Do Midweast Low Cost Good Rent Houses Defy Many Rules

[Michael Williams]

I am curious about this approach. I am still considered new to the investing game. I moved to Atlanta from Memphis TN about 5 years ago. I started out strong with real estate in Atlanta 4 years ago and did it for about 1 year. I got two birddog deals and had 5 under contract but all contract deals fell through. I then got away from real estate when I started another venture that included an investor. I just moved back to Memphis and a motivated seller just fell into my lap.  So I am contemplating taking advantage of the interest in the area.

I've been noticing that many out of town investors are drooling to get into the Memphis market due to the extremely low cost of properties and the good rent prices when compared to the cost of the house. For instance a small house in Atlanta my cost $50k plus $20k repairs totaling $70k and will bring about $680 - $800 rent.

In Memphis you can get 3 properties at $18k each averaging $5k-$7k repairs and pay and average of $75k total with each one bringing in about $600 each. This is $1800 per month minus expenses and some minor or major headaches with the area. Does this make sence from the numbers standpoint?

This prompted me ask another question of seasoned investors: Would you pay close to the ARV price of a property that is valued at $30,000, needs $6k in repairs to make it rent-able at $650 per month? This is $650 x 12 = $7,800 per year or return on investment in 3.9 years.
For example would you pay $22k plus $6k in repairs making your all in $28k to get this property? To save time let's say there have been some issues in the area as far as burglaries but still is the average of the entire city for these C areas. Not warzone but one of the nice pockets in bad areas. What would become your new measuring points in this type of area or would you keep the same formula for these type areas as for all of your deals? Is there ever a time to change a formula that has worked for you for years? 

[Eric Gerakos]

Michael, one thing to keep in mind is that while very inexpensive houses can look like cash flow kings on paper, the reality is that they are inexpensive for a reason. High vacancy and damage from renters can quickly turn those sorts of properties into money losing nightmares. My experience has been that it’s usually better to pay a bit more for a B neighborhood and the cash flow usually ends up being better with far less headaches.