Do people ever learn? (Memphis market observation).

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OP

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

8y

@Account Closed, mate I'm not trying to put people off. I love Memphis and it has been and is very, very good to me and my clients. I just want people to BE CAREFUL and get good advice. You can post any address in here and plenty of us will tell you whether the area is good or not. That's the minimum thing to do.

And completely ignore what you are told by whoever is selling you the property and don't believe their rental appraisal. PM me or post here and get some independent advice.

I've saved a LOT of people a lot of money by doing that for them.

Oh also MOST PM companies are completely useless in Memphis. Do your homework there as well. Generally it's better to move the management away from whoever sells you the property. Most of the wholesalers/turnkeys who do their own management are not so good. THERE ARE SOME EXCEPTIONS BUT CHECK BEFORE YOU LEAP.
Investing here requires 2 sets of skills. Doing due diligence on a property and doing due diligence on the management. The LATTER is more important than the former.

3 Reply

OP

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

8y

@Account Closed, plenty of good zips but most of them have bad parts so you need to check every address. 38128, 38115, 38119, 38120, 38125, 38141, 38133, 38134, 38135, 38018, 38016.

Areas that have gone bad but are still promoted as good include 38127, 38118, 38116, 38109 and 38122. However they still have some streets that are good.

Account Closed

Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes

8y

Originally posted by @Kai Van Leuven:

@Dean Letfus

To me you can attribute all of the OOS investing posts to 3 groups of people; the dreamers, the schemers, and the suckers!

The dreamers: usually post a congratulations. They would like to own 15 doors in WarZone, USA. They probably sit behind a desk, pull in 100k a year, and want it even easier.

The Schemers: those who live by the ABS (always be selling) principle. They know that what they sell is garbage but the money is too good, and the people are too uneducated about their product to turn them down. These are the turn-key (Morris Invest), mortgage brokers, and agents.

The suckers: they actually buy this crap! They think that they can calculate ROI, monthly cashflow, quality of tenants, ect. From 500+ miles away. These folks have more money than sense and are just buying a retail product at a retail price. They use the "Schemers" for advice and brag to all the "dreamers".

I dont think the dreamers have $100K desk jobs. I think the dreamers are those working low level service jobs that they hate and wish for a quick way out that doesnt involve getting an expensive degree or years of experience. I cant blame them. The $100K desk job people are the suckers who buy the stuff.

OP

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

8y

I guess at the core the real problem is selfish greed and blatant dishonesty. People should be able to trust a supposed professional who tells them this property would be a good investment. As a non resident alien I have to say I was shocked how dishonest y'all were when I first moved to Memphis. In New Zealand if we lied how you guys do we'd be in jail. It's illegal to lie about investment products in the civilized world down under :-)

Jason Simonin

Rental Property Investor · Blue Springs, MO · Member since 2018 · 3 posts · 2 votes

8y

@Dean Letfus Well I'm a buyer in the Memphis low income market. Its not been without its challenges, and I've been burned a few times, but thats the same everywhere. If you have reasonable services, i have interest in building relationships. Rehab, leasing, property management, etc. Based in KC, we're in over 10 different midwest markets...and currently have 109 SFH in Memphis. If you know of big packages, Im interested.

Matt K.

Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes

8y

Originally posted by @Dean Letfus:

I guess at the core the real problem is selfish greed and blatant dishonesty. People should be able to trust a supposed professional who tells them this property would be a good investment. As a non resident alien I have to say I was shocked how dishonest y'all were when I first moved to Memphis. In New Zealand if we lied how you guys do we'd be in jail. It's illegal to lie about investment products in the civilized world down under :-)

To some extent that blame needs to fall squarely on the person NOT doing the due diligence. It's absurdly easy to pull comps, pull sample rents, and even real rents. 10 mins on craigslist/hotpads will get you a pretty good idea of what rents will be and another email from realtor for local comps will get you the numbers you need. Not perfect and still risky, but not the same as the people buying houses cash w/ no appraisal or even new construction before it's built...... with literally ZERO due diligence.

Matthew McNeil

Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

8y

Originally posted by @Jay Hinrichs:

Originally posted by @Matthew McNeil:

Originally posted by @Jack B.:

Matthew what is a " recast strategy" have not heard that term.. thank you in advance..

Jay,

My investment strategy is buy-and-hold long term while paying down mortgages with loans higher than 5%. Recasting is simply paying down principal in blocks and asking the lender to re-amortization the loan whereby I get an immediate return of increased cashflow. Its only a tool for some investors to utilize amongst several options based on their respective strategies.

[email protected]540-960-1507

Cassidy BurnsBusiness Member

Investor · Alexandria, VA · Member since 2016 · 859 posts · 460 votes

8y

I just read this entire thread and I want to say, thank you. Thank you to everyone that contributed as this has been eye opening. I definitely fell in the "cash flow or nothing " "2% rule or nothing" type mentality. But have since learned from my lessons, planning exit strategies, and ready to refocus.

Great feed.

Thanks all.

Doug P.

Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes

8y

@Dean Letfus I keep seeing threads like: "I live in Vancouver/Toronto and can't afford anything here, looking for advice on investing in (insert any trash city USA here)." And I keep telling them to find a way to invest where they are! The reason real estate is expensive in these cities is because people want to live there! But it always falls on deaf ears.

OP

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

8y

@Doug P., amen and amen. My home market is Auckland in New Zealand and what would be a slum property in the US still costs you over half a million dollars in Auckland. But Auckland's rental growth and capital appreciation are phenomenal. So I get the same thing there.

I can't afford to buy in Auckland I've missed the market. Usually it takes less than 30 minutes to show them how they could do it. Those that do get very rich.

USA is the same, but it can be scary when you start. i started doing seller financing deals on 400K homes in Memphis. People thought I was nuts but it is SO PROFITABLE I can't believe it. No tenant hassles, loads of appreciation and the low interest means they are usually cash flow neutral on day 1!

Troy Marschall

Rental Property Investor · SE USA · Member since 2017 · 34 posts · 20 votes

8y

@Matthew Paul, I have actually yet to travel farther out of the city besides to the airport. I'll definitely start exploring.

Michael Japuncic

Investor · Langley, BC · Member since 2014 · 16 posts · 10 votes

8y

@Dean Letfus This has been a great thread and really hits close to home. @Doug P. I admittedly was the young, uneducated "I live in Vancouver and the prices here are too high to cash flow" beginner investor. Buying a whole house for $35,000 in Memphis that cash flowed $400/month seemed like a dream come true! Fast forward 9 years and I sold the house for $2000 less than what I paid for it. I would have made 10x the ROI buying a negative cash flow property close to home that had mortgage pay down and appreciation in the deal. I wouldn't change the path that I took because of the lessons that I learned along the way. *Disclaimer* Do not take the same path, just to learn the lessons! Stick with Bigger Pockets to learn.

The lessons that apply most to these cheap properties are:

1. Appreciation is icing on your investment cake but IT MATTERS! Stay away from flat or declining neighbourhoods.

2. Capital expenditures hurt a lot more in lower priced houses. An AC unit, roof or drywall costs the same regardless of the house value. Frickin squirrels cost me thousands on that property and trust me "squirrel repair" was NOT a line on the pro-forma!

3. Don't ever rely on just one person for your information on a property/neighbourhood (as Dean said), verify everything with a second source. With such little money to be made in these small deals, there will be people who will try to screw you (especially if you're from out of town). Lying about neighbourhood quality, rent amount, cost of repairs, repairs charged but not actually being done etc.

Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

8y

Originally posted by @Tony Kim:

I think part of the reason BP preaches cash flow over appreciation is that it is much easier to get started investing for cash flow. The bottom line is that you need far less initial capital to begin investing for cash flow. If this place was all about capital appreciation, then half the members would be priced out due to the high amount of capital required to just acquire one property...let alone scale into multiple properties. Thus, the core strategy that is pushed here is to start with as little as possible, leverage it out as much as you can, and earn your few hundred per door, paydown the loan as much as you can, pull out equity to purchase more properties, and keep repeating. Not a bad strategy because it obviously works for many people....but it's just not for me.

Tony, I seem to remember from years ago Joshua Dorkin (started BP) preaching about cash flow over appreciation and I believe it came from his own experiences and observations. He deeply believes in helping people to invest the right way and speculative deals without CF were one of the main temptations with potentially lethal outcome. The rest of the BP team adoptet this narrative and continued to bang that drum for all the right reasons. But it took on a life by it's own - missunderstood by many it became a sign of success to buy 2%-deals (rent to price ratio) with massive cash flow. People are worried that if their deal is less than 2% it's not a good deal. I believe this was never the intent of Joshua.

The crazy thing is that Cash Flow is live blood and pocket change at the same time. This is an ambiguity that people don't grasp and it's not easy to explain. Wealth comes from equity, not from cash flow. Cash flow is the fuel that allows your engine to run, so you will eventually get there. People got mezmerized by big checks from flipping homes they did nothing to it - as seen in so many ways in the exuberance of 2004-2006, now cash flow is the new god and it leads down the same path at the end - it just takes longer to unfold and it's therefore harder to see.

Jay HinrichsBusiness Member

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

8y

Originally posted by @Matthew McNeil:

Originally posted by @Jay Hinrichs:

Originally posted by @Matthew McNeil:

Originally posted by @Jack B.:

Matthew what is a " recast strategy" have not heard that term.. thank you in advance..

Jay,

My investment strategy is buy-and-hold long term while paying down mortgages with loans higher than 5%. Recasting is simply paying down principal in blocks and asking the lender to re-amortization the loan whereby I get an immediate return of increased cashflow. Its only a tool for some investors to utilize amongst several options based on their respective strategies.

can you get lenders to do that ???? always thought you would have to refi.. and pay fee's etc..

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Matthew McNeil

Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

8y

Originally posted by @Jay Hinrichs:

can you get lenders to do that ???? always thought you would have to refi.. and pay fee's etc..

Yes. It's not commonly advertised, but from what I understand; if the loan was conventional and backed by Freddie Mac or Fannie Mae then the borrower may rightfully request a recast - an entirely different animal than a ReFi. Most if not all the medium to large banks offer it. However, FHA and VA loans can't be recast. There is a fee. I pay a flat $500 per recast. As a general basis, for every $10k paid towards the principal results in $50 reduction in the monthly loan payment, but obviously that depends on the rate of the loan. I'd never heard of recasting until a loan officer at BoA sat me down a few years ago and explained it to me. I became an immediate convert, but I always run each recast scenario past my financial advisor before I pull the trigger because you have to look at the entire investment portfolio verses loan rates on debt before making a move. Its a tool, but not to be used on every asset. Generally, I'd say its more for the long term buy and hold investor.

Jay HinrichsBusiness Member

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

8y

Originally posted by @Matthew McNeil:

Originally posted by @Jay Hinrichs:

can you get lenders to do that ???? always thought you would have to refi.. and pay fee's etc..

Yes. It's not commonly advertised, but from what I understand; if the loan was conventional and backed by Freddie Mac or Fannie Mae then the borrower may rightfully request a recast - an entirely different animal than a ReFi. Most if not all the medium to large banks offer it. However, FHA and VA loans can't be recast. There is a fee. I pay a flat $500 per recast. As a general basis, for every $10k paid towards the principal results in $50 reduction in the monthly loan payment, but obviously that depends on the rate of the loan. I'd never heard of recasting until a loan officer at BoA sat me down a few years ago and explained it to me. I became an immediate convert, but I always run each recast scenario past my financial advisor before I pull the trigger because you have to look at the entire investment portfolio verses loan rates on debt before making a move. Its a tool, but not to be used on every asset. Generally, I'd say its more for the long term buy and hold investor.

that's a great tip... and cheap at 500 bucks.. bank still makes their interest and its an easy 500 for them. good job !!

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Jay HinrichsBusiness Member

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

8y

Originally posted by @Dean Letfus:

I guess at the core the real problem is selfish greed and blatant dishonesty. People should be able to trust a supposed professional who tells them this property would be a good investment. As a non resident alien I have to say I was shocked how dishonest y'all were when I first moved to Memphis. In New Zealand if we lied how you guys do we'd be in jail. It's illegal to lie about investment products in the civilized world down under :-)

You know Dean I agree on D class always have always will.. but again to be fair and balanced.. in the early days.

the SPRUIKERS from NZ and AU those guys that lived there and marketed these properties in conjunction with US based companies were some of the worst profiteers I have ever seen.. make no mistake it was both Kiwi and Aussie based companies taking a big wack out of this stuff and the US guys.. I mean never doing any due diligence.. selling houses for 80k they bought for 5k .. many times never rehabbing them.. etc etc.. their is enough blame to go all the way around the globe..

I first got involved with on line real estate social media .. when I found the property investor forum . AU I had never heard of BP I was on that forum for 2 years before I heard of BP.. and I was the BIGGEST contrarian on there the resellers of this stuff hated me.. Because is was telling them how it was.. and I helped a lot of Aussies dodge some big bullets.

that's why I wrote my E book on out of state investing.. it was for the AUSSIE audience but its germane to US buyers as well I give it out for free.. its the stuff no one tells you about.

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Curtis Moe

Rental Property Investor · Memphis, TN · Member since 2017 · 27 posts · 11 votes

8y

Dean,

I hear you, and am on many of the same wholesaler lists and ask the same question. I actually need to thank MarkHunt with Memphis Investment Properties for saving me from moving forward on a couple.

It is just mania. People catch wind that XYZ is a great market and will be the next Austin, TX so they buy up everything cause "what could go wrong?"

There is a similar, but different scenario in Minneapolis where I moved from. Prices are so high, nothing hardly gets even close to the 1% RTV ratio, but the deals are still labeled as "Great Investment Opportunity", and someone eventually buys it at the asking price. There is an appreciation game that can be played in Minnie, but that involves a lot more risk and that is not how these deals are advertised. Last year, even when I was walking through duplexes, tri's and quad's it was a struggle to find 1% RTV in those.

I honestly think investors run their numbers without accounting for vacancy, maintenance, and cap x. So of course the deals look better if they cut those out.

But you are spot on for Memphis. People are going to get burned.

Jack B.

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

8y

Originally posted by @Dean Letfus:

Originally posted by @Jack B.:

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 :-).

I wonder the same thing all the time. Lot's of novices and incompetent people who don't realize that buying a 30K house in the ghetto is not an investment. I also love all of the stories of their cash on cash return, which lasts for a short period of time before the house is shot up or tenants trash it.

I'll stick to properties that require a 100K down payment in Seattle and appreciate 50-100K a year over the 6K a year cash flow figures on the 30K houses.

@Jack B. What I see more often in Memphis is people paying 50, 60K or more for a 20K house in a war zone OR some wholesaler saying CASHFLOW OPPORTUNITY on a house for under 15k and actually letting someone lose that much money in an area where you have zero chance of ever getting the rent collected.

Totally agree. When I first started looking into turnkey on here, I got flooded with a bunch of people trying to unload crap at three times it's value. Luckily some investors here messaged me and tipped me off to the scams where you were basically being charged way more than the houses were actually worth. I've also heard that many of the turnkey companies make profit in multiple ways: over charging you for the house, management and repairs. Must be some racket they have going on over there (some of the turnkey providers anyways...)

Jack B.

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

8y

Originally posted by @Matthew McNeil:

Originally posted by @Jack B.:

I wonder the same thing all the time. Lot's of novices and incompetent people who don't realize that buying a 30K house in the ghetto is not an investment. I also love all of the stories of their cash on cash return, which lasts for a short period of time before the house is shot up or tenants trash it.

I'll stick to properties that require a 100K down payment in Seattle and appreciate 50-100K a year over the 6K a year cash flow figures on the 30K houses.

Ditto Jack. Our strategies are identical. I buy rent-ready SFHs in the Boise valley area that are 20 years old or less. Obviously, the down-payment for this market ($200k+) is higher than Turnkeys in cities like Memphis. The appreciation values on the last 2 SFHs I bought in 2015 and 2017 are up $65k and $23K respectively.

I understand that many people have done well with Turnkeys. I applaud them. For me, personally, I can’t drink that Kool-aide. I would never buy a house I’m not willing to live in myself. Give me 8-10 class A-B SFHs utilizing a recast strategy that parks me into a comfortable retirement and I’m sleeping well at night.

Agreed. I took one of my paid off rentals in 2017 and 1031'd it for two more rentals with leverage. Just these two properties alone went up 170K +/- in one year, not even counting the cash flow or principal pay down and tax benefits. The barrier to entry is much higher (I paid 200K down total for both) but the return is also higher, and the properties are less risky. A Doctor couple rents one of them for example.

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

8y

Originally posted by @Account Closed:

@Dean Letfus

Glad I read this thread. I was looking at Memphis but I’ll stay on the west coast =)

Any areas in Memphis (Zipcode) that you feel are worth evaluating?

Have you given any thought to investing in other areas like Ohio? There is a turnkey provider in Toledo whose team actually lives in the same area as their properties.

Vincent Chen

Real Estate Investor · Philadephia, PA · Member since 2016 · 214 posts · 36 votes

8y

@Dean Letfus Totally agree with you for the point.

I think the key point here is how to get familiar with neighborhood for new investor or out of state investor? And what exactly does the familiar with neighborhood mean? Build boot on ground team is important, yes, but it is really hard I think, not only does the expert hard to find, but also, the environment keeps changing, investors need to make choices constantly.

Any good thoughts here?

Account Closed

Flipper/Rehabber · Madison, WI · Member since 2018 · 3 posts · 1 vote

8y

Lol "White flight"? The subtle racism on Biggerpockets never ceases to amaze me. Plus there's always posts about what CAN'T be done, loser mentality at it's finest.

Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

8y

Originally posted by @Account Closed:

Lol "White flight"? The subtle racism on Biggerpockets never ceases to amaze me. Plus there's always posts about what CAN'T be done, loser mentality at it's finest.

Actually where we are in this country in terms of the political climate it doesn't amaze me at all. Many feel this is acceptable and they have the green light to openly express it. What did amaze me is up until this point no one seemed to see it as abnormal, including the minorities. The nasty insinuation was that it's impossible for a neighborhood to be good unless white people are there. Also I concur on the CANT be done stuff. People should just express the notion that it CANT be done by them. Many people of BP make it work daily, Many in here are just eating this up like it's gospel.