Is Memphis a good market?

Question

Is Memphis, Tennessee a good market to invest? Based on prices I’ve found, I can purchase 3 properties that would generate cash flow, but I also don’t want to invest in a market where appreciation is flatlined. Advice?

Eric Fernwood · Answer

Hello @Gilian Villatoro,

When evaluating a location, take into account both the initial return and the long-term economic performance. You can estimate the initial return by using standard cash flow and ROI formulas. However, such return calculations only predict how a property is likely to perform under ideal conditions on day one.

Financial freedom requires a passive income that meets the following requirements:

• Reliable - Your income continues even in difficult economic times.
• Inflation-Compensating - Rental income increases faster than inflation, which compensates for rising prices. If rental income does not keep pace with inflation, you will not have sufficient dollars to pay for inflated prices.
• Persistent  - Your income lasts; you or your spouse won't outlive it.

There are clear metrics for evaluating the probable long term performance of a location including:

• Metro population greater than 1M. Small towns may rely too much on a single business or market segment. List of cities: Wikipedia
• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. Wikipedia
• Low crime - Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Low operating cost - The three most apparent are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - Rocket Mortgage
• Rent control - Never invest in any location with rent control.
• Rents (and prices) keep pace with inflation.

There are other considerations but these are a good start. How does Memphis compare to these criteria?

✅ Metro population greater than 1M - According to the Census Bureau, Memphis metropolitan area was 1,337,779 in 2022.

❌ Both state and metro populations are increasing - Memphis population declined by 1.7% between 2017 and 2022. The result of a declining population is lower purchase prices (due to limited housing demand) and limited increases in rent and prices in the future.

❌ Low crime - Memphis is #5 on Neighborhood Scout's 100 most dangerous cities. High crime rates have multiple negative impacts, including job loss. Non-government jobs have a limited lifespan. On average, corporations last for 10 years, while S&P 500 companies last on average 18 years. So, all the jobs your tenants have today will disappear over time. Unless new companies move into the location and create replacement jobs, the only jobs remaining will be lower paying service sector jobs. As area income falls, city revenues also decrease. This forces cities to cut back on services, leading to increased crime and more people leaving the city. This creates a financial death spiral that few cities have been able to recover.

Low operating cost -

• ❌ Annual average cost of property insurance for Tennessee: $2,088. Compared to Texas: $2,536, Florida: $2,207, and Nevada: $1,144.
• ✅ Annual average property taxes for Tennessee: 0.71%. Compared to Texas: 1.80%, Florida: 0.89%, and Nevada: 0.60%.

✅ Rent control - I found no rent control in Tennessee.

❌ Rents (and prices) keep pace with inflation. According to RentCafe, the average rent per square foot for single-family homes in Memphis, Tennessee increased by 18.3% between 2017 and 2022. The CPI (Consumer Price Index) change between 2017 and 2022 was 29.8%. So, the buying power of rents decreased by 11.5% percent (18.3% - 29.8%). Unless rents keep pace with inflation, rents are effectively declining.

Other Considerations

• Urban sprawl - Population increase and limited room for expansion are what drive up prices and rents. As far as I can tell, there is unlimited room for expansion, as you can see in this time lapse aerial view. Without a barrier to expansion, new home prices and rents limit price and rent growth for existing homes.

Summary

Due to Memphis’ high level of crime, declining population, and unlimited urban sprawl:

• Properties will be low priced due to limited demand for housing.
• Rents lag prices by 2 to 5 years so initial return will be better than average.
• Rents have not kept pace with inflation so sooner or later, you will be forced back onto the daily work treadmill. This is not a location for long-term financial freedom.
• Urban sprawl limited rent and price growth for existing homes.

Gilian, not the news you probably wanted to hear, but these are the facts.

Walter Jones · Answer

What @Mike Mosee said. The pandemic price increases have settled, and we're hitting some price resistance but it's not going down - starting to see some concessions and small price adjustments. Also - rents went up stair step with prices, but those are seeing some resistance also.

I like buying properties that I like, in areas I'd live in, and give up a little cash flow for a property I'm proud of. Doing that has helped me get and retain good tenants with zero problems. I've done well with rent increases as well as appreciation. It's a long game for but I' happy with what I have. 13 mixed doors here and 4 under contract.

I have 2 great PMs that I like on here - one day I'll turn my own stuff over to them.

ALSO - There's a smart pool of local and out of state buyers here - well priced properties in good areas still get jumped on. You can be patient and find good deals, but I think you'll waste a lot of time trying to get a super duper deal, and are better off acquiring a quality property you like at a "good enough" price and get it in your portfolio.

Mike Mosee · Answer

Hi Gilian,

If cash flow is your primary goal Memphis works, depending heavily on area selected.    Appreciation will happen, but not as much as some parts of the country.   We've been investing there since 2011 & 1031ed out of Portland,Oregon where appreciation was high, but cashflow (& regulations) poor.

Be sure you have a good property management company to steer you on area selection & rental rates to get a reasonable ROI.

If you want to talk further let me know.

Best,

Mike

Dean Harris · Answer

Memphis TN is great! My portfolio is performing really well and my average rent is  over $1200 per property. I also sold/closed 36 houses to investors in May so the market here in Memphis is still really strong. I am seeing more and more BRRRR opportunities due to portfolio mismanagement. The opportunity is right now!

Best of Luck!

Is Memphis a good market?

Most Popular Reply