Memphis Market Oversaturated with Turnkey Providers??

25 Replies

I'm new to real estate investing. Been looking into the Memphis market as it's supposedly a hot market for rents. But as I run the numbers on most properties, they leave very little cash flow after expenses and the mortgage. 

I spoke to a Realtor and was told that investors have been unrealistically running up home values in the area. He also told me that if he finds a really good deal he's going to buy it himself instead of letting me see it. 

Anyway, it seems like there are too many turnkey investor groups in Memphis that are buying up all of the deals, so there's nothing left on the market for investors who aren't willing to go through the turnkey groups. Has anyone else seen this? Is it worthwhile going through what's on the market and submitting dozens of low-ball offers to see if one sticks? I'm mostly looking for positive cash-flow properties, but would like to have a built-in equity position, and the lower price would obviously help with cash-flow. 

I don’t know if your realtor is breaking any laws, or codes of conduct, but this....

“He also told me that if he finds a really good deal he's going to buy it himself instead of letting me see it.“

Is not a good sign. Why would he go out of his way to say he’s going to screw you? 

Maybe ask his broker if that’s how he runs his business, and all his realtors screw their customers over, or just this one?

Yeah that put me off too. But he’s a top 10 TN Realtor and is selling agent on a lot of investment properties out there. But doesn’t sound like he’s the right one for me with that mindset.

@Matthew Pruitt - Your profile doesn't show what market you are in.  Would Memphis be an out of state market for you?  If so, there are plenty of strong secondary and tertiary markets where you can find discounted properties that may produce a positive cash flow.

What has made Memphis so strong IS all of those turnkey companies who manage the properties.  Probably more than any other market, the Turnkey industry has been professionalized in Memphis with companies at almost every price point and level of finish.  S, what makes it attractive for passive investors makes it unattractive for active investors - especially out of state.

My advice would be to look at secondary and tertiary markets for the particular deals you are after.  You are likely to find less competition at that level.

@Matthew Pruitt - What kind of deals are you looking for?  We are still finding plenty of good ones in Memphis.  Sure the market is hot but it is hot all over the country.  You can still find houses that cash-flow here.

I'd agree with others and look for a new agent.  Message me if you need some recs

Like @Chris Clothier said TKP (good ones like MI and others) bring value both to the investor and the renter.   It's not for everyone but a good option for many OOS investors.

I'm not sure what makes an area "over-saturated" with investors or "unrealistically running up home values).  Yes, home prices in general are higher than they have been and this may keep some people out of the market, but we have no problem buying or selling our properties to investors.  

Keep looking for the best deal.  Might take longer than you think but they are still out there!

Best of luck!

Originally posted by @Matthew Pruitt :

I'm new to real estate investing. Been looking into the Memphis market as it's supposedly a hot market for rents. But as I run the numbers on most properties, they leave very little cash flow after expenses and the mortgage. 

I spoke to a Realtor and was told that investors have been unrealistically running up home values in the area. He also told me that if he finds a really good deal he's going to buy it himself instead of letting me see it. 

Anyway, it seems like there are too many turnkey investor groups in Memphis that are buying up all of the deals, so there's nothing left on the market for investors who aren't willing to go through the turnkey groups. Has anyone else seen this? Is it worthwhile going through what's on the market and submitting dozens of low-ball offers to see if one sticks? I'm mostly looking for positive cash-flow properties, but would like to have a built-in equity position, and the lower price would obviously help with cash-flow. 

I've been wondering the same thing for a while now. There are other markets out there where you can earn a nice ROI on a Turnkey property. Try looking more at the Midwest. Property is affordable, but rents are going up!

Originally posted by @Chris Clothier :

@Matthew Pruitt - Your profile doesn't show what market you are in.  Would Memphis be an out of state market for you?  If so, there are plenty of strong secondary and tertiary markets where you can find discounted properties that may produce a positive cash flow.

What has made Memphis so strong IS all of those turnkey companies who manage the properties.  Probably more than any other market, the Turnkey industry has been professionalized in Memphis with companies at almost every price point and level of finish.  S, what makes it attractive for passive investors makes it unattractive for active investors - especially out of state.

My advice would be to look at secondary and tertiary markets for the particular deals you are after.  You are likely to find less competition at that level.

Chris I made the same type of comment on another post.. With Turn Key up to prime time.. the market has corrected and the amount of inventory that used to be there because of poor PM and turn key sellers has evaporated.. We do have to keep in mind in these rental areas they are not really building new construction.. so at some point your going to have full absorption..  And in certain markets I think we are seeing those.. the hangover inventory is pretty much gone.. the liar loans and sub prime defaults have cycled.. the new Crop like I said of TurnKEY folks is much stronger and PM is on another level altogether than when I started in the space in 2002.. 

This has whats created the values where I live the west coast.. solid rentals  tons of homeowners and NO land to build on .. supply demand = prices rising.. now we will see if that equates to rising rents like we have seen on the west coast..

Some of these cash flow cities will get bracketed if they are heavy to subsidized rents.. 

However to me it seemed inevitable this would happen and I for one am happy to see it.. proves all those that bought in the last 10 years have bought right and have solid investments that are perking along just fine.. !!!!

And in some cities I was working in TurnKEY is no longer viable... Like Orlando prices rose so high and so quick NO way to compete with other parts of the country when 6 to 7 years ago they could compete..

@Matthew Pruitt what do you define as a deal exactly? I see lots of Memphis properties cost between 45-60k that rents for 650-850. This would be non turnkey. Turnkey for the same rent range would be 65-80k. I’m not really sure what you’re looking for so maybe elaborate. A 60k house in a B area that rents for 800-850 id take all day long, but maybe I’m not as picky as you.

I’m in my early 20s so I’m more concerned with cash flow and return. If I don’t have like 2-5k In built in equity at the beginning it’s not a big deal to me.

I also agree with some of the other posters about the turnkey providers being overall good. They improve neighborhoods and even my turnkey properties have already increased in value due to other turnkey sales. Can’t argue with that. Not to mention the PMs attached to the quality providers make the process much more seamless. There’s less room for bad PMs in Memphis now because of it

@Account Closed I’m familiar with the phrase lol.  I’m not sure what your point is exactly.  Yes a house that costs 45-50k now in Memphis was probably 20-30k in 2008-2011.  However that was the greatest buying opportunity in 50 years.  Can’t expect that to be the norm.  I was looking at a potential deal in Memphis last night that sold for 75k in 2006 and is now on the market for 57k.  Some areas in Memphis still haven’t fully recovered. I’d argue it’s worth closer to 60k then 75k as the market fundamentals today are better then 2006 since we don’t have all the liar loans. 

I'm looking for deals that pass the tests taught here on BiggerPockets. First, I'd like a property with monthly cash flows of 2% of the purchase price. I realize more often than not rents will not reach that level, but I want at least 1.5% to give me some security.

Then I would like some built-in equity. Following the 70% rule, I'm looking for a property that I can acquire for 70% of its after repair value, minus the costs of repair. Without this I don't think BRRR is possible, and without BRRR I don't see this as a scalable business.

@Caleb Heimsoth A turnkey that costs 65k and rents 850, is only a 1.3% rent to purchase ratio. And an $80k turnkey with 800 rents is only 1%. Is it an income-producing property that could make someone $$? Maybe. But turnkeys only pencil out for me if I take out my financing costs. I'll believe cash buyers can make money with turnkeys, but for most investors that want to use leverage, the numbers just don't pan out. 

Here's an example of a turnkey analysis I ran on a property the Realtor in Memphis sent me. It was barely posted and is already under contract at $110k. No way its worth that. This Realtor also told me that turnkey properties sell all the time in Memphis only to have expenses catch up with the investor and be sold off for less than they were bought for. 

Originally posted by @Matthew Pruitt :

I'm looking for deals that pass the tests taught here on BiggerPockets. First, I'd like a property with monthly cash flows of 2% of the purchase price. I realize more often than not rents will not reach that level, but I want at least 1.5% to give me some security.

Then I would like some built-in equity. Following the 70% rule, I'm looking for a property that I can acquire for 70% of its after repair value, minus the costs of repair. Without this I don't think BRRR is possible, and without BRRR I don't see this as a scalable business.

@Caleb Heimsoth A turnkey that costs 65k and rents 850, is only a 1.3% rent to purchase ratio. And an $80k turnkey with 800 rents is only 1%. Is it an income-producing property that could make someone $$? Maybe. But turnkeys only pencil out for me if I take out my financing costs. I'll believe cash buyers can make money with turnkeys, but for most investors that want to use leverage, the numbers just don't pan out. 

Here's an example of a turnkey analysis I ran on a property the Realtor in Memphis sent me. It was barely posted and is already under contract at $110k. No way its worth that. This Realtor also told me that turnkey properties sell all the time in Memphis only to have expenses catch up with the investor and be sold off for less than they were bought for. 

these rules are no longer applicable in todays market... have not been for a few years.

2% rule puts you in the HOOD 90% of the time and the only way your all in at 70% is if you have a direct to seller relationship and probably not up front with the seller as to what their home is really worth.. or its a hoarder house or some other very distressed property.

the market is pricing itself for risk.. and the investors are jumping to cash flow where they can find it that just has to beat bank rates..

@Matthew Pruitt well I have bought a 2 percent propterty and it’s C class.  But not in Memphis.  For B class you probably won’t get 2 peecent.  For turnkey basically it’ll be 1 percent if not slightly below.

When I bought turnkey rates were lower, so it worked better.  At best you probably get 1.1 percent ratio for turnkey.  For non turnkey you’ll probably be in the 1.2-1.5 ratio.

Not sure what market you’re in but I probably wouldn’t try an extensive rehab out of state to begin with.  

What was the rent on the 110k one? Not saying what you’re wanting isn’t impossible to find it’ll just be much harder.  What I want is basically a single and what you want is a double or triple.  By time you find one of those I’ll have 3-4 singles.  Everyone is different I’m just sharing with what I’ve seen so far.

Finally, turnkey done right can work well as part of a larger portfolio.  I like to mix turnkey and non turnkey. The turnkey I buy is entirely new.  All the mechanicals to the finishes, floors etc is all new.  Those mechanicals should last 10 plus years except for the water heater which isn’t that expensive anyways.  So keep that in mind. 

@Caleb Heimsoth Rents look like $850 for that property. 

I've considered new for the fact that capital expenditures should be low. But my real difficulty is finding a property that actually cash flows when you take into account the mortgage payment. And I haven't yet found a turnkey that will. At least not using conservative estimates like the 50% expense rule and 10% vacancies. 

Is it possible anymore to find properties that cash flow $300+/mo after expenses and mortgage, without having to do a complete rehab? Or probable?

I don't want to be a downer on the market, but I also don't want to rush out and buy property and lose my investment. I've heard that expenses are always more than you plan for, especially when using a property manager that makes money when you make repairs.

Originally posted by @Matthew Pruitt :

@Caleb Heimsoth Rents look like $850 for that property. 

I've considered new for the fact that capital expenditures should be low. But my real difficulty is finding a property that actually cash flows when you take into account the mortgage payment. And I haven't yet found a turnkey that will. At least not using conservative estimates like the 50% expense rule and 10% vacancies. 

Is it possible anymore to find properties that cash flow $300+/mo after expenses and mortgage, without having to do a complete rehab? Or probable?

I don't want to be a downer on the market, but I also don't want to rush out and buy property and lose my investment. I've heard that expenses are always more than you plan for, especially when using a property manager that makes money when you make repairs.

in nicer B and A props you can include the vacancy factor into your 50% not subtract.. but 50% is a good rule of thumb up to rents of 1000 to 1200  when rents go lower it can be a higher %..  but always good to have a nice cushion if you do better great  right ?

Originally posted by @Matthew Pruitt :

@Caleb Heimsoth  

I don't want to be a downer on the market, but I also don't want to rush out and buy property and lose my investment. 

Matthew,

Best advice that an experienced investor will ever give to a new investor is to slow down!  I think as you learn more about not only this market but others as well and surround yourself with a better agent that won't be so hard-pressed to downplay all of your options, I think you will find good opportunities.  

I believe they will be a little higher priced and you will have to uncover hidden value such as companies that hold down move-outs and turnover costs allowing you to use lower calculations in your worksheets.  No matter what, take nothing on faith.  Make sure you dig deep to make sure what you are being told is accurate for the long-term.  Using the word Turnkey like is actually means the same thing to different companies can lead you to trouble.  Unfortunately, there is no single definition any more.  It is much more of a buzzword used for marketing.  I'm not sure you will find everything you are looking for if you were to purchase Turnkey, but you may find that what you give up in return, you get back in safety and less-hassle.  

Either way, be patient and be careful.  I love that you wrote that you are not going to rush into anything.  That is a sure fire way to raise your risks and increase the likelihood that you would lose your investment.  Hopefully other readers will see that line and realize that they do not have to rush into anything.  

@Matthew Pruitt if you’re wanting 300 plus a month cash flow then that’s probably going to be tough.  10 percent vacancy usually seems high.  I usually use 8 percent.  This year my vacancy will be much less.  Sometimes it just works out that way.

You may want to consider a different market.  Cleveland has higher cash flow and prices.  But in my opinion it’s also more depressed.  I’m there too though.  

For the record yeah 110k and 850 rent is a bad deal.  Probably need a new realtor if that’s what they’re telling you.  

Originally posted by @Matthew Pruitt :

@Caleb Heimsoth Rents look like $850 for that property. 

I've considered new for the fact that capital expenditures should be low. But my real difficulty is finding a property that actually cash flows when you take into account the mortgage payment. And I haven't yet found a turnkey that will. At least not using conservative estimates like the 50% expense rule and 10% vacancies. 

Is it possible anymore to find properties that cash flow $300+/mo after expenses and mortgage, without having to do a complete rehab? Or probable?

I don't want to be a downer on the market, but I also don't want to rush out and buy property and lose my investment. I've heard that expenses are always more than you plan for, especially when using a property manager that makes money when you make repairs.

It would be challenging to find a cash flow of $300/ month after all expenses and debt services are accounted for. But keep in mind that cash flow is only part of the picture. A real estate investment can make money through three ways: property appreciation, increase in equity through payments on the mortgage principle, and of course positive cash flow like you mentioned. 

Once you take in consideration all three of these profit drivers, you can calculate the internal rate of return for your holding period, and then you can truly compare a real estate investment against any other available investment. I do this for all of my deals and my IRR has hovered between 15-19% using very conservative estimates. (This year the property values went up more than normal so my actual IRR was much higher than my initial estimates.)

Once you really dig into the numbers you'll find that even in today's market, nothing comes close to the returns that leveraged real estate offers. Stocks have done great this year, but over the long term, the DJI average is around 7-10% compounded rate of return. So unless you out perform the market every year, you won't beat real estate with a stocks. Even if you factor in a hefty illiquidity premium, real estate is still king in my books

I just don't get it...all this talk about memphis... sounds like a money pit/turnkey scammers wet dream.... here in jacksonville you can still be "all-in" for 50k and rent for 975...easily...with appreciation...

Everybody is knocking this realtor, but all he is saying is that the best deals go to insiders, not to someone who is calling from out of state who does not have a prior working relationship. 

Originally posted by @Rob Massopust :

That agent is just trying to motivate you by fear. He just wants a commission and not really care if you get a good deal or not, just as long as he gets paid!

this is Horse Pucky  too funny... 

Originally posted by @Mark Fries :
I just don't get it...all this talk about memphis... sounds like a money pit/turnkey scammers wet dream....

here in jacksonville you can still be "all-in" for 50k and rent for 975...easily...with appreciation...

 I am an out-of-state investor looking to invest in Jacksonville.  Can you suggest some good pincodes where I can start looking ? Also any good realtors you have worked with and would recommend?