Do people ever learn? (Memphis market observation).

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

8y

Many investors do not have the means but want to invest in real estate. They often are naïve that many D neighborhoods investors can not even receive rent regularly.

This also implies better B, C neighborhoods are not cash flow and unsophisticated investors are betting on a unrealistic outlook that will never happen. Some will put them up re-sell them to another group of suckers.

12 Reply

Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

8y

Sounds a bit like Baltimore city .

8 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Dean Letfus:

So brief background. I started investing in the USA around 08. Ended up in Memphis and with the help of a great mentor really got going in that city. It quickly became obvious that many parts of Memphis were terrible and likely to not re-gentrify. In fact more than that it was obvious that what us New Zealanders would call "white flight", meant that many areas that were either quite good or just OK were going to turn bad soon enough.

So location is super critical here in Memphis. More so than many other cities I believe.

Roll forward to late 2017 up till today. My inbox is filled daily with deals from pretty much every wholesaler I can find operating in Memphis and these days there are a ton of them.

99% of the deals on offer are in such bad areas you wouldn't drive down the street let alone own a rental there. And these deals seem to be selling, often to out of state investors, as fast as the emails get sent out.

How can so many investors be lining up to lose money when you only have to visit somewhere like this forum to know of the issues?

And I mean serious money. I know of an investment group from down under that is currently losing a fortune having to bail out of hundreds of terrible houses in awful areas.

So I'm posting this just as a discussion point so that people may find it when they search. The fastest way to grow a small fortune in real estate is to start with a large fortune and then invest in Memphis without expert local advice :-).

the absolute classic and truth in this thought process was the [post 2 or 3 weeks ago titled.

" 0 to 15 units in 12 months"

come to find out west coast person decided it was a good idea to leverage their personal residence and buy D class 400.00 a door rentals in this market.. and I don't care what market any market this is darn near financial suicide.. Now what I find very interesting and to your point is.. there were over 200 post congratulating this person and basically saying cant wait to do the same thing.. that was just incredible to me..

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

@Dean Letfus and the next thing these folks are going to do is try to buy these properties as is and do remote rehab like what is being talked about a bunch.. that's going to be a cluster of epic proportions..

its very very hard to remote rehab even in the best neighborhoods … there is a reason turn key rent ready is so popular in these areas.. ONe they generally stay out of the hood.. ( Mr. Morris is the main exception) and sell nicer areas.. and they take on the HUGE risk of dealing with the local rehab contractors.

what the out of area folks don't understand about these areas.. is there are only a certain type that will even work in those areas.. and these are simply not your top flight subs.. you want it done cheap there is not a lot of profit for the contractor.. they cant even buy their own materials.. Just a recipe for utter disaster.

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Dean Letfus

OP

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

8y

Yes and that is why turnkeys survive, because whether it's true or not, the perception is lower risk.

1 Reply

Bryan Devitt

Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes

8y

Originally posted by @Jay Hinrichs:

@Dean Letfus and the next thing these folks are going to do is try to buy these properties as is and do remote rehab like what is being talked about a bunch.. that's going to be a cluster of epic proportions..

its very very hard to remote rehab even in the best neighborhoods … there is a reason turn key rent ready is so popular in these areas.. ONe they generally stay out of the hood.. ( Mr. Morris is the main exception) and sell nicer areas.. and they take on the HUGE risk of dealing with the local rehab contractors.

what the out of area folks don't understand about these areas.. is there are only a certain type that will even work in those areas.. and these are simply not your top flight subs.. you want it done cheap there is not a lot of profit for the contractor.. they cant even buy their own materials.. Just a recipe for utter disaster.

As usual, Jay is right. In this climate, good contractors are getting top dollar. No one, including me, is stepping into some hell hole city/town where my tools might get stolen and work destroyed if I don't live on site. Personally, I am very optimistic about what is happening. I am one of the many that are waiting either for great deals (which almost never happen) or for the crash to load up. I feel bad that people are going to lose their shirts, houses, life savings and retirement accounts because of these moves, but they're taking uncalculated risks that have worse odds than playing roulette. At least when the crash happens, they won't have the money to fight people who know what they're doing. Otherwise they would all get luck, become hundred-thousandaires and then start teaching seminars to more delusional people and become millionaires about something they have little knowledge about.

7 Reply

Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

8y

I dont see the logic in "investing " in class d properties that cash flow lets say that $ 400 a door . You get little or no appreciation and Fifteen units would be a whopping $ 6000 a month . That sounds good until you factor in dealing with 15 different low income families , 15 hot water heaters , 15 roofs , property tax and water bills . Chasing down 15 rent checks and filing eviction papers . Now even worse when you are out of state . So you give it to a property manager , who has their best interest in mind . They nickle and dime you with service call fees etc .

I will stick to my class B and High C properties , they are harder to find , they cost more , but when done right they can cash flow rather nicely with out as much headache or gunfire

10 Reply

Dean Letfus

OP

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

8y

@Bryan Devitt "At least when the crash happens,". It's nothing to do with any crash, it's just stupidity. People are losing money in booms and busts if you buy badly enough.

6 Reply

Bryan Devitt

Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes

8y

Originally posted by @Dean Letfus:

@Bryan Devitt "At least when the crash happens,". It's nothing to do with any crash, it's just stupidity. People are losing money in booms and busts if you buy badly enough.

The uneducated lose money every day no matter what the financial climate, but I don't care about them. The part you quoted was me being happy because it makes it easier on ME when the crash happens and I have less competition. It is scary how many people jump in at the peak thinking it can never go down though, they cry all the way to the bottom of the slide about how it isn't their fault and everyone else is to blame.

2 Reply

Dean Letfus

OP

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

8y

Well I'll never gloat when people lose money. I posted here to try and warn people. My experience is that there is no shortage of deals, money, success etc. There is enough to go round. I invest in training people so that they don't fail. I'm not looking to create casualties but compatriots. Financial freedom is not so much fun if you have no one to share it with.

28 Reply

Tyler Jahnke

Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes

8y

@Dean Letfus - People will always look for the quickest and easiest way to make a quick buck and reach "financial freedom." And they don't want to take the time and effort to learn the basics of a market and build the proper relationships it takes to invest from afar.

I fell into the trap a couple years ago...went the turnkey route...was tempted by the "amazing" and quick returns on a $37,000 property....got burned.

But, I'm trying to grow, improve, learn more. I'm here sitting in the Indianapolis airport waiting for my delayed flight home to SF...after spending Labor Day Weekend...working...on my next real estate opportunities.

It takes real time, effort, sacrifice, and money to be successful in real estate.

24 Reply

Dean Letfus

OP

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

8y

Good on you @Tyler Jahnke, I have had similar disasters initially but once you get the skills, you'll succeed.

One of the best bits of advice my accountant ever gave me was "Just make sure you learn enough so that 51% of everything you do works. Then you'll be fine!"

5 Reply

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

8y

During the Great Recession a lot people lost their jobs much of it is beyond ones control. There was this investor who had rentals and was not getting rent that he had to use his pay take care of multiple 30 year mortgages. He got laid off. It was such a shock. He went to a gunshop went back to his ex employer. He shot his boss, VP and HR director and gave in. This is men slaughter! Today he is a lifer in prison. His wife still has these properties. She found a way.

There are many ways to resolve a bad investment, often it is a write off. Smart ones have a reserve and not going overboard. Former GE CEO did the same thing. Garage sale corporations, created factories overseas, leverage hostile take over, got into lending business then lost billions. Two CEOs later the actions taken before has a pronounced effect on the corporation even to this date.

1 Reply

Bernice Radle

Developer · Buffalo, NY · Member since 2018 · 13 posts · 17 votes

8y

@Dean Letfus this is where small scale community development alongside with investors makes the most sense. It’s what we do here in buffalo. You can’t just buy and expect them to work - you have to dedicate yourself or another human to really loving the properties and the neighborhoods. Put a garden in... add art... find solid tenants, etc...

6 Reply

Yonah WeissPro Member

Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes

8y

@Dean Letfus Great post! Should be very thought provoking for folks, especially out of state (or country) looking for 'too good to be true' returns on houses in low income areas. This is what @Ben Leybovich calls 'pigs' over and over again.

I learned the easy way, watching friends and acquaintances making the same mistake again and again. Even if the returns sound good, they usually factor in that you will actually be successful in collecting rent! Not to mention the headache and costs, of dealing with evictions, and rehab needed, once you successfully evict the tenants.

One friend bought a couple of houses years back in Rochester, NY for $30,000 a door, 'collecting' $600-650 in rent. After several months of unsuccessfully collecting rent remotely, he went through the eviction process. When he visited the houses to see if there was needed improvements, to his surprise, the radiators, and much of the iron piping in the kitchen, including the kitchen sink, were gone!!!

Long story short, Memphis, or anywhere else, you get what you pay for! If I wouldn't live there, I won't invest in it either.

2 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

8y

No, the general public is not interested in learning. Instant gratification is the goal, not growth or development. Cycles, history, bad habits, poor decisions, etc. repeat themselves (unless personal growth is the goal).

9 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Matthew Paul:

I dont see the logic in "investing " in class d properties that cash flow lets say that $ 400 a door . You get little or no appreciation and Fifteen units would be a whopping $ 6000 a month . That sounds good until you factor in dealing with 15 different low income families , 15 hot water heaters , 15 roofs , property tax and water bills . Chasing down 15 rent checks and filing eviction papers . Now even worse when you are out of state . So you give it to a property manager , who has their best interest in mind . They nickle and dime you with service call fees etc .

I will stick to my class B and High C properties , they are harder to find , they cost more , but when done right they can cash flow rather nicely with out as much headache or gunfire

this other person who I mentioned bought low end little plex's that have GROSS rent at 400.00 a door that's what he said in his post.

one was an 8 plex.. so ya its cheap to buy.. but he will soon get schooled in the finer art of managing 400.00 renter. and that the gross income is so low as to not be able to cap ex or turn over.. and turn over will be constant.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

when it comes to buying rental houses in the quote un quote cash flow markets.. these markets are pretty much all interchangeable.. rent rates pretty consistent with about a 1400 to 1500 cap.. higher than that and most will buy.

I think for quick math for out of state folks so they don't get lured into properties that are ONLY appropriate for local tough as nails landlords..

you simply need to look at the median price of the area.. then buy within 10 to 20% of that.. and also only buy were the rent commanded is within 20 to 25% of the top rents in the area.. this will keep you out of the hood this will give you a nice shot at safe secure investment.. and maybe god forbid some gambling appreciation.

also will tend to have better schools and because your buying right at or close to the median you actually have people buying homes to live in as owner occ which stabilizes the area and keeps the thefts down.

when you buy at the bottom of the median or 50% of it or less.. what does logic dictate.. same with rent.

and if your sitting on the west coast not really knowing or in Sydney or Hong Kong.... quality of tenants does not move DOWN exponentially with values and rent rates.. it does the exact opposite it get riskier and riskier.

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Dean HarrisBusiness Member

Real Estate Agent · Memphis, TN · Member since 2015 · 1k+ posts · 1k+ votes

8y

This post is why I have always said to be careful of your source in Memphis. You can look back at my posts and see that I say this in almost every post. You really need to trust and know your source. @Dean Letfus is correct, there are a ton of wholesalers that are looking to move houses that are in terrible areas with no thought of our future and what it could mean to us to sell us a terrible product.

Again, trust your source. Know what you are buying and getting multiple opinions is always something I would recommend.

Good Luck out there!!

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George Pauley

Chandler, AZ · Member since 2017 · 174 posts · 269 votes

8y

Originally posted by @Dean Letfus:

Yes and that is why turnkeys survive, because whether it's true or not, the perception is lower risk.

I am using a turnkey service in Memphis. I, of course, went out to Memphis and examined their operation before I invested. One thing that really made an impression on me was a giant map of Memphis on the wall with large sections X'd out and labeled "War Zone". They informed me that "We don't invest in the War Zone!" As I read this thread I keep thinking about that map. :)

7 Reply

Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

8y

@Dean Letfus

Unfortunately, too many investors are in a hurry. I too receive emails from investors daily asking questions and listing their plans that are almost disheartening. I spend a lot of time advising investors on what not to do and less on what to do it seems.

The other problem is that sellers are sophisticated. Not necessarily the wholesalers that you mention, but the up-sellers who are using sales tactics and techniques to sell. Delaying tactics to make it seem like they are too busy with demand. Using squeezed time frames for decisions because there is someone else wanting to buy the property. Buzzwords - including Turnkey - that are like shiny trinkets are constantly used to attract investors and new investors are especially susceptible to sales techniques.

Not to mention, the easiest person to lie to is ourselves. I did it for years as a new investor. This isn't a knock on investors. I made these same mistakes early on and was so ready for quick and easy money that I bought everything put in front of me. I made myself an easy target for good sales people. It wasn't their fault. They were simply selling and using all of their techniques. I was the one making the decisions.

It took that failure as an investor to learn to be patient. To make sure I slowed down and asked questions and sought advice of other people.

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Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

8y

One thing a west coaster might not be used to is how some areas turn into renter hoods of sfrs. For the most part these are not common or they have never seen that happen where sfr hoods turn into lower end apartments essentially. I remember checking out some for a bper pre escrow in Memphis and after researching, both houses on each side were for rent and about 5 more were for rent walking distance. So that was about 8 vacancies in about a 25 house stretch. Crazy. The price I remember was 88k about 4 years ago, my guess is it has not gone up.

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James WachobBusiness Member

Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 887 votes

8y

Memphis is a lovely city with an exciting future. I live in the heart of town (not in the suburbs) and appreciation in my neighborhood would rival that of any city. However, there are areas of this great city that I choose not to invest in. I choose to invest in areas of Memphis that are highly desirable to my hard-working, family-oriented tenants.

I agree with you @Dean Letfus - Several times per month I speak with an investor who has purchased a property and needs some help. Often they have paid too much for the property, with no solution but to sell it to another investor.

My advice to any OOS investor looking to purchase an income property would be to "set your property manager up for success!"

Buy homes in nice areas of town. - The Truila.com crime map can be a great tool!
Perform a full renovation. - This will help attract and keep a quality renter
Seek counsel from multiple parties. - You should hear the same advise, or something may be off.
Visit the city you plan to invest in. - You can learn a lot by experiencing it for yourself!
Build a team that will shoot you straight and looks out for your best interest!

13 Reply

Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

8y

@Dean Letfus This is an interesting topic. Memphis isn’t really any different then other cities from the Midwest or other parts of the south. There are good and bad parts to invest in. Any of you experienced local Memphis people feel like openly sharing some of those areas? I avoid hickory hill, frayser, 38127 and orange mound as a general rule of thumb

2 Reply

Dean Letfus

OP

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

8y

@Caleb Heimsoth, your post is a good example of the problem with Memphis. Zip codes are a useful guide but you can have a pocket in a bad zip that is awesome to invest in. Even 38127 has parts that are fabulous. You need always to get local input on the actual block of the actual street. I own homes where you can walk 100 meters and the whole demographic changes.
One basic rule is never go below $800 a month rent, We don't really look at anything under $900 to $950 these days. I've only invested in Phoenix, Atlanta and Memphis and Memphis is far more changeable than the other 2. It really is amazing how quickly you can walk from shoot em up bang bang to mansion in Memphis without breaking a sweat.

@James Wachob, I agree with you mostly. I think number 4 is a complete waste of time. Especially in Memphis you are more likely to get deceived actually. Really bad areas of Memphis look awesome. Big tree lined lots with neat looking houses. But the area is a zoo. So visiting is a waste of money to me. Just get good advice and don't get enamoured with any particular company. I hope what you say about your deals is true, I know I rarely see an email from you that's in an area we would buy in but the bulk of your inventory probably sells before it's advertised so we may only see the marginal deals?

@Chris Clothier, failure is far more helpful than success in my opinion. I have learned nothing from success except that it's successful. But failing your way to success is the best way to get there!
You're right about up-sellers although I have observed many wholesalers getting much more sophisticated and dishonest, (if that's possible). Sadly many of the larger players are now marketing the houses that are in such bad areas they cant turnkey them to people as fixer-uppers or equity deals. This has always made me mad. Why don't companies do what you guys do and just stick to decent areas. Of course the answer is greed but it taints everybody when the big boys don't have any standards either.

4 Reply

Do people ever learn? (Memphis market observation).

Do people ever learn? (Memphis market observation).

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