REI Nation (Memphis Invest) Case Study - Barltett (Memphis), TN

[Dan T.]

Hey everyone, long time listener, poster and reader - first time investor. I have been in the analysis paralysis state for a solid year. I get super close to making a move and back off when it's time to put pencil to paper. I feel that the simplicity of the BRRRR model is overstated - sure, it's the best way to create the most equity but also the riskiest way to enter the world of real estate investment. I have a full time job (55-60 hours per week), 2 daughters under 2 years old and a personal life so i started looking heavily into turnkey for my first investment.

I understand that TK isn't the fastest way to create wealth or equity. My goal is to have 15-20 of these under management in the next 10-15 years; the long game on this will hopefully outweigh the opportunity cost forfeited by choosing the TK model. In researching Turnkeys, it seems there are a LOT of companies to avoid. I narrowed it to Norada, Spartan and REI Nation. After researching the companies and markets in which they operate, then seeing Chris' replies on here and seeing his clients ALWAYS handled even in situations beyond their control, i decided to move forward with REI Nation.

I spoke to Taz to start,  he got an idea of what i was looking for. $150K-$200K property, A-B neighborhood, good schools, decent cash flow ($200+) when traditionally financed with 25% down and a COMPLETE renovation. Taz passed me along to a lender, I got preapproved and was passed over to Rick to hone in on their available properties. I looked at several in Arkansas, Oklahoma, Texas and Tennessee.

I finally saw one i loved in Barltett, TN 34814. As of today, I've locked my rate and put the Home under contract. I have a conversation planned with REI on Monday, i'll post all details as they happen.

[Dan T.]

Originally posted by @Caleb Heimsoth:

@Dan T. What’s the purchase price and rent?

Here's their full analysis.

[Dan T.]

Originally posted by @Account Closed:

The turnkey model has grown too big for its own good. When I first bought in 2011/2012 there were small operators where you dealt with the owners of the company directly. Now they have become big corporations and while you would think economies of scale would apply, it seems the price mark ups are even higher than with the individual operators. The difference is slick marketing but that doesn't translate into better profits for the investor. There are steps between BRRR and turnkey. You can buy off current investors who want to sell. You may do some small rehab (equal to a rental turn) and should choose your own PM. You will get a better price without the mark ups, certainly will not pay more than appraised value and end up with the same result with marginally more effort. In the end your PM will run the property anyway.

 I would agree, the properties ALL seem expensive and there's no arguing the company size/operational cost wrapped up in the purchase price. I looked at a bunch of "roofstock" properties and portfolios and figured i would be buying someone else's headache and that wasn't how i wanted to enter this world. My thoughts, no one is going to run through and tidy their investment property before selling it or them - i don't want someone's problem child. That's honestly why i went the route i did. It's expensive but, if i plan to hold the property for 10+ years (hell, I don't ever "plan" to sell), it will pay off in the long run and my entry to the real estate investment world would have been as easy as possible - just expensive. These are just my thoughts, where they land in reality, i do not know. Would've been cool to have a mentor in all this but I've always been one to dive in.

[Chris Clothier]

@Dan T.

I love the thread topic and encourage you to continue to update on your progress.  Thanks also for taking the time to talk today and giving me the green light to share a little bit on this thread to inform readers and help them make the best decisions for them.  I think these types of threads can be very good for readers, but there are already some statements on here that I felt needed to be addressed.

The biggest is the notion that the word Turnkey means anything.  It does not.  It is an over-used marketing term that has been hijacked by so many different companies and people here on BP because it catches eyes.  There is no uniform industry and no uniform definition.  For an investor to compare any two properties offered by two different companies using the word Turnkey to describe their offering, they really have to dig deep into their due diligence rather than just assume that both are the same because they use the word Turnkey.

I have read a lot of @Caleb Heimsoth's posts on here and I will agree with a little sliver of what he said, although over-all I think he makes the classic mistake that too many others make.  Caleb talks about Turnkey as if there is a standard definition of it and says it is a bad investment.  I do believe that many investors who are buying turnkey property today are going to be hurt precisely because they are buying "Turnkey".  They are buying the word.  To read Caleb's posts, he falls into this trap - always referring to an industry that is non-existent.  You even read that in a few other comments on the thread.  I don't know what Caleb's expectations were.  But it is safe to say those investments did not meet them.  That is not because they were sold with the word Turnkey.  It is because the properties, the renovation, the management did not meet his expectations and he may even say today that it is partly his fault as well.   That is the real rub.  I don't believe that a majority of investors will lose money because of the word Turnkey.  I believe they will lose money because they failed to set their expectations properly against the investment they are making.  They just assume because the property was turnkey.

Dan, I would encourage you to look at this investment the same way you would any other real estate purchase.  There is nothing special about the word Turnkey.  This is a passive investment you are making.  If you have your clearly defined expectations and have spent your time working with companies to determine who gives you the best opportunity to meet your expectations, then you move forward - but not until then. 

As far as investor comments about making a better return with other passive investments, that is possible.  There is trade-off.  Perhaps you make a higher return with a syndication than with actually owning your own property.  I know that each syndication I have participated in, I have made roughly the same cash on cash return and at times maybe a little higher. However, I hated the fact that I didn't own anything.  I had no say - at all.  I have lent my money out to other investors and made really big returns, but again, I owned nothing, couldn't borrow against my investment and had no tax play when my investment was over.  For me, owning the best piece of real estate I could find in its' best condition has always been my preferred way of investing passively.  That is my preference and single-family homes meet my passive expectations.  I will simply make fewer investments and buy higher quality and higher priced properties rather than make other forms of passive investments.

Is it the right way?  For some other reader, maybe not.  They may think I'm a fool for investing passively in the first place and not being an active investor and making a bigger return.  For me, it's absolutely the right way and the reality is, as long as my investments are meeting my expectations, I am absolutely investing the right way.

I know from talking with you today that you are an entrepreneur (your picture made sense to me after we talked) and you love what you do actively on a daily basis.  I know what your long-term goals as an investor are and that your first priority is to have a return OF your investment and that you secondary concern is a return ON your investment.  I know that cashflow is not king of your investments, but maximizing your long-term strategy is.  

For some readers, they won't like your strategy and you have to be careful. Anyone can say anything here on BP. The anonymity, the freedom to just keyboard cowboy away with comments is both good and bad here. You have to take every comment with a grain of salt, including mine. You have no idea if someone commenting has any experience or simply likes to make comments. You don't know the level of their experience and just how relevant their experience actually is. I did find it amusing when you are posting about REI Nation/Memphis Invest and you get two polar opposite responses. One from an actual client for five years and one from someone who had never purchased before. I know it can be confusing to know who is actually giving you good advice from experience and who isn't. You just have to take all the comments and formulate your thoughts.

 In the end, you have to be crystal clear on your expectations, be direct with voicing those expectations, be diligent in making your investment decision and then you take action based on your best efforts and due diligence.  The absolute worst thing you can do is invest based on what someone else thinks.  You have to invest based on your expectations.

@Lena Davis - I applaud you for having a standard that you believe in and being able to voice it.  I do however want to give you the other side of your comment about paying above appraisal.  On the surface it is smart and I think you should stick to that if that is your expectation.  But do consider why a company would be willing to lower their price and why a company would not.  It comes down to value.  What value are they providing and is their value indicative in that price.  A company that says "Yes, we will gladly lower our price to whatever it appraises for" sounds like a company that either doesn't provide any real value (or else why would they lower their price in the first place) or they mark their properties up arbitrarily hoping for a higher appraisal.  They look like heroes by lowering their price if it appraises low, when all they did was mark it up higher in the first place for no rhyme nor reason.  If it appraises at the higher price, you don't know the difference and believe you've made a great investment, while they simply made more money on their bet.

My point is, my advice is to be more open to what is real value when you are buying a passive investment.  The numbers on a sheet of paper matter, but not as much as the question "how likely is it that a company will be able to deliver those numbers".  Whether a company will lower a sales price or not matters less than how the company reaches their price in the first place.  You want to know if the value is justified by the product and the service (the house and the on-gong management).  

For anyone reading this, remember that these are passive investments.  Your job as an investor is to determine the value you are getting and the price you are willing to pay for it.  At that price, is your investment protected and likely to give you the return you expect.  It is really that simple.  It all boils down to an investors expectations and how good they are at making an investment that will meet their expectations.

[Caleb Heimsoth]

@Dan T. You can PM me the details if you want. That photo is too small to see. Typically TK companies underestimate maintenance by a lot and vacancy and repairs. Your capex will be low due to the rehab but tenants will have repairs and since you pay such a premium, your cash flow is already small. When the repairs add up, your cash flow goes away long term.

Keep in mind it costs 80-100 bucks just for a service call. This doesn’t really change no matter what it is or who the TK company is.

@Chris Clothier has some good points, specifically around the definition of “turnkey” which I guess is true, but regardless of how you define that word, the bottom line is what companies pitch OOS investors on these properties and the reality of them is very very different.

These properties were an okay buy 7-9 years ago when everything was undervalued. For the last 3 plus years I would say they would be overvalued. You may find the numbers still work for you, but you can get a lot better return with a lot less risk and headache in just about any other investment (in my opinion).

[Account Closed]

Originally posted by :

@Lena Davis - I applaud you for having a standard that you believe in and being able to voice it.  I do however want to give you the other side of your comment about paying above appraisal.  On the surface it is smart and I think you should stick to that if that is your expectation.  But do consider why a company would be willing to lower their price and why a company would not.  It comes down to value.  What value are they providing and is their value indicative in that price.  A company that says "Yes, we will gladly lower our price to whatever it appraises for" sounds like a company that either doesn't provide any real value (or else why would they lower their price in the first place) or they mark their properties up arbitrarily hoping for a higher appraisal.  They look like heroes by lowering their price if it appraises low, when all they did was mark it up higher in the first place for no rhyme nor reason.  If it appraises at the higher price, you don't know the difference and believe you've made a great investment, while they simply made more money on their bet.

My point is, my advice is to be more open to what is real value when you are buying a passive investment.  The numbers on a sheet of paper matter, but not as much as the question "how likely is it that a company will be able to deliver those numbers".  Whether a company will lower a sales price or not matters less than how the company reaches their price in the first place.  You want to know if the value is justified by the product and the service (the house and the on-gong management).  

I agree with most of your points but seriously depart from you on paying above appraisal. There is zero justification for that (assuming its a good appraisal with proper comps). The cash flow markets are not like a coastal bubble where the prices move faster than comps can keep up. The bank is smarter than me. If it decides its loan amount based on the value of an appraisal why should I pay more? If you are providing greater value then charge for it separately. So you can say the house is 100K (appraised value)  and my advice is 5K. Then if the buyer wants to pay the extra, at least he or she knows what its for. 

[Chris Clothier]

Originally posted by @Account Closed:

Originally posted by :

@Lena Davis - I applaud you for having a standard that you believe in and being able to voice it.  I do however want to give you the other side of your comment about paying above appraisal.  On the surface it is smart and I think you should stick to that if that is your expectation.  But do consider why a company would be willing to lower their price and why a company would not.  It comes down to value.  What value are they providing and is their value indicative in that price.  A company that says "Yes, we will gladly lower our price to whatever it appraises for" sounds like a company that either doesn't provide any real value (or else why would they lower their price in the first place) or they mark their properties up arbitrarily hoping for a higher appraisal.  They look like heroes by lowering their price if it appraises low, when all they did was mark it up higher in the first place for no rhyme nor reason.  If it appraises at the higher price, you don't know the difference and believe you've made a great investment, while they simply made more money on their bet.

My point is, my advice is to be more open to what is real value when you are buying a passive investment.  The numbers on a sheet of paper matter, but not as much as the question "how likely is it that a company will be able to deliver those numbers".  Whether a company will lower a sales price or not matters less than how the company reaches their price in the first place.  You want to know if the value is justified by the product and the service (the house and the on-gong management).  

I agree with most of your points but seriously depart from you on paying above appraisal. There is zero justification for that (assuming its a good appraisal with proper comps). The cash flow markets are not like a coastal bubble where the prices move faster than comps can keep up. The bank is smarter than me. If it decides its loan amount based on the value of an appraisal why should I pay more? If you are providing greater value then charge for it separately. So you can say the house is 100K (appraised value)  and my advice is 5K. Then if the buyer wants to pay the extra, at least he or she knows what its for.   

Anish, I love that you replied!  I have much respect for your posts on here and have read your posts for the last few years. 

So, hopefully you and I can agree that a seller gets to choose their price.  If a seller has comparable sales, which lets be direct here - is subjective, and they are selling a product that they believe is valued at the sale price, then they have the right to stick to their price.  I think a company alerting a buyer on the front end that they do not negotiate is a good thing. There is nothing wrong with transparency.  My advice to Lena was to figure out the real value of what you are receiving.  A guarantee to lower the price is simply an invitation to raise the price as high as a seller can, with or without adding any value, and gamble on an appraiser bringing in as high a value as possible.  They win either way because the buyer is attracted to a guarantee and nothing of real value.  This is a trend that is starting right now in the industry and the industry leaders are absolutely going the other way.  They are bringing real value and sticking to their price because it is a justified price.

In my case, we know the market as well if not better than any appraiser.  Their job is to properly set a valuation opinion for the bank.  They don't work for me nor the buyer.  They work for the bank.  I know from just dumb luck that we are going to get an unqualified or seriously biased appraiser some percentage of the time.  We have had appraisals swing as much as $38,000 in a matter of 5 weeks when two different appraisers are hired.  Nothing changed in that time, it was just one appraiser not wanting to credit work done (possibly harboring a bias) and the other bringing in a value close to what we had determined the real value to be at the beginning. Each appraiser used completely different comps and justifications.  Again, in our case, it is all about communicating with an investor on the front end for what they can expect and being transparent about how we handle scenarios that may not go smooth or as expected.

As for real value, so that I'm not mis-understood, there is real value to a higher-end renovation.  One that leaves no deferred-maintenance.  An appraiser sees a roof as a roof.  An investor has to see it differently, and in my opinion, value it differently.  An investor needs to see a roof as one with 25 years left on it because it's brand new or as one that has to be replaced in the next few years because it was not replaced.  An appraiser may or may not adjust the value of the home, but that simple line item absolutely adjusts the value of the investment.  That was my point with that line.  Is the seller justified in asking for this price based on the value they are offering?  

[Michael P.]

@Dan T. before you spend 180k on a 1970s rehabbed property that rents for $1295 (not saying it’s bad thing) 

JUST BE AWARE that in OKC (an awesome city/economy) you can buy a new construction for that amount that rents for 1295 and is in a stellar school district/neighborhood.

[Philip Eaton]

Originally posted by @Michael P.:

@Dan T. before you spend 180k on a 1970s rehabbed property that rents for $1295 (not saying it’s bad thing) 

JUST BE AWARE that in OKC (an awesome city/economy) you can buy a new construction for that amount that rents for 1295 and is in a stellar school district/neighborhood.

I really appreciate all the comments in this thread. I have been looking into turnkey and have a call setup with REI nation this week.
Do you have any builder names or links to these new homes in OKC you are talking about? 

[Michael P.]

Originally posted by @Philip Eaton:

Originally posted by @Michael P.:

@Dan T. before you spend 180k on a 1970s rehabbed property that rents for $1295 (not saying it’s bad thing) 

JUST BE AWARE that in OKC (an awesome city/economy) you can buy a new construction for that amount that rents for 1295 and is in a stellar school district/neighborhood.

I really appreciate all the comments in this thread. I have been looking into turnkey and have a call setup with REI nation this week.
Do you have any builder names or links to these new homes in OKC you are talking about? 

Yeah they are all over NW OKC, ill dm you some areas to search

[Account Closed]

@Chris Clothier I do agree with you on several points. In the end any market is buyer and seller so seller can set any price they like and if a buyer pays so be it. And yes the appraisal is a tool for valuation and its not perfect by any means. However, my simple thinking as an investor is that if an independent data point as the banks appraiser is telling me I am paying over the assets value, I would consider that very seriously. And I would have to know with great certainty that I know better than the appraiser for some reason, which in out of state investing is never the case. I personally would pass and move on to another deal. Of course you can charge whatever you see fit and think the market will bear. 

[Alyssa Dyer]

@Philip Eaton There's also a lot of cash flow opportunity here. You can get something just below turnkey (updated along the way but not ripped down to the studs) for 100k and still be at an 8% cap rate. New construction you'll be closer to 6%. 

[Edwin L.]

@Michael P., can you point me in the direction the the new construction in OK? Thanks!

[AJ Singh]

@Dan T.

you have had great advice on all aspects of OOS turnkey investing. i will add one more. 

Be prepared to scale to multiple properties. one property will eat up your annual trip to memphis. dont think you can do remote asset management sitting from anaheim. 

also you can invest in inland empire with similiar numbers. i am not sure why you are not casting your net locally. As @Caleb Heimsoth and @Account Closed mentioned, the memphis market was undervalued four yeas ago but is now very strong. Any killer deals are all cash nowadays with seven day close!! 

Best of Luck!

[Dan T.]

Originally posted by @Michael P.:

@Dan T. before you spend 180k on a 1970s rehabbed property that rents for $1295 (not saying it’s bad thing) 

JUST BE AWARE that in OKC (an awesome city/economy) you can buy a new construction for that amount that rents for 1295 and is in a stellar school district/neighborhood.

Thanks, Michael! In what parts of OKC are you talking about? I am still looking in Moore, Yukon and Norman. I will be investing there as well, this will not be my only property. Seems Moore/Norman are the only decent school districts from my research.

[Dan T.]

Home inspection report came in and all found items are being addressed.

Most  importantly, the Appraisal came in. Purchase Price $179,900 - Appraised Value $180,000.

[Rhett Tullis]

Not to hijack this (and be aware I ONLY know OKC ) I was recently lowballed on an offer by a prominatnt "turnkey" operation on a rental we have listed for sale for an investor.  we were a bit stunned by the 50% below asking offer as was the seller.  We did some digging on recent transactions by this potential buyer.  Here is what we found.

-They recently bought a property for 45k from a wholesaler we work with often

-They rehabbed the home and resold it to an investor for 120k

-The Zestimate (which for okc metro is always inflated) is 69k and that is being generous.

While they did a stellar reno and the house I am sure is awesome it was sold for well above what it is or will be worth in my lifetime.  I know the neighborhood well it is in and I have bought and sold there and manage dozens in the neighborhood.  If this was the only "deal" i have seen with seller I would not even be posting this but I have seen several examples.  

Needless to say these buyers have been taken to the cleaners.  I do not fault the "turnkey" seller but please everyone buying out of state - DO YOUR HOMEWORK!!

It is one thing to buy for cashflow and for the numbers to "work" for you but when you pay 20k or more than what any potential buyer will give you for a home in our lifetimes you are putting your investment and your future at risk.  Especially if you scale up as some have recommended in this thread.

[Michael P.]

Originally posted by @Dan T.:

Originally posted by @Michael P.:

@Dan T. before you spend 180k on a 1970s rehabbed property that rents for $1295 (not saying it’s bad thing) 

JUST BE AWARE that in OKC (an awesome city/economy) you can buy a new construction for that amount that rents for 1295 and is in a stellar school district/neighborhood.

Thanks, Michael! In what parts of OKC are you talking about? I am still looking in Moore, Yukon and Norman. I will be investing there as well, this will not be my only property. Seems Moore/Norman are the only decent school districts from my research.

 

Edmond, Deer Creek, Yukon, Piedmont, and Mustang.

[Michael P.]

Originally posted by @AJ Singh:

@Dan T.

you have had great advice on all aspects of OOS turnkey investing. i will add one more. 

Be prepared to scale to multiple properties. one property will eat up your annual trip to memphis. dont think you can do remote asset management sitting from anaheim. 

also you can invest in inland empire with similiar numbers. i am not sure why you are not casting your net locally. As @Caleb Heimsoth and @Account Closed mentioned, the memphis market was undervalued four yeas ago but is now very strong. Any killer deals are all cash nowadays with seven day close!! 

Best of Luck!

 Agree with scaling.  Don't agree with traveling to a put eyes on the property.  Thats PM's job.  If PM is failing you don't need to fly, just fire them and get a new PM.

[Lena Davis]

@Rhett Tullis AGREE!! 

[AJ Singh]

@Michael P.

PM is managing multiple clients portfolios. They are not just managing one client.

Passive investing in SFR is not that passive.

I am not doubting your ability to manage passively without visiting your rentals.

A MultiFamily syndication May be a better bet for some investors nowadays

[Allan Fisher]

@Dan T. Congrats on your purchase in Memphis. I'm also in SoCal and have a couple of rentals in Memphis, both in Cordova, 38018. One cashflows slightly better than the other (I pay city and county taxes on one of them). Rents are $1250 & $1300. I took a slightly different route on purchasing, although I did consider TK. I did somewhat of a remote BRRR method, paying cash (both were off market properties), fixing them up, putting a renter in, then refinancing them. I've had a few issues with some earlier renters but now both properties have great tenants!

I'll occasionally jump on RedFin or Zillow to see what's available in Cordova and Bartlett.  One thing I did notice is that 3/2 w/ 2 car garages in the 120k - 150k range aren't staying on the market for long.  They are selling quick! Glad to hear the appraisal came back high.  Congrats on your purchase! 

[Dan T.]

Originally posted by @Rhett Tullis:

Not to hijack this (and be aware I ONLY know OKC ) I was recently lowballed on an offer by a prominatnt "turnkey" operation on a rental we have listed for sale for an investor.  we were a bit stunned by the 50% below asking offer as was the seller.  We did some digging on recent transactions by this potential buyer.  Here is what we found.

-They recently bought a property for 45k from a wholesaler we work with often

-They rehabbed the home and resold it to an investor for 120k

-The Zestimate (which for okc metro is always inflated) is 69k and that is being generous.

While they did a stellar reno and the house I am sure is awesome it was sold for well above what it is or will be worth in my lifetime.  I know the neighborhood well it is in and I have bought and sold there and manage dozens in the neighborhood.  If this was the only "deal" i have seen with seller I would not even be posting this but I have seen several examples.  

Needless to say these buyers have been taken to the cleaners.  I do not fault the "turnkey" seller but please everyone buying out of state - DO YOUR HOMEWORK!!

It is one thing to buy for cashflow and for the numbers to "work" for you but when you pay 20k or more than what any potential buyer will give you for a home in our lifetimes you are putting your investment and your future at risk.  Especially if you scale up as some have recommended in this thread.

Wouldn't a situation like this be ruled out by the appraisal? If someone's paying cash and waives that contingency, i get it but I can't see an appraisal jumping a home's value 50-100%. Perhaps this is ignorance from my lack of experience in Midwest markets? In terms of my primary residence, that would be like the appraiser puting my $750K house at 1-1.5m. I can't see a mistake of that caliber being possible! 

[Deborah Burian]

Not in Oklahoma City but I personally know of a deal where the buyer went $30,000 over appraisal because of a lack of inventory in that market. We have a lack of affordable inventory here in OKC right now. Will there be another bust? Market cycles tell us yes, there always is, so if you’re over-paying now, you better be prepared to hang on later.

[Dan T.]

All is in line to close on March 6th. My 3rd party home inspection found a couple items that were addressed (all minuscule) - I sent the report over to REI and they had someone one it that day. All items are confirmed fixed and we're in process of loan funding. My closing coordinator, Malorie Moore, has been awesome keeping everyone on the same page.

REI doesn't sell the property with a tenant in place as a condition of closing like many companies do. That said, i received notice they were running background on a potential tenant a couple days ago. Today, i received the following message:

"The application got approved and they have now put down a security deposit!$1,295 Rent Year 1

$1,295 Rent Year 2
2 Year Lease Length
Expected Lease Closing Date: 3/6/2020"

The rent range was estimated $1,195-$1,295. I am happy to report that we've secured a tenant at the higher end of the rent range!

[Dan T.]

Originally posted by @Deborah Burian:

Not in Oklahoma City but I personally know of a deal where the buyer went $30,000 over appraisal because of a lack of inventory in that market. We have a lack of affordable inventory here in OKC right now. Will there be another bust? Market cycles tell us yes, there always is, so if you’re over-paying now, you better be prepared to hang on later.

I am paying $100 under the appraised value, not $30K over. I would never make up that difference on a single family home in this price range. That said, i am investing with money i can afford to keep invested - I'm under no illusion that this will pay off as a short-term investment. My hope is I can get a BUNCH of these houses (15-20), pay them off as quickly as I can and use that as my retirement passing them to my kids. Should i need to liquidate short term, buying these higher-end properties should allow me to minimize realized loss.