Memphis. Market Analysis. Pros and Cons

[Account Closed]

Some I have been investing for almost a year now and feel like I have learned a ton. Ingot properties in both Indianapolis and Birmingham and have now sparked an interest in Memphis. The reason I like Memphis now is that I think I have found a great company to work with. That said I now need to research the market in more depth. What can you tell me about Memphis? Pros and Cons?

[Chris Clothier]

I have a ton of respect for these two gentleman from what I read form them here on BP.  I am an experienced investor and I still learn from reading their posts.  A few great points from both @Account Closed and @Jay Hinrichs on what to truly expect from a midwest market and a bit of a reality check mixed with some hyperbole.  I think the assumption is made - and in this case there is really no problem with assuming - that most sellers of properties in midwest cities are not going to tell prospective investors, new or experienced, about the fallacy of buying 10  -  $50,000 properties in a city like Memphis or any other Midwest city and quitting a job to make $4,000 of income in a month.  Can it actually happen?  Yes.  It does every year with plenty of investors, but the odds are greatly stacked against you and IT WILL NOT HAPPEN year over year.  The biggest mistake that investors make regardless of how or where they buy is having poorly set expectations.  

Much of the success in these markets will depend on who you are working with in that city, what price points and parts of the city they work and unfortunately, much of your success depends on how good they are at doing their job.  All of the points that Bob and Jay make are valid.  You are hiring a staff to work for you and your success depends on them.  If they do not set the proper expectations on the front end, the investor will not be prepared for lean years when those properties return a fraction of what was expected.  Again, move-outs are real, vandalism and theft are real, extended vacancies are real and out of ten years an investor can expect to have a year, and in some cases more, where the return is zero.  One more point to what Bob said, there are properties here in Memphis where an investor can purchase a property for less than what it originally sold for in the 1970s.  Same holds for hundreds of neighborhoods in hundreds of cities across the country.  Rents may have doubled in some areas, but it took 15 years.

So proper expectations are a must.

As for the comment about investing for profit and cash flow is not profit.  You are correct, but Im puzzled by what else you said.  If an investor takes a set time period (month, quarter, year or many years) and they have higher income than expenses on their bottom line, they have netted a profit.  Now, some people may call a revenue number profit or call a cash flow calculation profit or even fail to properly account expenses.  So, in all of those instances they would be wrong.  As you stated, that is not profit.  Sometimes they are doing the right calculations and just using the wrong terminology.  However, you stated that you made $400,000 on a Honolulu property in appreciation.  Surely you are not counting that number as profit are you?  That would be a rookie mistake and you are not a rookie.  You cannot do anything with appreciation (certainly nothing that can be called profit) unless you sell the property and then you will experience a majority of that as profit after the expense of selling (minimal).  If you leverage that equity, then you are borrowing.  Again, not profiting.  If you add it to your balance sheet to improve your net worth then, again, that is not profit.  Both of those things absolutely are beneficial in generating more profit, but they are not profit themselves.

I also believe 100% in what I think is Bob's theory of how to invest.  The problem is that maybe (i think the number would actually be smaller if it was tracked) 1% of the actual investing population would be able to invest the way Bob suggests in the cities that Bob suggests.  I know he was joking, but to suggest that someone should invest in San Fransisco or in Honolulu instead of looking to the midwest is just fallacy.  So few are able to actually do it on the budgets they have available.  Can they build and have a plan to invest in those locations?  Absolutely.  But many cannot start off there - some can - most can't.

I have read most of the posts that Bob has made here on the site and it appears that Bob has been the beneficiary of riding an incredible wave of appreciation on the west coast and in Hawaii.  I'm not sure Bob has ever said the year he got started or the prices he paid for his first properties, but based on 40 years of investing, I would say he has been at it a while and bought at prices that would make newer investors' eyes pop out and drool from the corner of their mouths.  Condos do not sell on Diamond Head for $35,000 anymore!  I looked today and one site showed minimum list price of $639,000 and maximum sell price of $2.8 million.   

It would be absolutely wrong to say Bob was lucky because he was smart enough to make the original investment and hold on to them (that is an assumption - he may have sold and re-bought and sold and re-bought - he can clear that up if he wants).  However, a $100,000 purchase in the 1980's in California that sells for $2 million today or a $35,000 condo purchase that wold cost $639,000 today - neither example is an applicable experience for an investor starting out today to try and model. 

Just buying a home to occupy in San Fransisco swallows up 77% of a buyers income!!  Forget investing, just living is almost impossible.  The median home price hit $1,000,000 in June of 2014.  This is a quote from the SFGate - "It's really hard to buy if you don't have cash or 50 percent down and make an offer that is non-contingent," says Doricko. She's had buyers who made the highest offer lose out because the seller asked cash buyers to come up to that price. "And they do," she says.  

In Los Angeles, home ownership is expected to take 59.6% of a buyers income.  Those are the two least affordable cities in the U.S. with the median rent in San Fransisco being over $4,200.  Roughly 65% of the housing stock in San Fransisco is rental housingand 72% of that rental stock is under rent control.  

I'm not saying that an investor should not try to invest locally - absolutely they should!  But not everyone can.  Not everyone is currently an early retiree nor do they have experience in the real estate field.  Most investors are passive with regular day jobs and do not have the time nor the desire to learn to DIY.  More than anything, they do not have the dollars it takes to invest locally so they are absolutely looking for alternatives that are more inline with their budgets.  It is our responsibility as experienced investors and commentators here on BP to help make sure we at least give them the real story and help - if they will listen - to understand how to invest wisely and safely.  They may not be able to duplicate our success, but we can help them understand the risks and rewards of whatever they are considering.

There is no one size fits all for any and every investor.  None of the warnings that Bob and Jay give are incorrect.  Investors have to take on the responsibility themselves of investing smartly and with their eyes WIDE OPEN.  

So back to the original question.....anyone else got any more data good or bad for the poster on Memphis? (-: