Memphis intersection - how to determine A/B/C areas?

Question

I am looking to buy a property in Memphis, TN at an intersection of I 40 and I 240. I tried to get an idea what the neighborhood classification is but there are the boundaries of 4 main areas/towns/neighborhoods all meeting close to the interstate intersection and I can't figure out if the place I am looking at is in a good area or not. The address is 5008 Acorn Drive, Memphis

Douglas Skipworth · Answer

@Dr. Axel Meierhoefer,

I have personally owned houses in this neighborhood (ie, Berclair = 38122) for many years.  As usual, @Chris Clothier makes some excellent points.  Why I call it "great" is because, in general, the residents stay for many years and when they move out the property usually is in decent shape and the next renter moves in quickly.  That cannot be said for other rental areas in Memphis with similar price points that Berclair* offers.

I was hoping for more details about the property to help your thought process.  Here's the minimum data we use to make investment decisions.

PHYSICAL DATA

# of Beds

# of Baths

Sqft Amout

INCOME DATA

Rent Amount

OPERATING EXPENSE DATA

City Tax Amount

Co. Tax Amount

Insurance Estimate

Maintenance Estimate

Management Estimate

PURCHASE DATA

Sales Price

Rehab Estimate

FINANCING DATA

Loan Amount

Interest Rate

Maturity Date

Amortization Length

*For what it's worth, my family and I work, shop, socialize, worship, and go to school in 38122 every day.  It's not the fancy part of town, but it's definitely great to us.

Chris Clothier · Answer

Dr. Meierhoefer,

It is always good to hear from a poster who is and has been investing directly in that area.  38122 is a big zip code, but I trust Douglas when he says he personally invests in this pocket.  Those are the kind of recommendations that you are looking for and I am sure his company is also managing plenty of properties in the area.

I know you've been patiently learning about the market and talking to a lot of people.  I commend you for that and truly hope you develop a great portfolio!  Best to you -

Axel Meierhoefer · Answer

@Douglas Skipworth Thanks. I look at all those points too. For me, this posting was mainly to find out more about the area than the viability of the deal.

I have @Chris Clothier checklists and a set form BP and one from a team I work with. Though we have that offer for the address I mentioned I am looking to build a portfolio and mainly like to learn what you responded to. I appreciate your views and hope that getting invested in that area will be a good starting point in Memphis.

Your point about the longer term rents is what several other people indicated and I found that teh schools in the area are pretty good.

I also saw that some of the commercial stuff in the area would benefit from some improvements. On the other hand, if everything is A grade (and I hear you @Chris Clothier on scales), the prices typically are at premium level as well.

Chris Clothier · Answer

I don't know that I would call this a great rental area, but for the most part it is a tidy, clean area.  It is definitely an area struggling a bit with a lot of closed storefronts on Summer and with housing dating back to the '40s and '50s right in this particular area.  It is a blue collar area and you will find there will be a lot of rental activity.  That may be why it is being referred to as a great rental area.

How are you calculating your numbers for return?  The house looks like a duplex to me - is that correct?  If so, deferred maintenance may be an issue you want to look into before buying.  There will be two of every major system.  Just make sure the property has been properly maintained over time and nothing major has been deferred for the new owner to deal with.  Surprises on houses like these are the worst.  High end renovations are not going to be a needle mover in this area - rental price is.  So, landlords in this area may be quick to lower rents and slow to fix things.  You absolutely need a thorough inspection.

The road into the neighborhood is lined with decent looking small apartments that will be competition for qualified residents.  Someone looking for a duplex may be inclined to rent an apartment as well depending on how strict qualifications are.

I hate to use the Alphabetical rating system because it is completely arbitrary and often abused for the benefit of the seller and to the detriment of the buyer.  However, this is not an area I would rate highly for something I personally would want to buy.  I always caution investors buying from so long distance that numbers on paper are not the same as performance.  This is possibly a C area based on conservative definitions of what a C area should be.  I don't think it slides into the D classification.  If you move forward, look to hire a great property management company if you buy here.  I think you can find my list of questions to ask a property management company before hiring them here on BP.

Property management is going to be the key differentiator in making this particular investment a success or not.

Hope that helps - Best of luck to you!

Axel Meierhoefer · Answer

@Douglas Skipworth

It's a 9% return and cash flows about $250/month from the start

Axel

Axel Meierhoefer · Answer

Thx @Chris Clothier

Axel Meierhoefer · Answer

@Chris Clothier Thanks Chris

Yes, it always helps and the property will be renovated before purchase. What I was able to find is that a lot of the properties there are being purchased, renovated and rented. Maybe its early for that particular neighborhood but I feel like being part of the renewal process is not a bad thing.

Douglas Skipworth · Answer

@Dr. Axel Meierhoefer,

I consider that a great rental area.  What are the details on the deal you're looking at?

Memphis intersection - how to determine A/B/C areas?

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