Do Midweast Low Cost Good Rent Houses Defy Many Rules

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Do Midweast Low Cost Good Rent Houses Defy Many Rules

Michael Williams
Investor · Memphis, TN · Member since 2017 · 100 posts · 28 votes

I am curious about this approach. I am still considered new to the investing game. I moved to Atlanta from Memphis TN about 5 years ago. I started out strong with real estate in Atlanta 4 years ago and did it for about 1 year. I got two birddog deals and had 5 under contract but all contract deals fell through. I then got away from real estate when I started another venture that included an investor. I just moved back to Memphis and a motivated seller just fell into my lap.  So I am contemplating taking advantage of the interest in the area.

I've been noticing that many out of town investors are drooling to get into the Memphis market due to the extremely low cost of properties and the good rent prices when compared to the cost of the house. For instance a small house in Atlanta my cost $50k plus $20k repairs totaling $70k and will bring about $680 - $800 rent.

In Memphis you can get 3 properties at $18k each averaging $5k-$7k repairs and pay and average of $75k total with each one bringing in about $600 each. This is $1800 per month minus expenses and some minor or major headaches with the area. Does this make sence from the numbers standpoint?

This prompted me ask another question of seasoned investors: Would you pay close to the ARV price of a property that is valued at $30,000, needs $6k in repairs to make it rent-able at $650 per month? This is $650 x 12 = $7,800 per year or return on investment in 3.9 years.
For example would you pay $22k plus $6k in repairs making your all in $28k to get this property? To save time let's say there have been some issues in the area as far as burglaries but still is the average of the entire city for these C areas. Not warzone but one of the nice pockets in bad areas. What would become your new measuring points in this type of area or would you keep the same formula for these type areas as for all of your deals? Is there ever a time to change a formula that has worked for you for years? 

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Eric Gerakos
Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
8y

Michael, one thing to keep in mind is that while very inexpensive houses can look like cash flow kings on paper, the reality is that they are inexpensive for a reason. High vacancy and damage from renters can quickly turn those sorts of properties into money losing nightmares. My experience has been that it’s usually better to pay a bit more for a B neighborhood and the cash flow usually ends up being better with far less headaches.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    You appear to be describing a turnkey company, and people obviously do pay those prices. It all depends on how much work someone wants to put into a property, because if they are looking to maximize their return they would just fix the property up themselves, but if they don't want to deal with the headaches they will likely buy from a turnkey company or buy turnkey off the MLS

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    I’ve bought a couple rentals in memphks from out of state and plan to buy more going forward. I wouldn’t want to have rent of 650 in Memphis though. I like 750 and above minimum. If I am paying 75kish for a house in Memphis, which I have done, I want the house to be almost entirely new as far as mechanicals and big ticket items go. If it’s dated or not rehabbed I’d pay less. Probably closer to 60-65k
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  • Eric Gerakos
    Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    Michael, one thing to keep in mind is that while very inexpensive houses can look like cash flow kings on paper, the reality is that they are inexpensive for a reason. High vacancy and damage from renters can quickly turn those sorts of properties into money losing nightmares. My experience has been that it’s usually better to pay a bit more for a B neighborhood and the cash flow usually ends up being better with far less headaches.

    2Reply
  • Michael Williams
    OP
    Investor · Memphis, TN · Member since 2017 · 100 posts · 28 votes
    8y
    Originally posted by @Aaron K.:

    You appear to be describing a turnkey company, and people obviously do pay those prices.  It all depends on how much work someone wants to put into a property, because if they are looking to maximize their return they would just fix the property up themselves, but if they don't want to deal with the headaches they will likely buy from a turnkey company or buy turnkey off the MLS

    Thanks for the input Aaron

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  • Michael Williams
    OP
    Investor · Memphis, TN · Member since 2017 · 100 posts · 28 votes
    8y
    Originally posted by @Caleb Heimsoth:

    I’ve bought a couple rentals in memphks from out of state and plan to buy more going forward. I wouldn’t want to have rent of 650 in Memphis though. I like 750 and above minimum. If I am paying 75kish for a house in Memphis, which I have done, I want the house to be almost entirely new as far as mechanicals and big ticket items go.

    If it’s dated or not rehabbed I’d pay less. Probably closer to 60-65k

     
    These houses are in the lower end. The plan is to pay $12k-$18k to acquire and have an estimated $5k-6k in rehab.  These are to flip to another investor. These are neighborhoods with aging owners that are still interested in maintaining the area. But many of them are dying and leaving the property to their siblings that don't believing in paying property taxes. Which I can use to my advantage to get under contract. I am strictly in wholesale mode at this point. 

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  • Michael Williams
    OP
    Investor · Memphis, TN · Member since 2017 · 100 posts · 28 votes
    8y
    Originally posted by @Eric Gerakos:

    Michael, one thing to keep in mind is that while very inexpensive houses can look like cash flow kings on paper, the reality is that they are inexpensive for a reason. High vacancy and damage from renters can quickly turn those sorts of properties into money losing nightmares. My experience has been that it’s usually better to pay a bit more for a B neighborhood and the cash flow usually ends up being better with far less headaches.

     
    Hi Eric, and that's why I posted this question. As I said I've been reading many discussions about this topic and I wanted to get views from both side, if any. The area my mom lives in is like this. All of my neighbors have been here for over 40 years or more and houses are paid for. The property value ranges are $24k - $38k. These are ARVs. My mom and 70% of the neighbors still take care of their properties and take pride in the neighborhood. There is one house that is a problem but I want to make them an offer to leave one day, but that's later in the plan. There are two vacant houses that belonged to neighbors that have passed away. The relatives stayed there for a short period of time then left, leaving them vacant. 

    The reason I asked the question is because many investors want cashflow and like you said "if the cashflow comes with headaches it may not be worth it". There are many neighborhoods like my mom's here and I am looking to carve a niche with these what I call "Hidden Pockets". The key is to find good tenants for these properties once acquired and this is something that I am good at because I am a Facebook marketer that understand the power of marketing. Finding the good tenants will not be a problem so that is a side service I can offer an investor with the deals that I plan to provide. I think the Memphis market is a ripe one for the investor like me that can see the vision. I just wanted to get some insights about my plan from the BP Family to help me put together a strong strategy for this venture. Thanks for the input.       

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