3/2 SFR in Memphis, TN - Am I Crazy?

Question

Out-of-state turnkey investor in Memphis, TN.  I've looked at other markets and price-to-rent ratios are mostly under 1% these days if buying from a TK operator (from what I've seen).  I have an opportunity to buy a property from a TK provider (from another investor who's held it about 2 years - which is scary).  Here are the numbers:

Purchase Price: $74,500

Gross Rent: $850/month - tenant moves in next month.
20% down, 30-year fixed, 5.25% (for 1.7 points of $1,012...5.75% with no points)
P&I: $338/mo
Insurance: $45/mo (estimated based on another similar property I own 15 mins away)
Taxes: $115/mo
Vacancy at 8%: $68/mo
Property Mgmt at 10%: $85/mo
Cap-Ex at 5%: $43/mo
Maintenance at 5%: $43/mo

Cash Flow: +$113/month
Price-to-Rent Ratio: 1.14%

My other turnkey rental in this market only has a 1.05% price-to-rent ratio but cash flows closer to $200/month.  One thing I noticed is that the property taxes seem much lower on my other property.  1.85% here and about 1.23% on my other rental.  I don't think the property taxes on my other one have "caught up" to reflect the increased price paid for that property (if/when they do, my cash flow will drop a tad).

I think this deal is a little lean but it's tempting because it's with the same provider, I trust the PM, and it gets me off the sidelines in 2018.  With that said, I guess it's better to do no deal than a bad one.  Thoughts?  Remember, I'm a retail turnkey buyer (not a rehabber or someone willing to put in sweat equity), so keep that in mind.  Thanks.

Mark S. · Answer

@Jonathan McGee, thanks.  Yes, it’s a 3/2 about 1140 sqft.   Built in 1984.  Glad to hear it’s a better deal than I originally thought.

I calculated only about a 7% cash-on-cash return (annual cash flow over total cash out of pocket, including closing costs).

Then I factored in first year principal pay down by tenant and depreciation tax benefit (assuming a 30% effective tax rate savings) and got about 15% total return the first year.  Not a home run, but not too shabby for something virtually totally passive and better than most years in the stock market.

Mark S. · Answer

@Randy E.,

Current owner paid $72,700. Before that, turnkey provider paid $32,000.  I wasn’t given a concrete reason other than it sounded like he may be going through a divorce and selling off assets.  When it went vacant recently, he decided to list it on the investor exchange program.  New tenant moves in next month.  Everything looks okay other than high property taxes.

Jonathan McGee · Answer

Good price point for that zip code from a turnkey provider assuming it is a 3/2. I would imagine you are paying less than retail.

Mark S. · Answer

@Jonathan McGee, they do not allow for negotiations as part of their exchange program, full price offers only.   Repairs after inspection are negotiable.  Weird, I know.  Zip code is 38116.  What do you think?

Jonathan McGee · Answer

@Mark S.

Do you mind me asking what zip code it is located in? I'd be looking at appreciation as well to form a potential exit strategy.

As AJ stated, depending on what part of Memphis you are in, you may be paying both Shelby County taxes and Memphis City taxes. Other parts only pay Shelby County taxes which may be why you are paying less on your other property, or the tax assessment is much lower than the appraisal.

Seems like a pretty standard deal to me. Of course you could probably find a cheaper property renting for the same amount, but you'd be finding these deals directly from another investor or a wholesaler such as myself. If you are comfortable with your provider and PM, than this sounds like it would a suitable fit for yourself.

If you know the previous investor paid 72,000 I would be trying to negotiate to buy at the same price if not lower unless the property has appreciated. I'd be accounting for wear and tear in those two years unless it has been re-inspected and any wear has been resolved.

Mark S. · Answer

@Caleb Heimsoth, what provider are you referring to if you don’t mind me asking?

In terms of what the provider sells the “new” TK homes for normally, these “used” TK homes are discounted to reflect the fact that they’re older, have slightly more wear on the components, etc.  The idea is to have them be as close to apples-to-apples comparisons as possible.

As far as their value vs other non-TK homes, or distressed homes that you buy for much  less and rehab potentially for less, they may seem “over-priced.”  In my opinion, it’s all about price versus value.  Putting a value on your time, convenience, etc., is naturally going to reflect a higher price.

At the end of the day, the question is whether or not these numbers work as a virtually completely passive investment without any work for the many benefits real estate provides.

My primary objective is to generate current, consistent cash flow that will grow over time (although I don’t need that cash flow today, but prefer to have it as a cushion).  I find myself sometimes possibly focused too much on this relative to the other benefits it provides (depreciation/tax benefits, equity growth/principal paydown by tenant, potential appreciation, leverage, inflation hedging benefits, etc.).

Even though the cash flow might be a bit tight, I’m asking myself whether I should instead focus more on the “total return” of the components mentioned above and consider cash flow as secondary.  That’s where I’m struggling.  For my personal investment philosophy, is the deal “good enough” to pull the trigger or can I do better?

Mark S. · Answer

@AJ Singh, can you please elaborate?  I’m not following you.