Memphis Investment Properties Turnkey Case Study
Memphis Investment Properties Turnkey Case Study
Disclaimer: I am an investor/customer of M.I.P, I do not work for them nor being compensated in anyway, just sharing my experiences with other investors.
Providers Involved:
Norada Real Estate Investments
Memphis Investment Properties (M.I.P)
Reedy and Company Realtor, LLC – Real Estate Broker and Property Management for M.I.P
Bemortgage – Lender
Lipscomb – Insurance
The Prep:
- I originally came across M.I.P through Norada (Marco Santarelli, BP contributor and has his own podcast).
- I was assigned an advisor who gathered my goals and situation and we worked together to identify two markets to look at Memphis TN, and Birmingham, AL.
- I’m am an out of state investor living in Colorado and have two other properties in Texas (not turnkey) and have been a BP member for some time.
- I attended an investor Tour in May in Memphis to check out the area. It was hosted by M.I.P and we toured properties, meet lenders, insurance agencies, and other provider doing business with M.I.P
My Criteria/Situation:
- 100K Purchase price
- Good working-class B, B+ area
- 3/2/brick house
- Was looking for 1% rent to purchase ratio
- Conventional financing with 20-25% down payment
- Utilized 401K loan for down payment and closing costs
The Purchase:
During the M.I.P Property tour in May, they handed out flyers with properties for sale reserved for visitors that weekend. I put down $3K deposit on a house during the first day of the tour.
Below is the Performa and the initial picture of the house. Additional pictures, comps, and a list of renovations were provided, no costs, just items they would do. We had seen a similar house on the tours. M.I.P is willing to replace HVAC’s, roofs, windows, etc. when needed, but they will minimize the renovations based on the age of major items, etc.
This house needed a new HVAC/condenser, but the roof and floors were in average condition.
This house was set to be empty June 30, and close August 45 days later, this did not happen as planned.
Timeline of events:
- Property Tour May 17-19
- Deposit on May 18, 3K for $95K purchase
- May 21 Purchase Agreement signed electronically
- June 30, the house will be vacant (renovations start)
- Was notified in early July tenant would not leave
- July 17 house syndicated on Zillow, Realtor.com, Trulia etc. (pictures of current house pre-renovation listed along with a second house-MISTAKE)
- July 23, tenants move out and return keys
- Aug 31 First set of renovations complete, mostly cosmetic
- Through Sep I negotiated with Norada and M.I.P to improve the renovations, I was not satisfied with work nor scope, they agreed to all items and improved the unit through Sep while it was on the market.
- Sep 12 Appraisal came in for asking price of $95,000, cost $495
- Sep 18th Third Party Property Inspectors found items, M.I.P fixed all issues, Cost $295
- Sep 28th, closed on the property, no tenant yet
Closing:
- The closing was smooth, mobile notary came to my house
- All paperwork initially was signed via DocuSign, but ended up signing everything in front of the mobile notary at the end again
- Electronic copies were available post-closing
- No issues with wiring money, etc.
Post-Closing:
- Home is still empty, Reedy and Company Realtors, LLC is now the Property Management company
- Pictures of final renovations were provided after many inquiries
- House rent rate was lowered to $965 after sitting vacant all summer at $1065
- I was not sure why they raised the rent so high during the closing process. A friend of mine noted that some do that to actually discourage renters during the renovation process, so they can finish and have access. Others note that the marketing department wants to raise the rents for the benefit of all. I do not think this was a major strategy killer, but the house sat empty during peak rental time (Summer before school started) and is still vacant at a price above Proforma.
Some Observations:
- Closing costs came out to be much higher than the proforma estimate
- Taxes were spot on
- Property Mgmt. fee spot on
- The vacancy is listed at 4%, even though PM says I takes an average of 45 days to rent, so it’s a broad average I’m assuming after tenant leases or across all their properties.
- They advertise 2-year leases during the tour and most turnkeys are rented prior to closing, not the case for my property, still vacant
- One inquiry has come in for a family whose house burned down, but they want 3-month lease smack in the middle of winter for another renewal, not optimal
- Neither the marketing department nor PM inside Reedy was very proactive as far as communication. I had to get Norada involved too many times to push them to email me back. This is probably my major complaint as this is totally controllable. As an out of state investor all we can expect is communication since we are trusting the process 100%.
- The delay in closing was also probably controllable since it was their tenant to remove. This caused me a rise in interest rates and the second hit to my credit since it had to be pulled twice over the period of closing.
| Proforma Estimate | Actual | Notes | |
| Closing Costs | $2854 | $4086 | %43 higher than the estimate |
| Pre-Pays | $0 | $734 | I was told that M.I.P does not try to estimate pre-pays |
| Interest Rate | 5.25% | 5.375% | I put 25% down, the delay in closing caused me to obtain a higher interest rate |
| Property Taxes | $97 | $97 | Spot on (2017 records) |
| Insurance | $40 | $52 | I used Lipscpomb, M.I.P .recommendation |
| Vacancy | 4% (14.6 days a year) | Since tenant vacated 26% (95 days) | Since my ownership 5% (21 of the 95 days) |
Overall Summary:
Overall, I would recommend Norada and M.I.P. My experience was not perfect, but most items come with the territory in my mind. You must do your due diligence and expect delays.
My major complaint was lack of proactive communication. I work in the I.T. field were daily, weekly communication is the key to working in a remote environment. I have come to expect that from anyone who is in partnership around my investments. I did express my disappointment many times in lack of communication and it improved a bit after closing. I do not hold any one individual at fault, I believe its part of the system, they are overly busy and have to multi-task quite a bit. I think they should be upfront that you might not hear from them for days or weeks sometimes.
I would be more than happy to talk to any investor about my first Turnkey investment. I will most likely do this again because I'm not an expert in BRRRR, Wholesaling, or Fix and Flips. I need consistent CoC, Tax relief, and mortgage pay down, etc.
We ended up lowering the rent to $895, and it rented pretty quick.
I ended up with three months of no income and a $60 a month drop for 18 months.
The rent comps showed high of course in the summer and suggested $950 was correct, as we entered Fall it did not work.
The PM side of Reedy is trying to work with me, but the income loss is math that makes this investment a failure on paper for 2018.
- 2018, a loss of $2850, around 10% of the initial investment
- 2019 a loss of $660 in income, CoC return will be around 3% if there is no more vacancy.
- The 11.4% CoC return and 4% vacancy for this turnkey did not work out.
In 18 months, I will try to get a market rate again, hopefully, it goes up then. If not this investment will be less than inflation and consider a failure in the short term.
The only item of due diligence I could not do easily was to talk to past and current investors. Reedy does not endorse other investors talking to each other of course. There are some members on Bigger Pockets that own properties that I'm trying to reach.
Aug 2019 Update
My rental has been occupied since Feb, with no real issues. The Property Management Company is doing well at this point, I have had many new "managers" along the way as people get promoted to other roles, etc. That is par for the course, but something to be aware of.
One item I did not think of until recently, is if your Turnkey Provider is flipping your house and getting new appliances, water heaters, HVAC, maybe a new roof, it is good to collect the warranty info, maybe even the color swatches/flooring for paint if you decide to self manage or move to another PM company. It is easy to forget those items over time. Many of the TK providers have the same colors, flooring, etc, but I'm guessing over time, buy different stock items, and they keep all the warranty paperwork to my knowledge.
@Peter Schuyler when you’re tenant leaves you’re going to get hit with minimum 2-3k in repair work plus lease up commission. That’s what makes this model unsustainable. If your tenant stays a while I would be happy and sell when you can. Hickory hill is considered one of the worse off areas of memphis.
Originally posted by @Caleb Heimsoth:@Peter Schuyler when you’re tenant leaves you’re going to get hit with minimum 2-3k in repair work plus lease up commission. That’s what makes this model unsustainable. If your tenant stays a while I would be happy and sell when you can. Hickory hill is considered one of the worse off areas of memphis.
I'm starting to realize that, I imagine we will not raise the rent next year and hope the tenant stays, and move up to either another zipcode/A area in Memphis or maybe to an STR somewhere else. The sales pitch was a good one, but you can not expect much from a $95K investment I guess in that zip code other than low rent and hopefully a long term resident.
Originally posted by @Peter Schuyler:Originally posted by @Caleb Heimsoth:@Peter Schuyler when you’re tenant leaves you’re going to get hit with minimum 2-3k in repair work plus lease up commission. That’s what makes this model unsustainable. If your tenant stays a while I would be happy and sell when you can. Hickory hill is considered one of the worse off areas of memphis.
I'm starting to realize that, I imagine we will not raise the rent next year and hope the tenant stays, and move up to either another zipcode/A area in Memphis or maybe to an STR somewhere else. The sales pitch was a good one, but you can not expect much from a $95K investment I guess in that zip code other than low rent and hopefully a long term resident.
Youll get a 15-25 dollar rent raise every 2 years or so if you’re lucky.
Originally posted by @Peter Schuyler:Aug 2019 Update
My rental has been occupied since Feb, with no real issues. The Property Management Company is doing well at this point, I have had many new "managers" along the way as people get promoted to other roles, etc. That is par for the course, but something to be aware of.
@Peter Schuyler, I'm glad to hear your investment experience is improving. I have 2 properties with Memphis Investment Properties. A summary of my experience on the 2 is:
I initially purchase both in Dec 2017, which is the worst time of year for getting tenants into place. 1 property took 2 months and the other took 3 to get initial tenants in place, however the occupancy has been very good ever since. MIP increased the rent by 3% after one year on one. And increase by over 4% on the other at end of 2 yr lease. I've had one tenant turnover. It cost $1,300, but $550 was taken from tenant security deposit. MIP got it rent ready and released quickly. I understand that their standard lease terms are now for 2 year, with a 4% increase at end of 1st year. They are getting top of market rents. This is only possible because of the quality renovation work they do before sold to an investor. My maintenance and repairs expense thus far has been reasonable. My returns are running very close to their original proformas. I am in process of purchasing a 3rd from them. As a passive investor, the balance of property renovation quality, 8% property management fee, and the Memphis market rent-to-purchase price ratio is something that is hard for me to match in my local market. Reach out to me if you'd like to share thoughts with each other on a conversation.
Ive been looking into Memphis investment properties too. However, after reading this thread i do not feel confident in investing with them what so ever.
Even at $950 a month it does not align with the market research.
I have consolidated my Memphis properties with another turnkey provider, but the experience has not really improved. All the books, posts, forums, and investors I talk to, still point to Investors deals can make or break with the Property Management, it's not that hard to flip houses (Day 1), yes supply can dry up, but Day 2 operations is the key. I work for a company that is world known for its operations, so I'm not a stranger to a operational process done well. Covid-19 has only made this harder, missed rent, late rent, etc. Im focusing on other regions where I can be closer to the PM staff, and build solid trust so I can scale, not close to the properties per se, but I spend way too much time chasing PM's.
I am two years late to this post but thanks Peter for sharing. I think this is the reality of many turnkey operations, the turnovers are expensive, you have to be on top of the PM constantly, and things can still go not according to plan.
Hopefully you have at least experienced some nice appreciation if you held on till now.
Quote from @Kang-Li Cheng:
I am two years late to this post but thanks Peter for sharing. I think this is the reality of many turnkey operations, the turnovers are expensive, you have to be on top of the PM constantly, and things can still go not according to plan.
Hopefully you have at least experienced some nice appreciation if you held on till now.
Turnovers are expensive and if you hold long-term, just wait till you get a major cap expense. That'll wipe out many years of hard-earned cash-flow. OOS TK, I learned a long time ago, is not my first choice as a pathway to building wealth.
Quote from @Tony Kim:Thanks for that Tony. Did you find something that worked better for you?
Quote from @Kang-Li Cheng:
I am two years late to this post but thanks Peter for sharing. I think this is the reality of many turnkey operations, the turnovers are expensive, you have to be on top of the PM constantly, and things can still go not according to plan.
Hopefully you have at least experienced some nice appreciation if you held on till now.
Turnovers are expensive and if you hold long-term, just wait till you get a major cap expense. That'll wipe out many years of hard-earned cash-flow. OOS TK, I learned a long time ago, is not my first choice as a pathway to building wealth.
Quote from @Kang-Li Cheng:
Quote from @Tony Kim:Thanks for that Tony. Did you find something that worked better for you?
Quote from @Kang-Li Cheng:
I am two years late to this post but thanks Peter for sharing. I think this is the reality of many turnkey operations, the turnovers are expensive, you have to be on top of the PM constantly, and things can still go not according to plan.
Hopefully you have at least experienced some nice appreciation if you held on till now.
Turnovers are expensive and if you hold long-term, just wait till you get a major cap expense. That'll wipe out many years of hard-earned cash-flow. OOS TK, I learned a long time ago, is not my first choice as a pathway to building wealth.
I only invest locally now here in Los Angeles, but right now, adding new local properties at the Mom and Pop level just doesn't pencil out. So my current focus is on a few other things like private securities and public REITs.
