MEMPHIS INVESTMENT PROPERTIES Case Study

MEMPHIS INVESTMENT PROPERTIES Case Study

Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes

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!!!

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y

@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..

See this reply in the discussion

148 Replies

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  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    you have the rents doubling. the rents in those markets are quite static have been for the 20 years I have been doing business there.. to base your model on rents doubling is  pie in the sky.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Hau N. my loan rate isnt helping me & somehow this deal has so much Closing Costs. But, is there hope for me when I hold this for 20 years if the projections and assumptions pan out as shown above? That I dont and wont know I suppose.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jay Hinrichs Good advice, I'll go back in the calculator and delete that automatic input and see what it "tells" me. Thanks much, the truth will set me free!

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    if you got 159k in net rental income on a sfr like this over 20 years.. that would be something.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    Nov 12 - This is where I am at today. Huge thanks to the comments of @Jay Hinrichs and others for getting my #s more towards a realistic projection of my returns.

    My updated assumptions in my Proforma:

    • 8% vacancy @ $ 912 / year
    • 8% maintenance reserve @ $ 912 / year
    • $872 county taxes (annually)
    • $694 city taxes (annually)
    • $350 HVAC preventative maintenance (I removed the termite prevention)

    My assumptions in my IRR calculator:

    • 1% rent increase annually (the calculator didn't let me put zero) 

    Here is where I stand today with my first investment.

    Thoughts anyone? Is there light at the end of the tunnel?

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    better I still think your light on vacancy and maintenance and or you need a cap ex line..

    you simply can't maintain a rental home over 20 years for only 900 a month and include in tenant turn over. you also don't have lease fee's your going to have those unless your PM has offered to find and place new tenants for free. you should check on that..  I think most will tell you 18 months is about average for tenants to stay.. many put 2 year leases and hit those.. many folks stay for another 2 years.. it would be quite rare to have someone stay for 20 years..   I have kept my long term tenants by never raising rent and being under local market rent.. so if they move its going to cost them.. and then being proactive in keeping property nice.. but again I look at tax benefits and mortgage paydown cash flow is something I never count on in these asset class's.. and if we got any we just threw it towards the mortgage.. its about owning them free and clear as soon as possible .. at least that's my way of doing it which I know is not common or a popular way with most refi till you die folks  :)  and or got to maintain max leverage.. I have seen the carnage of max leverage over the years.

    900 a year not 900 a month :)

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    Here is my updated Proforma as well:

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jay Hinrichs you are taking me to school....and I forgot my lunch and backpack! Thanks for your wise words and time!!!

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    I am conservative in this asset class if U do better that's great but if you are going to be disappointed if you don't hit Ur numbers exactly then you need a contingency line..

    just like I do when I build new homes or new subdivisions even though we have firm bids from all subs I put 10k in the contingency line and we use it every time.. stuff happens ..

    when you close on this.. just take whatever positive cash flow you get and pay down your mortgage.. its not going to be enough to really save up for another down payment take you forever.

    you want as much equity in these as you can get as soon as you can get that.. so if you did have to sell you have a exit plan

    any way just one persons opinion.. but you can see when you started this exercise you did not know about the city tax.. that's a little gotcha in Memphis.. I learned that the hard way as well.. LOL.. so it sticks with me..

    Just like going to Texas and their insanely high property tax's  you have to be careful to add in all the numbers.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jay Hinrichs trust me, you are opening my eyes, the sun is burning, but you are opening my eyes. I prefer to be realistic more than anything. Greatly appreciated. 

    Yes, it is all about Contingency is the budgets. We live and die by our Contingency in Construction, that's what I do on a daily. This aspect of Real Estate is definitely very, very new to me. A HUGE learning lessions. Great thanks!

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    8y

    This is an example of why imo for sfrs it is safer to buy historically appreciating cash flow properties and or path of progress/gentrification. 

      I understand the BP only cash flow mantra and yes long haul mortgage pay down but that's a real long haul/risk. Appreciation is your really your only back stop and exit friend. 

    There was a bp dude who bought sfr cash, it took 5 years to get people out and tens of thousands legal fees. And still made money because it was a historically appreciating property. Obviously,  if that was in a down cycle another outcome. 

    My main point is appreciation will be your best friend and opens up early exits options vs being stuck in the red for extended periods of time. It is a pretty critical element for actual end game profits. Relying on cash flow alone is actually much more risky imo. 

    It is such a simple rei concept and partly insane it is not strongly encouraged on a rei site. The other option is high volume (doors) but that is easier said then done (work). Appreciation is passive (sleep).

    Good luck!

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Matt R.  for whatever reason you have the tag line

    "appreciation is gambling or speculation" and I am not a gambler or speculator..

    in some markets this is accurate in others its not wise at all.

    like when you see his rental proforma and the rents double in 20 years.

    the only place I have seen that is on the coasts.. not in the mid west.. I started buying in the mid west in 2001 ( actually lending) and rents by and large are static.. they may have moved 10 to 15% in some areas but in the under 100k houses pretty stable.. which is good for long term planning.. but for assuming rent is going to double .. that is a real speculation move.

    but lets look at his case study.. this gentlemen can get a rental for 21k out of pocket.. pretty tough to do that on the coasts.. And that is the draw to these markets.. along with the cash flow is king mantra.

    but cash flow demands scale.. appreciation you make by being smarter than other investors and knowing were to get ahead of were the market is moving.  but of course takes some risks.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    NOV 12 - UPDATE:  I've updated my assumptions 

  • Honolulu, HI · Member since 2017 · 92 posts · 59 votes
    8y

    Mr H would do this fella good by tellling him forgettaboutthit it.   This is starting to get depressing n sad.

    Question for Mr N.  Have you even  priced out other homes in the area.   You seem so Stuck on your pro forma for that one propety.

    Have you thought about advertising for a second hand Turkey..................lol.   Buy once removed from Memphis or Elvis Realty.  I bet tons of people would want to unload their Turkey....gobble gobble gobble.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jody Newman I priced out other Turnkeys before I contracted with this one & I have earnest money invested. My original Proforma assumptions were to loose it appears. This deal gets worse and worse for me everytime I look at it.

  • Honolulu, HI · Member since 2017 · 92 posts · 59 votes
    8y

    Am i the only lunatic who says to go touch what you are buying?    Before you buy not after signing to buy.

    WO Jay H blessing i would just forfeit the EMD!

    If you really want TK go with Kathy fettke.  although i saw horrible numbers on her latest deals.  Just absolutely horrible.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jody Newman No, you're not the lunatic, first time investors like me are! ;) I do plan on visiting after the Home Inspection is performed and issues are addressed.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jay Hinrichs Your generosity & wisdom has helped me get my Proforma to the following place which I think now sides with some caution and is more realistic than all previous iterations. It may not be conservative enough. A 10 year projections results in a 10.00% IRR theoritically.

    "you can lead a horse to water but you can't make it drink "

  • Honolulu, HI · Member since 2017 · 92 posts · 59 votes
    8y
    Originally posted by @Victor H nieves:

    @Hau N. my loan rate isnt helping me & somehow this deal has so much Closing Costs. But, is there hope for me when I hold this for 20 years if the projections and assumptions pan out as shown above? That I dont and wont know I suppose.

     I googled st address then googled homes for sale in your zip. You getting JACKED big time kid.

    $74,900

    3574 Bowen Ave, Memphis, TN 38122 is a lot nicer than your deal..............lol.

  • Investor · San Francisco, CA · Member since 2017 · 41 posts · 20 votes
    8y
    @Jody Newman I was gonna say the same thing. It's always better to keep all taxes in check. I always check for vacancies in the area with other reputable PMs. Always keep the lease fee, CapEx, Maint. in mind, before you buy. I, personally, think that if it's a below $1000/month rental, why not buy in a cheaper neighborhood? Either go with >$1000 or go with doing the rehab yourself. Just my two cents...
  • Honolulu, HI · Member since 2017 · 92 posts · 59 votes
    8y

    It gets worse.   Just did a HOTPADS rent study in the area.   No way you gonna get $900 plus in rent.     Lots of 3 beds going for $700 -$750.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jody Newman Yes, you bring up amazingly obvious points and I questioned the $950 rent since day 2 (yea, not on day 1 enough) because I did check the area and didn't see many $950 rents.

    Am I getting JACKED? Well, the numbers don't lie and your backing up your comments with data...

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Victor H nieves  my experience in the deep south is that 1 bath will not rent for as much as 2 baths.

  • Investor · Miami Beach, FL · Member since 2017 · 73 posts · 64 votes
    8y

    @Jay Hinrichs  you are totally on point on that one "AGAIN" , yes 3/2 is an ideal situation surely but if the neighborhood has 3/1s, it could be reasonable.

    I think I have bigger issues....I still dont have CapEx in my proforma above, which im now including @ 5% and my deal gets more worse plus Joy highlights the "fact" that one is hard pressed to find many $950 3/1s in the area.

    Painful yet eye opening lessons here! 

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