How's my plan?

Question

I work an 8-5 as a Software Engineer in Memphis, TN. I want to get into real estate investing to replace my job in 10-15 years. I see a great opportunity in the Memphis area, and I want to take advantage of it. "Blue Oval City", Ford's new electric vehicle plant, is coming to Stanton, TN in 2025. This will create thousands of jobs and bring many newcomers to the Memphis area. I think the area that will benefit the most from the new-comers will be Lakeland and Arlington, which is about half way between downtown Memphis and the Ford plant. I want to try to get some single family homes in the area to rent out. I currently own a home in Cordova, TN. My plan is to buy a house in Lakeland or Arlington and rent out my current house. I will live in the new house for a year or 2, then buy a new house and repeat the process.

My thinking is that this will allow me to slowly build stable income. I will get good interest rates/down payments because it will be my primary residence. I can live in the houses and fix anything that needs to be fixed while living there. I will gain a good amount of equity because I will be buying houses in the 250k-300k range rather than finding cheap deals for like a 50k house.

Is this a good plan? What am I not considering?

My thinking is that this will allow me to slowly build stable income. I will get good interest rates/down payments because it will be my primary residence. I can live in the houses and fix anything that needs to be fixed while living there. I will gain a good amount of equity because I will be buying houses in the 250k-300k range rather than finding cheap deals for like a 50k house.

Is this a good plan? What am I not considering?

Michael Smythe · Answer

Appears you are targeting Class A properties, see below OPINION to use as template to build your own profiles:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenants: Majority will have FICO scores of 680+.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenants: Majority will have FICO scores of 620+, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should often be used to also cover nonpayment & evictions.
Tenants: majority will have FICO scores of 560-600, many blemishes, but should have no evictions in last 2 years. Verifying previous 2-years of rental history very important!

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenants: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Douglas Skipworth · Answer

Though other people on BiggerPockets will disagree with us, I agree with you that Memphis is an awesome long-term market to build wealth in. It has a lot of strong tailwinds going for it such as BlueOval City, which you mentioned.

Your plan is definitely good at the high level. I've seen many people move to a new house and keep their old one as a successful rental (I did this with my first Memphis house and still have it in my rental portfolio 20 years later!). I've also seen many people regret selling their house when they could have kept it as an income property. You don't want to be this person.

Here are 2 items I've seen that limit the scalability and/or timing of your plan.

First, life happens to most people. Once they settle down with a partner and start raising a family, moving from house to house ever couple of years becomes a real challenge.

Second, depending on the monthly mortgage payment (which itself depends on purchase price, down payment amount, interest rate, and amortization period) the market rent might not be sufficient to cover additional expenses such as maintenance, taxes, insurance, and property management fees.

Your plan is 100% doable.  If I were you, I'd go make it happen immediately so you can start building wealth now. Just be mindful of the two obstacles above.

James McMurrey · Answer

@Jonathan SniderYou are correct as far as you will get more favorable rates for primary residence oriented loans. If you don't have a general contractor type RE network, then I think your plan is solid. It is much tougher to find properties below $100k and then expect a contractor to complete $50k in renovations for an ARV type scenario. Plus, many of those investment property/renovation loans have interest rates above 8% these days. Cash flow is hard to come by. Much easier to plan around an FHA or VA loan for primary residence, then refinance/rent after a few years in this environment. Happy to connect and help strategize from the lender perspective!

-JamesVeterans Alliance- Umortgage

NMLS 2302283

Steve Milford · Answer

I would say, go buy that next house, and see what kind of rent you will get for the current house. And rinse and repeat. There are so many things that may or may not happen.

i.e. Some people find that they don't like being landlords. Some people find that they make better income investing in the stock market, or like the liquidity of stocks better. Some people find that tenants can be unreasonable. Some people love it. The possibilities are endless. Many people have similar experiences, but no one's journey is the same.The biggest issue I see with this plan is that it really only works best when the market is hotter, or there is more demand than there is now.

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