I'm in NY so I won't throw out 38106 rents from memory, but here's how I'd nail it down fast. Pull every 3/1 that actually leased in that ZIP in the last 6 months on Zillow rentals and Rentometer, then call 2 or 3 property managers who run houses there and ask what their renovated 3/1s rent for and how long they sit vacant. PMs give you the real number, listings give you the asking number.
For cap rate, when houses are cheap relative to the rent the expenses eat a bigger share, so I'd want it to work at around 8 to 10%. Say it rents for 1,200. I'd budget about 10% management, 8 to 10% vacancy and turnover, 8 to 10% repairs and capex, plus taxes and insurance. That's usually 45 to 50% of the rent gone before the mortgage. If a seller's numbers show 30%, something got left out.
Biggest cash flow killers on older houses are turnover and capex. One bad turnover with paint, flooring and a couple months vacant can wipe out a year of cash flow on a house netting 250 a month. Get a real insurance quote before you offer too, not an estimate.
Long term I look at the age of the roof, HVAC and sewer line, and how long tenants typically stay. A house that keeps a tenant 4 or 5 years beats slightly higher rent that turns over every year.
@Queenie Orteza I don't have current 38106 leases, so I'll leave the rent number to local property managers. But I can tell you what moves cash flow most in that kind of area.
It's usually turnover, not the line items people list. Say a renovated 3/1 rents for $1,300, just as an example. One move-out can mean a month vacant, $1,500-2,500 of make-ready and a leasing fee. That's roughly $3,500-4,500, about three months of rent. Insurance on older houses also tends to come in higher than investors expect, so get a real quote before talking cap rates with a buyer.
What makes a good long-term rental there: a recent roof, HVAC and plumbing, a true 3-bed layout, and a price that still cash flows after 10% for repairs and capex. That's the house that keeps a tenant for years.
Queenie, I run 236 properties in Memphis, so here are my actual numbers. I do not buy 38106 — my ZIPs are 38109, 38111, 38112, 38114, 38116, 38117, 38118, 38122, and 38128 — but the underwriting travels. On rent: I buy single-family under $100K and underwrite to Section 8 at $1,395 to $1,950 for 3BR and up, checked against the 1% rule. I do not shop by cap rate. My two gates are rent clearing the 1% rule and an ARV of $180K to $265K on sold comps, so the DSCR refinance at 70 to 80 percent LTV hands my capital back. The expense that actually bites is turnover: a vacant house plus a 21-day turn eats more cash flow than any line item. Long-term, the layout matters most — a true 3BR or a 3/1 converted to a 4/2 rents faster and holds value.
I’d be careful about relying on a ZIP code or a target cap rate by itself. I’d want to verify the actual rents, taxes, insurance, maintenance and vacancy on comparable properties and then see if the deal still cash flows with conservative assumptions. The property and the numbers matter more to me than the market’s advertised cap rate.
One financing thing to check early in 38106: a lot of houses there sell cheap enough that the loan can fall under DSCR minimums, which run roughly $75k to $150k depending on the lender. So ask about the minimum loan size before you get too far into a deal. Also the lender will usually qualify you off the appraiser's market rent, not your projected rent, so run your numbers off what the comps actually support.
I own a few rentals in various parts of Memphis. I believe that zip code is a not a great area. South Memphis. All of mine are east and northeast of the city. I have no issues finding tenants. And my PM does a great job. If you are interested in talking with them about the area, I'm happy to connect you. They also have properties you can purchase. Both turnkey and BRRRR.
Queenie, welcome to the Memphis market — and smart to ask local investors before underwriting anything here. A few things I tell everyone looking at Memphis rentals: this is a block-by-block market, especially in areas like 38106, so zip-code averages can mislead — verify rent with actual signed leases on comparable streets, not listings. The expense items that hit cash flow hardest here are the ones beginners underestimate: maintenance and turnover on older housing stock, vacancy reserves, and the steady climb in taxes and insurance. Cap rate targets vary by investor and submarket, so I'd frame it as: underwrite conservatively, assume real vacancy, and make sure the deal works on today's numbers, not projected rents. Are you looking at buy-and-hold here yourself, or advising clients?
Same goes for expenses - on those older blocks I'd underwrite higher vacancy, turnover and repairs than the zip average suggests, since that's usually where the projected cash flow disappears.