Evaluating a property listed by a turnkey in Memphis

[Sneha Deshmukh]

Hello BP community,

I'm a newbie in real-estate world and am interested in dipping my toes with SFH long-term rentals in Memphis. I am looking for out of state investment due to low entry capital and a renovated property with property management. My goal is cash flow with decent appreciation. Since I am not local and cannot have my boots on the ground I am looking at a turnkey who is local to this area. Below is the property evaluation projection for a B class property (zip code: 38127). Considering the high interest rate, the projects and COC return seems too good to be true. Am I missing something?

[Nicholas L.]

@Sneha Deshmukh

I think repairs and Capex are way understated. Say it needs a roof or a furnace or a couple of appliances. There goes your cash flow. You just don't go 15 years without major expenses.

Will you go to Memphis in person to take a look at this property or others?  There are lots of threads on BP about investors who bought something because the numbers looked good on paper and then got crushed.  here's an example.  it's not Memphis but it could be anywhere.

https://www.biggerpockets.com/forums/48/topics/1160450-run-i...

[Nicholas L.]

https://www.biggerpockets.com/forums/12/topics/1056378-is-me...

https://www.biggerpockets.com/forums/432/topics/342296-memph...

[Sneha Deshmukh]

@Nicholas L. Thank you for pointing me to these threads. The turnkey investment property claims to be renovated recently but really hard to confirm if they have any foundational problems. All I have is this list of improvements made on that property. Is it recommended to get an inspection done before any serious thoughts on the house?

[Nicholas L.]

@Sneha Deshmukh

yes - definitely get an inspection.

and again... everything can be brand new and the furnace can still go in year 3.  no one is guaranteeing it won't, or offering to cover the cost.  once you buy the house, it's all your responsibility... and they'll happily charge you for it.

just to be clear - will you go there in person?  I can't imagine buying a house in a neighborhood I've never been to and don't know anything about.

[Michael Smythe]

@Sneha Deshmukh what interest rate are they projecting on your mortgage?

1) ALWAYS need maintenance factor as tenants will break things

2) Where did they come up with Vacancy amount?

3) They should know the property taxes, so why "estimated"? Will change with your purchase.

4) Go find out cost of landlord insurance policy as seems VERY low.

5) ALWAYS get your own inspection and have them camera the sewer line

[Sneha Deshmukh]

@Nicholas L. and @Michael Smythe

Thank you for your invaluable insight. I was considering doing a trip to Memphis once I have a house shortlisted. But certainly looks like I need to do some more homework while analyzing properties offered by this turnkey

[Maureen McCann]

@Sneha Deshmukh

Sneha...Congrats on finding your way to BP and to investment real estate. Memphis is still a good rental market and if you are looking for a good turnkey operator in Memphis there are 2 really good ones I can direct you to.  I own rentals in Memphis, Birmingham, and Chattanooga, TN.  I have an excellent PM company and reputable turnkey operator in Memphis that I can refer you to. 

I agree with many comments on this thread.  I agree with Nicholas that the capex expenditures are low. I agree with Michael to always get inspections. Ask the operator if they conducted a home inspection & sewer/septic inspection on the property in its distressed state. This will let you know if they understand the scope of work that needs to be done to fix up the property to the City inspector building code/standards.  I am happy to give you more helpful tips. I have been investing in real estate for 16 years and I own a turnkey company in AL.  Happy to guide you along your RE journey.  Feel free to connect. Cheers!

[James Wachob]

Memphis holds a lot of great opportunities. I'd love to be your contact for anything REI related.

[Chris Clothier]

Quote from @Sneha Deshmukh:

Hello BP community,

I'm a newbie in real-estate world and am interested in dipping my toes with SFH long-term rentals in Memphis. I am looking for out of state investment due to low entry capital and a renovated property with property management. My goal is cash flow with decent appreciation. Since I am not local and cannot have my boots on the ground I am looking at a turnkey who is local to this area. Below is the property evaluation projection for a B class property (zip code: 38127). Considering the high interest rate, the projects and COC return seems too good to be true. Am I missing something?

 Hi Sneha,

Welcome to BP!  Without knowing more than what you've shared, my two concerns are the classification of area and $170,000 of price appreciation in 15 years.  You've listed the zip code as 38127 and I'm not aware of any pockets in that zip code that I would list as B class.  For reference, I don't use the alphabet coding because it is easy to dupe investors into feeling comfortable with an area without having to get into detail.  In my opinion, when an investor uses alphabet classifications, B class should be areas that are above median value, median income, primarily owner occupant and in financially stable areas.  38127 as an area is primarily below median value, income and primarily rental properties and definitely an area challenged for economic development.

With that being said, houses in this area are not valued at $170,000 to begin with so expecting $170,000 in appreciation is not practical.  I can't comment on the actual value since I don't know where it is actually located, but even the brand new properties sold at top value are sold to investors with the only real expectation of resale is to another investor - not owner applicant.

I would suggest you be patient and don't rush into judgement good or bad.  Continue to research companies and cities and when you feel more comfortable, visit the company you want to work with and visit the homes you have researched through them.  The main thing you are doing is seeing if the story you are told about the houses, the areas, the company themselves matches what you see on the ground.  If you are patient, there are some high quality companies both in Memphis and other cities, and this company you're talking to may be one of them, that have reputations for being spot on with their data and operations.

[Kevin Luttrell]

I agree with everyone else here. Very important to do your own research on all of these items and not just accept their projections as accurate. 

One thing I haven't seen mentioned yet is the rental income projection. They're estimating $12,900 in year 1 and a steady 3.3% rent increase every single year. That might be the national average for rent price increases but I don't know if that's a realistic expectation in Memphis. I don't have any property in Memphis myself though - I would strongly suggest reaching out to investors who do own property in Memphis to get their opinion on it (many folks here on BP are very helpful and willing to provide insight). 

Another thing is the $1,483/yr tax savings. Where is that number coming from? How are you saving $1,483 in taxes? I would just throw that out completely in my personal analysis. 

[Jenni Smith]

Welcome to BP @Sneha Deshmukh! Memphis is a great market to start your investment journey. A ton of great information on this thread. Keep in mind as well that a ton of OOS investor make the mistake about buying a turnkey property because of the numbers but end up buying the best house in the WORST neighborhood. Memphis is street by street and I am happy to share insight on specific pockets I would stay away from. Feel free to reach out. 

[Dean Harris]

You are likely paying too much if its a true Turnkey property. Memphis is full of BRRRR opportunites an you can end up with the same product.

Good Luck

[Devvrat Kumar]

Hi - I am a local investor in Memphis area. I have some understanding of areas and can advise on which areas are good for appreciation and which areas are good for cash flow. I am also learning, but happy to connect.