MEMPHIS INVESTMENT PROPERTIES Case Study

121 Replies

Greetings BiggerPockets!

Just last month, I started crawling, walking (& dare I say running) towards being a new real estate investor! Last night, I was reading the Morris Invest Case Study 2.0 (@tyler jahnke) and not only was it enlightening to see the trials and tribulations of his journey but it was astounding to see how the BiggerPockets community got so involved in the comment threads and how helpful everyone is. Truly incredible!

A little background about me: I work in a real estate development company as a Design & Construction Manager keeping an eye on Architects/Engineers and Contractors but I don't really work on the front end with Acquisitions, Proformas, etc. so investing is generally new to me but I learn quick :)

So, my journey begins...

Oct (week 3) - I began spending hours a days reading and researching about single family home rental investments and Turnkey investment properties around the nation. I read many articles on the best cities to invest and I started finding out about companies that specialize in this investment vehicle. 

Oct (week 4) - To make a long story shorter, I ended up making an offer on a 3 bed/2 bath on Scottsdale Ave near Parkway Village with the company Turnkey Properties (@alex craig) http://turnkeyinvestproperties.com/

I really appreciated their website and the information it provided such as the Sales Offering Packet which contained a lot of information including a detailed Scope of Work that they would perform on the property. 


I had a few Lenders lined up but when the rates started coming in, it sunk my Proforma and the Cash on Cash return and Cash Flow dropped significantly. So significantly, I had to drop out of the deal which really took the wind out of my sales.


Turnkey Properties returned my Ernest money because they said I was trying in good faith to stick to my end of the deal but my credit wasn't as good as I thought it was so the 5.5% rate, points and closing costs we're just too much. (4 years ago and beyond, I didn't really pay any school loans so that came to bite me on the ***!)

Hopefully, in the future, I will get the opportunity to work with the team at Turnkey Properties (@jeremy veldman) again because I had a favorable opinion of them up to the end.

Oct (week 5) - To make a short story longer, at some point in the journey, a Lender, Security National Mortgage Company (@aaron chapman) convinces me to pay my credit card to zero and they would rerun my credit score (Every month I pay it to zero but I guess when Lenders run credit scores, I must have had a high balance). I did and low and behold, my credit which was under 680 suddenly went above 680 which not-so-magically lowered my general rate.

One thing leads to another and I end up signing a purchase agreement on a 3 bed/1 bath on Avon Road near Berclair with Memphis Investment Properties (@james wachob @mark hart  ) http://memphisinvestmentproperties.net/

Nov (week 1) - A different Lender (Supreme Lending) offers me a lower rate than 5.0% with points which allows me to move forward with the Loan. I have signed all the Loans documents to date. Unfortunately, SNMC couldn't offer me a better rate but @aaron chapman congratulated me on it (he is a true gentlemen, which EVERYONE tells me he is!).


Nov (week 2) - Today, I received the Scope of Work from Memphis Investment Properties that is to be performed. In a few days, I will post before that Scope of Work and before photos and update the BP community on the progress.

The schedule is as follows which I will update periodically:

Nov (week 3) - Renovation

Nov (week 4) - Renovation

Nov (week 5) - Renovation

Dec (week 1) - Renovation complete.

Dec (week 2) - Home & Termite Inspection to be performed. Home Inspection report issues to be rectified.

Dec (week 3) - I plan on visiting Memphis and walk the final product, meet Memphis Investment Properties team including Property Management.

Dec 18 - Close on the deal.

Questions and Comments are MORE than welcome!!!

Nov 9 - Today, I spoke with @Mark Hart and he clarified the Scope of Work for the Renovation as follows:

849 Avon Scope of Work - EXTERIOR

  • Roof- Wash the roof, approximately 7 years old
  • Window Repair- Repair or replace any broken windows and repair all rotten wood
  • Pressure Wash- Clean dirt and other debris off of the exterior of the home
  • Landscape - Trim grass and shrubbery and add fresh mulch
  • Mailbox - Add a fresh coat of paint
  • Driveway Patch- Patch all major cracks in the driveway and patio area
  • Fence Repair- Add planks and posts on the North East side to ensure privacy
  • Iron Security Doors x 3- Iron doors to be installed
  • Rekey- All doors to the property
  • Electrical Repair- Perform an inspection to ensure all outlets are in working order
  • Interior Paint- New paint on walls and trim where needed. Sheetrock will be repaired on all walls beforehand if needed
  • Flooring- Install tile, Resilient Plank Vinyl Flooring in Cherry, and refinish all existing hardwood floors where needed
  • Kitchen Repair- Paint cabinets and add new formica countertops with granite look where applicable
  • Bathroom- Repair or replace all bathroom toilets, sinks, tile, vanity, shower heads and bathtub
  • Dumpster- To haul away debris
  • Hardware Package- Replace all door knobs, blinds, A/C vent covers, light fixtures, and receptacles
  • Final Clean- Deep interior clean to get property camera ready for professional final rental listing photos

More images of the Interior to follow....

Scope of Work - LIVING ROOM  & DINING NOOK

  • Floors - Carpet will be removed to expose wood floors which will be refinished. 

Scope of Work - 3 BEDROOMS

  • Floors - Carpet will be removed to expose wood floors which will be refinished.

Scope of Work - KITCHEN

  • Cabinets - the knobs will also be replaced

Scope of Work - BATHROOM

  • Fixtures - If I remember correctly, they will be replaced.
  • Floors - If I remember correctly, they will be replaced.
  • Tube & Toilet - I was told they we're in great condition.
  • Sink - I forgot what I was told about this.

Scope of Work - ADDITIONAL ROOM

  • Floors - replace with new resilient plank vinyl flooring
  • AC Unit - replaced with new unit

This wasn't a room that I was expecting in the house before I started to understand the floor plan. At first, I didn't know if it was a Bedroom or something else. To my surprise, it was an additional room! $$$

@Victor H nieves I highly recommend that you go to Memphis and see the MIP Campus. I am also in the process of buying a turnkey property from MIP and flew to Memphis about two weeks ago to meet with them. Because of my job, I'm a very skeptical person. When I met @Mark Hart and the MIP crew I was instantly put at easy. In my opinion (newbie opinion) they are a very professional company. Mark took me all around and taught me about the City of Memphis.

Let me know if you have any questions that I can answer for you.    

Thanks for the comments @Dawn Fawcett and YES, I have a flight scheduled for Dec 12 and 13 to visit the Memphis area, meet with the MIP team and the see the final renovation of the property after it has had its Home Inspection and its open items have been addressed.

  • Should I have visited prior? Probably.
  • Should I visit today? Probably.
  • Should I not visit? Definitely not.

Through the research that I have done, I have no doubt that MIP is a professional company and I chose them because of that name recognition and the fact that they acquire, renovate, sell and manage which is the type of Turnkey operation I am looking to invest in in Memphis, Indianapolis and elsewhere.

A few weeks ago, when the Lender provided me with the Loan details, I was able to compare the MIP team's Proforma with my Proforma.

Issues that affected its performance:

  • I had to buy Points! My credit was 688 (I thought it was better...but if it wasn't maybe I would have never tried to invest in Turnkey)
  • Actual Loan Fees were much higher that original projected (another learning lesson!)

Question? 

  • Is it correct of me to not add Prepaids and Reserves into the Proforma so that it affects Initial Cash Investment? I know it is Cash that will come out of pocket but I am just not sure if it goes "under/after" Initial Cash Investment so it doesnt affect the Cash on Cash Return calc. Answer is _____?

For prepaids, I'd amortize that expense over the timeframe of it's use. Account for it within your monthly "Total Operating Expenses " line. 

Ex: Annual insurance bill of $1000, should be amortized $1000/12 months = $83.33/month - add this to your monthly "Total Operating Expenses " line

For reserves, it's a similar premise. Let's say you want to reserve 10% of your gross rents towards maintenance issues. Therefore your monthly maintenance expense is $950 * 10% = $95. Because some months you'll have maintenance expense and other months you won't, the balance of these funds for maintenance related issues will grow or decline accordingly. I'd also account for this expense in your monthly "Total Operating Expense" line item.

Also, I was calculating your numbers and the $24,149 doesn't seem to jive. If I total up the numbers I only get to $22,770. You might not be line-iteming out something. 

Hey Victor.....I️ do it as a monthly line item. Another thing I️ like about MIP is their proformas are very “realistic”. Before I️ found MIP, some other companies do not show maintenance and vacancy as a line item.

But if I️ understand your question right, yes do it as a monthly line item. And tbh, I️ like the property you picked. It’s actually the one I️ wanted 😩. But you beat me to it. Hahaha. It will be a good money maker for you.

@Patrick Shawn Faherty oh yes YES I have hidden all those details (vacancy, maintenance reserve, mgmt fee, insurance) ... haha, i would have REALLY been starting off on the wrong foot!!! (ps: I could still be starting off on the wrong foot!)

What about Reserves &  Prepaids....should I calculate that into my Cash on Cash return? I was but now im not sure if I should because thats cash I need to pay anyway but I just pay it upfront.

Thoughts?

@Garrett Haefele you are absolutely correct, it is $ 22,770, I have an actual excel sheet (on Google Drive) that totals this amount. I incorrectly input the $ 24,149 into this table when i posted it. Good eye!

Also, under Operating Expenses, I do have:

  • Property Tax $ 83
  • Insurance $ 40
  • Mgmt Fee $ 76
  • Maintenance Reserve $ 76

TOTAL $ 276

But im still confused about Prepaids & Reserves .... I thought the Lender will require me to pay some of these upfront?

Prepaids

  • Insurance $485
  • Mortgage Interest $ 150

Reserves

  • Insurance $ 121
  • State Taxes  $ 234
  • County Tax $ 335

@David Fawcett are you serious! oops :) but I hope it does perform as anticipated.

Yes, above, I do include those in my Operating Expenses.

Im still confused about Prepaids & Reserves on the Lenders Loan doc. Maybe I will post it.

Victor I’m sure it will perform as anticipated. That was kind of one of my questions that I️ asked MIP, “how do you know it will get the rent you are thinking?” They have a very good database to support the figures they provided you.

Yes you will have prepaid items at closing. You will have to pay for insurance (I️ think a year in advance) and taxes (I️ think 3 months). Hope that helps

@Patrick Shawn Faherty @Garrett Haefele @David Fawcett

Nov 11 - I've unhidden all of the Operating Costs, etc in my Proforma and I've also updated and added 2 costs that I will  may want to incur: (a) AC preventative maintenance and (2) pest prevention which increases my projected Operating Costs and therefore affects my Cash Flow.

The big hit in this Proforma was my credit score forcing me to pay for Points. Maybe I should have gotten a 5.0% vs 4.75% rate but that would have lowered my Cash Flow so not sure that would have been a good idea.

  • Thoughts?

@Victor H nieves   one major flaw in your numbers and possibly two.. if your in Memphis proper you have two tax's not just one.. maybe you are out of Memphis proper. but inside you have Memphis city tax and then you have county tax..

the other is you are massively under estimated what its going to cost to own and run this over time.

76 a month is no were near what it will cost you on a ten year run.. along with vacancy factor. And lease up fee..

900 a year for routine maintenance  is a good number.. could be lower or could be higher.. you have turn over when tenant leaves these are always 1000 to 2500 depending on how touch your tenant was.

and over a 10 year run you will have a 5k roof you will have HVAC water heater and other more expensive items.. CAP EX needs to be put in your calculations or its like cheating at solitare.. you win but its not real.

so re run your numbers and see how this flushes out use 50 to 60% of gross revenue as fixed expesnes then take out your mortgage that is far more realistic over a long term hold.

I am going through this right now in Madison MS.. it was a new construction I bought 12 years ago same tenant the entire time.. normal wear and tear .. and the bids I am getting are 18 to 23k.

paint in and out.. new roof.. new counter tops all new carpet etc etc.. so that's basically about 2k a year.. your only putting 1k ... And this is because I never had a turn over and self managed .. so I did not have those expenses but still all my positive cash flow just got sucked up .

but the tenant did pay down the house that is were I will get my profit.. I owe 152k and it will sell for 210k  so add in 23k your at 175k  minus 15k to sell and I net about 20k which is basically getting my down payment back.. with Zero profit only thing I made is tax shelter they were go zone.. so I saved 30k in tax's the day I bought it.

Disclosure: sponsor

Originally posted by @Garrett Haefele :

For prepaids, I'd amortize that expense over the timeframe of it's use. Account for it within your monthly "Total Operating Expenses " line. 

Ex: Annual insurance bill of $1000, should be amortized $1000/12 months = $83.33/month - add this to your monthly "Total Operating Expenses " line

For reserves, it's a similar premise. Let's say you want to reserve 10% of your gross rents towards maintenance issues. Therefore your monthly maintenance expense is $950 * 10% = $95. Because some months you'll have maintenance expense and other months you won't, the balance of these funds for maintenance related issues will grow or decline accordingly. I'd also account for this expense in your monthly "Total Operating Expense" line item.

Also, I was calculating your numbers and the $24,149 doesn't seem to jive. If I total up the numbers I only get to $22,770. You might not be line-iteming out something. 

 You all are being too kind. SPEAK the truth, it will relieve you of all the streSS. My friend you wont be making much money in a turnkey. It takes 10-12 years just to break even. People deceive themselves with Turkeys everyday and twice on Sundays.

@Jay Hinrichs   Ouch, this a slow death ;) I've bumped up the vacancy and updated the taxes from the Shelby website. My Initial Investment because of my credit is killing me softly :)

@Victor H nieves   that's more realistic  and you do have a lease fee of one months rent when you get a new tenant and if you own this 10 years you will have 4 to 5 lease fee's minimum .. unless management takes a very reduced fee or you get lucky and get a long term tenant.

pretty much anyone buying 1% or so rule property is going to net 5 to 8% COC with 20% down.. over time.. and if you get that tenant from hell you will net nothing or go in the negative.

If you get a great tenant that stays for years does not damage ( pretty rare frankly) then you could do better.

but its best to be realistic than to do blue sky performa's and then be disappointed later ..

the idea behind these rentals is very much lost in the cash flow is king debate.. the idea behind owning rentals is to get them paid for as QUICK as possible.. that's when you loving life.. up until then its managing expense's and you should put every dime back into them to pay down debt and or keep them in good shape.. the other thing is you should be buying were there is a reasonable expectation that values will climb some what you need that to offset sales cost when you do finally exit.

Now many folks I fund over the years they are buying with the intention of never selling and they have goals to own 100 or more.. I help them get to that goal.. and have done it many times one of my clients I have funded has over 250 rentals and self manages them all.. its their business its what they do and so on and so forth.. and they only take a little of the cash flow out for themselves the rest goes to pay down their debt so they can at the end of some time have decent equity.. I am NOT a refi till you die guy I don't believe in that at all.. I am a get property paid for guy.. and the most successful private owners I now have little to no debt. that's when you really cash flow.. If you had no debt you would be at 450 a month with MY expense numbers that's where you want to be..

This is why I haven't pulled the trigger when I found a few 1%-ers in out of state market in the Midwest.  The headache that comes with making $100-200/mo is not worth it to me after running the numbers conservatively.  

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