Just back from Memphis

[Dean H.]

I visited Memphis last week ( 2/7 - 2/10 ) and was blessed to have wonderful weather to tour a wonderful city. My goal was to meet and greet as many of the people that have helped me assemble my portfolio of properties there as possible, plus meet more of the fine professionals active in Memphis real estate. I achieved about 35% of that goal and to those I missed I apologize and hope for a raincheck soon.

With the help of my team on the ground I toured extensively, viewing my properties, the fine city, and areas of future investment interests. Then I drove neighborhoods of interest again both day and night to attempt to get a feel for areas and talk to some local folks. I buy, rehab, and rent in C+ to B areas so my thoughts relate to these areas.

Inventory. Endless in my lifetime. A few years ago I was concerned about them all being bought up and missing out, probably not of concern now.

Activity. Wow I think anyone with ambition and a hammer is working a rehab of some sort in the Memphis area. I ran into a couple of crews that were down from Chicago because its " crazy busy here" I walked a couple of projects and overall quality of workmanship is a concern.

Tenants. I have been around west coast land lording all my life. This is a different world! In the areas of Memphis I invest in it will forever be difficult to have a stable tenant base. They for the most part are good people that need good housing but throw your 700 credit, first and last plus deposit, and abiding by lease terms ideas out the window. Probably a bit harsh but be prepared. They just have to many options.

Asset valuation. When the locals say block to block they mean block to block. Memphis, like many mid west cities, has thousands of vacant lots , burned out houses not cleaned up, and just plain depressing areas. Be very diligent picking properties as this affects the "true" value tremendously. Remember these burned out shells will probably eventually get cleaned up but I don't think banking on infill using up all the vacant lots is prudent. The appraised value of that house and the true value of that house could be two wildly different values.

Leverage. I'm anti debt as I get older so take this to heart. I never say never but please be careful borrowing to the hilt anywhere other than solid "A" properties. Odds are your not going to appreciate to equity and the less than stable tenant base and crazy cap ex are going to make ample reserves mandatory. Your only a fire next door that isn't going to get repaired away from " true equity loss "

Exit. Huge concern. This has been beat to death on BP so I'll be brief. I'm buy and hold hopefully forever. If I had to liquidate today I think an investor would jump at the package, I strive to have the nicest house on the block and the tours show I'm getting close. With the current credit market and the retail customer base in the area reality says retail would be a tough option.

Rant. I don't understand why the City of Memphis and Shelby county don't consider dropping the  tax rate on multi family. I might be shooting myself in the foot tenant wise but this would really help cleanup the depressed areas. Taxed at the single family rate I think investors would snap them up but the true net just gets killed as it is.

Closing. I had a great time and learned a hell of a lot from some great local folks. My biggest concern going forward I learned from a little old lady waiting for her dinner at Bill's BBQ. I don't remember what started the conversation but after explaining my situation and her knowing of two of my projects she asked a simple question. " what are you going to do when you rehab so many you run out of tenants" Food for thought, without serious economic growth in the region we could literally improve our way to lower returns.

Above is just my personal concerns and observations. I didn't want to come off negative but wanted to open some eyes including my own. I will continue to invest in Memphis

Wonderful opportunities await!!!

x

[Alex Craig]

Thought I would chime in as a local active buyer, investor, TK provider and PM. Comments below after the *********** in all caps.

Activity. Wow I think anyone with ambition and a hammer is working a rehab of some sort in the Memphis area. I ran into a couple of crews that were down from Chicago because its " crazy busy here" I walked a couple of projects and overall quality of workmanship is a concern.*********** THIS IS SOMETHING THAT ROYALLY PISSES ME OFF AND IT IS A CONSTANT FOCUS WITH MY CREWS TOO. I KNOW EXACTLY WHAT YOU MEAN AND IF YOU DO NOT HAVE A GOOD JOB SUPERVISOR, THEN YOUR RENTAL HOME WILL BLEED IN MAINTENANCE COST. WE TALK ABOUT THIS EVERY MONDAY IN OUR PRODUCTION MEETING AND MAKE OUR CREWS GO BACK TO THE JOB IF WE SEE SLOPPY WORK. THEY GET GOOD, BUT WILL AT TIMES REVERT BACK TO OLD HABITS. @Alexander Price WALKED THROUGH ONE OF OUR REHABS AND I HAD HIM STAND BY A DOOR KNOB WITH PAINT ON IT AND POINT TO IT WHILE I TOOK A PICTURE...TO WHICH I SENT TO OUR JOB SUPERVISOR OR THE CREW LEADER.  THEY ALSO HAD PAINT ON THE GRASS, TO WHICH I MADE THEM CLEAN UP. IF YOU HIRE A CONTRACTOR IN THIS SPACE, FORGET ABOUT, THE QUALITY OF WORK WILL LIKELY BE TERRIBLE. THERE ARE EXCEPTIONS AS GOOD CONTRACTORS IN THIS SPACE DO EXIST (NOT HATING ON ALL CONTRACTORS), BUT MOST SUCK. THE KEY IS BRINGING YOUR OWN LABOR IN HOUSE--WE DID THAT ABOUT 5 TO 6 YEARS AGO AND IT HAS WORKED WELL, BUT THEY STILL NEED TO BE MANAGED.

Tenants. I have been around west coast land lording all my life. This is a different world! In the areas of Memphis I invest in it will forever be difficult to have a stable tenant base. They for the most part are good people that need good housing but throw your 700 credit, first and last plus deposit, and abiding by lease terms ideas out the window. Probably a bit harsh but be prepared. They just have to many options. *********NOT TO MANY 700 CREDIT SCORE TENANTS, BUT THEY DO EXIST. OUR 2016 MOVE IN STATS ARE: 122 MOVE IN'S, AVG RENT WAS $930. AVG CREDIT SCORE WAS 665 AND AVG GROSS HOUSE HOLD INCOME WAS $4,931. THE LOWER THE RENT IN THE AREA, THE LOWER YOU SHOULD EXPECT A CREDIT SCORE BY YOUR TENANT. RENTAL AMOUNT, HOME VALUE AND CREDIT SCORE ARE ALL CORRELATED. THAT BEING SAID, WE EVICTED OUR FIRST 700 + TENANT LAST MONTH...HE ACTUALLY HAD AN 800 + CREDIT SCORE. TO BE FAIR THOUGH, HE STAYED THERE FOR 8 MONTHS, ALWAYS PAYING ON TIME AND THEN ONE DAY THE RENT STOPPED COMING AND HE ESSENTIALLY DISAPPEARED. I CHECKED THE OBITUARIES AND DID NOT SEE HIM THERE. HE WAS KIND OF A HIPSTER, SO HE PROBABLY FOUND SOME REALLY GOOD JAMAICAN WEED AND IS FOLLOWING WIDESPREAD PANIC.

Asset valuation. When the locals say block to block they mean block to block. Memphis, like many mid west cities, has thousands of vacant lots , burned out houses not cleaned up, and just plain depressing areas. Be very diligent picking properties as this affects the "true" value tremendously. Remember these burned out shells will probably eventually get cleaned up but I don't think banking on infill using up all the vacant lots is prudent. The appraised value of that house and the true value of that house could be two wildly different values.***********BLOCK BY BLOCK REALLY STARTS IN THE LOWER INCOME / LOWER RENT AREAS. WE DO NOT EXPERIENCE THAT IN THE $930 RENT AREA. BUT YES, THIS IS CERTAINLY TRUE INSIDE THE 240 LOOP AND IN 38127. BURN OUTS ARE MOSTLY IN LOWER RENT AREAS TOO. WE DO NOT MANAGE IN THESE AREAS--SIMPLY TO LABOR INTENSIVE FOR A PM AND IS ONLY PROFITABLE AT THE OWNERS EXPENSE. NOT A WAY I WANT TO MAKE MONEY AS A PM. BEING A PM IN THESE AREAS IS LIKE BEING A MAKER OF REVERSE HALLMARK CARD. ONE WOULD GET A CARD THAT SHOWS THEIR RENTAL PROPERTY ON THE FRONT, THEN YOU OPEN IT UP AND IT SAYS "SORRY FOR YOUR TUESDAY, YOU AC WAS STOLEN. PLEASE SEND US $2,000."

Leverage. I'm anti debt as I get older so take this to heart. I never say never but please be careful borrowing to the hilt anywhere other than solid "A" properties. Odds are your not going to appreciate to equity and the less than stable tenant base and crazy cap ex are going to make ample reserves mandatory. Your only a fire next door that isn't going to get repaired away from " true equity loss " ************I AGREE, SIMPLIFY LIFE AS YOU GET OLDER. DEBT IS GOOD TO GET IN THE GAME AND TO ACQUIRE PROPERTIES. I STILL USE IT AND WILL PLAN TO USE IT, BUT I USE IT TO ACQUIRE HOMES AND USE THE CASH FLOW AND SHORT MORTGAGES TO PAY DOWN DEBT. I GET DEBT ON HIGHER AND LOWER INCOME AREAS--JUST HAVE TO BE SMART ABOUT IT. I HAVE MADE A LOT OF CASH FLOW PROFITS ON $595 TO $750 IN RENT.  MGMT IS IMPORTANT. I ALWAYS RECOMMEND LEAVES THESE DEALS FOR THE LOCALS OR REAL ESTATE PROFESSIONALS THAT HAVE EXPERIENCE IN THIS SPACE AND NO THE RISK 

Exit. Huge concern. This has been beat to death on BP so I'll be brief. I'm buy and hold hopefully forever. If I had to liquidate today I think an investor would jump at the package, I strive to have the nicest house on the block and the tours show I'm getting close. With the current credit market and the retail customer base in the area reality says retail would be a tough option.*************************** IF YOU WANT TO EXIT MEMPHIS OR ANY MIDWEST MARKET, YOU BETTER PLAN TO BE IN IT FOR AT LEAST 5 YEARS. WE HAVE A FEW INVESTORS WHO HAD 5 YEAR CALLS RECENTLY MAKE MONEY ON THE SELL, NOT A HUGE AMOUNT, BUT STILL, NOT BRINGING MONEY TO THE TABLE. TO BE SAFE, PLAN ON 7 YEARS. IF YOU NEED TO EXIT EARLIER, GO TO ANOTHER EMERGING MARKET OR BUY INTO A REIT OR SOMETHING MORE LIQUID. I THINK YOU WOULD BE SURPRISED THAT NICE HOMES EVEN IN THE INVESTOR HEAVY AREAS THAT SELL RETAIL. I KNOW OF A FEW INDIVIDUALS WHO DO ONLY RETAIL AND SELL IN THESE AREAS. THEY BASICALLY DO WHAT SMART INVESTORS ARE DOING KNOW BY FIXING UP THE HOMES REALLY NICE WITH UPGRADES, BUT ADDING GRANITE AND TILE BACKSPLASHES AND THEY ARE SELLING.

Rant. I don't understand why the City of Memphis and Shelby county don't consider dropping the tax rate on multi family. I might be shooting myself in the foot tenant wise but this would really help cleanup the depressed areas. Taxed at the single family rate I think investors would snap them up but the true net just gets killed as it is I WISH TOO, BUT NOT A CHANCE. THOSE AREAS YOU REFER TO ARE THE LOWEST OF INCOME AREAS WITH HIGH CRIME. TAX COULD BE $0 AND I WOULD NOT WANT. TRUE STORY, I HAD SOMEONE OFFER TO QUIT CLAIM ME A DEAL IN 38106--IN OTHER WORDS, A FREE PROPERTY. I PASSED AS I TOLD HIM I NEEDED 1 YEAR WORTH OF INSURANCE, TAX AND $1,500 TO TAKE IT.

ON THE LITTLE OLD LADY, THIS IS ALREADY A PROBLEM FOR LANDLORDS WHO HAVE A PROPERTY WITHOUT ANY UPGRADES SUCH VINYL PLANK FLOORING, FANS, UPGRADED FAUCETS, UPDATED KITCHEN AND BATH. WHILE THERE AREA  LOT OF RENTAL HOMES, THERE ARE MORE OUTDATED & NEGLECTED RENTAL & HOMES MANAGED BY BAD MANAGERS HOMES THEN GOOD RENTAL HOMES THAT LOOK GREAT AND MANAGED WELL. TO MANY INVESTORS FALL IN LOVE WITH "PAPER RETURNS" AND DO NOT THINK ABOUT THE MOST IMPORTANT PART OF THE EQUATION......WHICH IS THE HOUSE! CUT CORNERS ON THE FRONT END AND CASH FLOW PROBLEMS WILL HAPPEN A LOT QUICKER THEN ONE THINKS. BEEN THERE, DONE THAT FROM 2007 TO 2010. I NEVER WILL UNDERSTAND WHY SOMEONE WOULD GET A 30 YEAR LOAN ON A PROPERTY THAT HAS A 15 YR OLD AC, ROOF AND SUB PAR COMPARED TO THE OTHERS IN THE AREA JUST TO SAVE $10,000 ON THE PURCHASE. THAT 10K ONLY COST 2K ON A 30 YR MORTGAGE. THAT 2K ADDITIONAL WILL PROVIDE FOR MORE CASH FLOW THEN CUTTING CORNERS ON THE FRONT END.