Deal or No Deal? Memphis, TN 38115 Not Turnkey!!

50 Replies

Hi BP Community!!

I finally found the right place to post this....I'm working on a deal right now in Memphis, TN and I was wanting to get some opinions on this. 

The property is in Memphis in Hickory Hill, 38115 and for buy and hold. I THINK these numbers are pretty conservative, but not sure. Here are the stats.

SFR, 3/2 + "extra room that can be used as a bedroom" 1300 sqf

Purchase: 56K

Rehab: 4k

ARV: 70k

Rent: $800 (according to PM, but I think it might be closer to $750)

Vacancy - 8%

Repair - 8%

Capex - 8%

PM - 10%

P&I - $270

Insurance - $50

Tax - $90

Cashflow - $120 ($100 if using $750/mo)

Deal or No Deal?

I'd personally be very reluctant to do this deal.  As an out of state investor, I want to stick with properties that rent higher than $850.  I personally go for $1k and above.

@Antoine Martel   My numbers include P&I

@Larry F. Do you do value add when you buy?  Or buy retail or mostly rent ready?  Most of $900+ rental properties in Memphis just don't have the equity and value that I like to have.   Would you say even with 10k equity to start, that this is not a great deal?

@Jason D.   everything is about 10 years old, part of the rehab budget is a new water heater.  They will need to replaced at some point, but I don't think in any hurry.  I may bump it up to 10% for capex.  

@Zack P. If all those numbers in your model make your cash flow positive at $120/ mo. and that’s enough for you year 1 because you are planning to hold for the long term then I’d say it’s a deal especially with the RTV over 1... go for it!
@Zack P. So here's how I do capex, take it for what it's worth. I dont like the percentage theory, I use real dollars.... I take a 30 year window, and take the three major capex items... roof, HVAC, and Water heater, and add their costs together. So say roof is $5000, HVAC is $4000×2 ( 15 year lifespan), and water heater is $1000×3 (10 year lifespan). That's $16000 in capex over 30 years, which is roughly $50 per month (I would go $75 to account for price increases and other misc. items like siding, windows, driveway, etc...) That's if everything is new. Since you are already 10 years in, divide that $16000 by 20 years and you're at roughly $70/mo. with no buffer. I, personally, would reserve $100/mo. for capex in your situation.

@Zack P. - 38115 and the term 'Hickory Hill" encompass a lot of area.  It is hard to tell without a little more reference to where it is located - maybe nearest major intersection if you are trying to keep from listing the address.  I would caution you that a $4,000 renovation is literally doing nothing to a property.  The absolute bare minimum on a property with every major component 10 years old minimum.   That is $3.04 per square foot.   Add to that that the rents are at or near median rent in Memphis and this reads out like a very risky investment - average to below average at best, imo with the little info shared on location.

I like the way @Jason D. advised you to look at capex.  I can also warn you that at this price point, you will be addressing wear and tear issues more frequently and most likely addressing capex more frequently as well.  Even by his calculation, you may need to account for more as you may be in the red after two turns and they may come faster than you think.

You just have to be very, very careful with how you are viewing a cheap investment like this.

Keep in mind that everything is more expensive these days.  The property you are buying for $56k today, probably sold in the mid 30's a couple of short years ago.  Those properties, with a lot of deferred maintenance, the high likelihood of more transient renter pool, and relative difficulty finding high quality management at that rent price all point to a property like this tending to bring the most risk, especially for out of state buyers.  Just go into it with your eyes wide open to the risk.  

Originally posted by @Zack P. :

Hi BP Community!!

I finally found the right place to post this....I'm working on a deal right now in Memphis, TN and I was wanting to get some opinions on this. 

The property is in Memphis in Hickory Hill, 38115 and for buy and hold. I THINK these numbers are pretty conservative, but not sure. Here are the stats.

SFR, 3/2 + "extra room that can be used as a bedroom" 1300 sqf

Purchase: 56K

Rehab: 4k

ARV: 70k

Rent: $800 (according to PM, but I think it might be closer to $750)

Vacancy - 8%

Repair - 8%

Capex - 8%

PM - 10%

P&I - $270

Insurance - $50

Tax - $90

Cashflow - $120 ($100 if using $750/mo)

Deal or No Deal?

 I think one thing to look at in these calculations is with those lower end rentals turn over happens yearly or on average of every 18 months.. so ask your PM if there is a re leasing fee of one month and you 9 times out of ten will need to turn a turn over and that causes you a month of vacancy as well.  so run your numbers of at least 2 months vacant per 18 months and see where you come out.. One month being accounted for in your 8% and one month for release fee.. and then figure 750 to 1500 at the same time for a turn over.. 

these units given the tenant base will take on a lot of more wear and tear .. so be prepared for that.. 100 a month can get lost pretty quickly.. what is the upside..  

@Jay Hinrichs   Thanks for your input.  I'll double check the PM agreement, but I think it's 50% rent for each lease period.  I definitely need to add this in.  

This deal seems to be turning into zero cash flow pretty quickly.  :-(  

@Zack P. I could be wrong in saying that hickory hill is all bad but I’ve had some people tell me to avoid it so that fact alone I wouldn’t but this deal. 4k doesn’t get you much. That gets you a water heater (at least on my rental in Memphis) and either a AC unit or Furnace roughly speaking. Roof is probably 4-6k depending on size. Furnace is roughly 1500-3k, AC unit 1200-1500, water heater around 1000. So I wouldn’t do this deal likely because your cash flow is to low. And the area is probably not great. Bare minimum for me as an out of state Memphis investor is 750 in rent. Tenant pool takes a small dip in quality from 600ish to 750 and then falls off a cliff below 600, in my experience and opinion. Now I have had zero issue so far with renters in the 800 plus category, but these are still B minus type renters. If you want A class go with 995 or above. Not an expert on Memphis like @Chris Clothier . But I hope this helps. And it’s been my experience so far as well as with the input of others

This is a really good topic. Without the address it is hard to say why the actual value is but here is a question to ask: if a home for example is worth say $85k with rents for example $850 per month but for the price you get a home with a great renovation, or you can buy the same house for say $65-$70k as it with some deferred repairs and majors only having half of their life left and slightly less on renovations: who would rather have it fully renovated at market value or get more equity but more repairs to come sooner than later? 

Originally posted by @Jason D. :
@Zack P. So here's how I do capex, take it for what it's worth. I dont like the percentage theory, I use real dollars.... I take a 30 year window, and take the three major capex items... roof, HVAC, and Water heater, and add their costs together. So say roof is $5000, HVAC is $4000×2 ( 15 year lifespan), and water heater is $1000×3 (10 year lifespan). That's $16000 in capex over 30 years, which is roughly $50 per month (I would go $75 to account for price increases and other misc. items like siding, windows, driveway, etc...) That's if everything is new. Since you are already 10 years in, divide that $16000 by 20 years and you're at roughly $70/mo. with no buffer. I, personally, would reserve $100/mo. for capex in your situation.

One thing most folks miss in this stuff is the waste line to the street unless its brand new your going to replace it for 3 to 5k as well over the life.. along with plumbing fixtures etc and maybe even a replumb under the house along with dry rot etc..  

Originally posted by @AJ Singh :

great point @Jay Hinrichs

i have a quote of $3200 for similiar stuff for a rental in memphis

@Zack P.

great advice from @Chris Clothier and @Caleb Heimsoth . this rental does not make sense for an OOS investor. $90k to $120k will get u a good rental in memphis neighborhood. Also if you are not going to scale up, it doesnt make sense to be an OOS landlord

when I thought I wanted to be king of the C class rental world and bought 350 of these.. one thing I did prophylactically was I replaced the waste line on all our homes during initial rehab..  ( if it was not obvious the line had been replaced in the recent past or was not PVC.).

Its one thing I see many turn key buyers miss in their home inspections is a sewer scope.. out in our market every realtor first thing they do is recommend a sewer scope I even have them do them on my new construction homes..   with a rental its very important because fouled sewage backing into the unit means providing a hotel room until it gets fixed.. and also when we do the rehab we get a much better price than an emergency sewer line replacement.. just those little gotcha things we live and learn.

Originally posted by @AJ Singh :

great point @Jay Hinrichs

i have a quote of $3200 for similiar stuff for a rental in memphis

@Zack P.

great advice from @Chris Clothier and @Caleb Heimsoth. this rental does not make sense for an OOS investor. $90k to $120k will get u a good rental in memphis neighborhood. Also if you are not going to scale up, it doesnt make sense to be an OOS landlord

Whats the cost breakdown and scope of work for that 3200?

Originally posted by @Caleb Heimsoth :
Originally posted by @AJ Singh:

great point @Jay Hinrichs

i have a quote of $3200 for similiar stuff for a rental in memphis

@Zack P.

great advice from @Chris Clothier and @Caleb Heimsoth. this rental does not make sense for an OOS investor. $90k to $120k will get u a good rental in memphis neighborhood. Also if you are not going to scale up, it doesnt make sense to be an OOS landlord

Whats the cost breakdown and scope of work for that 3200?

 In parts of the SF Bay area its the law that old sewer lines must be replaced when properties are sold.. my brother in law is making a KILLING doing this.. pipe burst systems for 5 ot 8k a job done in 4 hours.. LOL talk about making bank.. 

@Caleb Heimsoth

we fixed through snaking with a plumber temporarily. its been two months and no backflow. but i will need to replace the pipe from house to main sewer. 

i have a tenant in cordova leave after one year and left the house dirty and cosmetic rehab needed 

the joys of being an OOS landlord lol.