Turnkey homes investments

[Marc Marquez]

Hi everyone, I live in Texas and a newbie of sorts.  I’m looking at buying one or two turnkey rental income investment homes in the Memphis TN area located in zip code 38127.  Doing my own due diligence it appears that that zip is not the greatest but also not the worst either in regards to crime, etc.  However, property values seem to be lower on average than what I’m being offered on the new homes I’m considering buying, i.e. about $150k for the property.  In fact it’s way to the top end of the scale. It also seems that the rents being projected by sellers of $1350/m is also to the high end as well for this area.  So I’m not sure what to believe here by what the sales folks are saying and what’s reality. Hence my posting today to get some help.

The homes are build by Bryce and Brown Home Builders. Does anyone in the forum have any feedback to share regarding these turnkey rental properties or the builders? Positive or negative feedback is appreciated as I’m trying to learn on the fly and make a decision as to if to move forward with them or not.  
Thanks in advance!

[Leo R.]

@Marc Marquez will this be your first investment property, or do you have prior experience in REI and property management? Also, what is the grade of the neighborhood you're looking at?

I ask, because we see a lot of folks on the forums who are inexperienced, and who buy OOS "turnkey" properties that turn into trainwrecks. The story is always the same: the property is a fresh rehab (looks great in pics!), but it's in a C (or lower) area, and the investor buys it because it has "great cashflow on paper".  Then, the problems of the C-class area begin: non-paying tenants, crime, vacancy.  Then, the PM goes MIA because the revenue of a single house in a C area is minimal for a PM, yet the burden of management is maximal. In other words, most PMs cannot afford to put in the significant amount of effort required to correctly manage in a C area for the minimal returns a single property produces in a C area. PM'ing a single property in a C or lower area is like taking on the worst job in the world for the worst pay in the world! (maybe not that bad, but point being: the incentive to perform usually just isn't there for the PM in these scenarios).

Properties in A and B areas are usually easier to manage, but of course the cashflow doesn't come naturally, so value-add strategies that force casfhlow are often the only option...

I don't know anything about the Memphis market, but if the property is $150k and rents for $1350, that's pretty close to hitting the 1% rule--which would make me quite skeptical. When a property hits the 1% rule in today's market, there's usually a major catch (two of the most common catches are that 1) the rent projection isn't accurate, and it's actually nowhere near hitting the 1% rule, or 2), the rent projection IS accurate, and it IS close to the 1% rule, but it's in a C or lower area and comes with all the aforementioned problems).

Good luck out there!