trump would at least be interesting :-).

I'll take a bit of a shot there at the note that "cashflow is what most of my serious investors are looking for". 

Cashflow only isn't always what its made out to be. There are war zones out there that cash flow great - provided you want to deal with all the nonsense that can go along with being a landlord there.  

And while I understand that turnkey means you're typically going to have a PM, the bottom line is that PM may turn out to be a turkey and then you're really in trouble. 

I don't know memphis so I'm not sure if the appreciation is war zone like or as incredible as california. No clue. But it doesn't sound like its that great.

And I would suggest that people look at the numbers historically in the areas that have a balance of cash flow and appreciation versus those that are strictly cash flow before they suggest that serious investors only care about the cash flow.

Typically, the areas I see that don't appreciate but cash flow well also don't see the rise in rents that some of the more balanced areas have. And one of the values in buy and hold, whether you like it or not, is the value of appreciation. 

So if you're looking to buy and hold for 5 or 6 years, then sure, go ahead and look at the areas with the highest cash flow. But if you're looking to build a portfolio and want to know what that will look like in 20 years, then I'm a firm believer you want to be in an area with some balance. 

Because in a high cash flow area, you might see more profits today, but the value of your asset and the cash flow it gives off in 20 years is going to be what should truly drive your decision making.

You could buy a house for 100k that makes you $400/mo today. And in 20 years, its worth 120k and is making you 500/mo.  Or maybe you could buy a 120k house that makes you $300/mo today. And in 20 years, its worth 240k and is making you 750/mo.

I know which one of those I would want. 

And just so the turnkey guys don't clobber me here (which I know they would like to), that doesn't mean you have to rule out an area altogether. But maybe you want to guide the turnkey company towards your end goal. I'm sure there are some areas in every one of those towns that are nicer than other and maybe have some tradeoff in cash flow for better chance at appreciation. And those would be the areas I would recommend people at least consider.

But to just go after the houses that have the highest cash flow? That can be a recipe for disaster and, at the very least, an incredibly short sighted mistake that may cost you a ton of return over the long haul.....

@Mike H. In Memphis management is pretty much everything. Guys like @Derrick Craig can get very marginal areas to perform but in the main for out of state investors finding the best PM you can is arguably the most important piece of the puzzle.  Then they can help you decide on areas.

@Dean Letfus

Thanks for the mention and you are correct I do make money in areas of Memphis that others can't...

@Alex Craig , I make that "My last deal I am all in at $170k and home rents for $1,495, but it is in Collierville" to be under slightly under 6% net return, (guessing a few numbers). So is that enough yield for you or is it the appreciation that makes it work?

@Dean Letfus , closer to 182%. Let me explain.

So I went back and looked at this deal. I am actually all in at $160,942. Rent is $1,495. Taxes are $2,466 and taxes are $754.  When I got my loan, the appraisal came in at $190k.  The equity is not important to me, but worth noting. Cash on cash is 9.1% before vacancy and maintenance. Post rehab, I have had a tenant in place 22 of 23 months and current lease expires around February on 2018.  If the tenant moves out as his lease expires, that is almost 4 years with only 1 month vacancy.  So lets call it 0% vacancy. Maintenance and tenant turn cost has been minimal. Since my daughter was playing club soccer in Collierville while it was vacant, I leased the property myself and saved on leasing agent cost.  All that being said, I have a 15 yr loan on it where the cash on cash is only 5%.  The principal pay down for me right now is about $600 a month.  Guessing at the tax deprecation last year, I would guess about 12k in losses. Total return through principal paydown, tax savings and cash flow were about 182%.

My real estate strategy is clear:

  • Acquire real estate properties that cash flow on 10 and 15 yr mortgages (I already have all my 30 yr slots taken)
  • Acquire real estate in good areas (accomplished with this Collierville property)
  • Acquire real estate to save on Federal Taxes
  • Use 30 yr mortgages to support shorter term mortgages with lower cash flow
  • Once 10 yr mortgages get paid off, start paying off the oldest 15 yr mortgages
  • Keep acquiring properties to save on taxes as deprecation schedule is being accelerated 
  • At some point, with enough paid for homes, start paying myself

That is why the 182% return is so important. Through all my holdings, I was able to report a $190,000 in losses.  Total game changer for my federal tax payment.

Not to side track the thread, but I was about to ask @Alex Craig details on tax dep., then I hit show49 in the podcast with Amanda Han. While I'm sure Alex would have done a bang up job, having the CPA explain it was great.

@Chris Williams in regards to tax dep, all I can add to the conversation is the huge benefit of being a full time real estate investor of cutting down my tax bill.  Any further details on tax and I like to defer that to a CPA.  I will say, my CPA is a tad bit more aggressive, but he was also a landlord of 150 properties and does a lot of the investors around the Memphis area.  I defer to his expertise.   

Thanks for such a comprehensive answer Alex. I really appreciate it. So really your strategy is a finance and tax play, which makes perfect sense. I sort of do the same but I have to drop down to B grade homes because my interest rate is so much higher than yours.  Plus I believe you have a lot more tax benefits than I, as I am a non resident. Again thanks for laying it out so well.  Now I "get" you a lot more.

@Dean Letfus I could not have been more wrong on the election. It will be interesting over the next 4 years.  Really it is a wild card because he flip flopped so many times on his platforms, so who knows what will happen. I think he will probably govern from the middle because he is a deal maker and also has been a Democrat longer then he has been a Republican. 

As for the REI strategy, because my pay day is down the road when these assets get paid off and I have so many on 10 and 15 yr mortgages, the rehab and area is very important to minimize maintenance and vacancy.

Surprised you can not get local financing since you live or have lived here before.  Local banking wants to see a local address and a local checking account.

@Alex Craig , it's having an ITIN instead of a social that's the problem. We have just gotten bank lending actually but still at 7% not like you locals :-).

I'd been picking Trump for some months but you Americans are so crazy on your politics I would never have mentioned it on here. And I picked him based on the broader policies rather than the circus ringmasters on display.....

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here