Memphis - buy renovated home for 65K or original home for $30k?

Question

Hi All,Like many others, I have been doing research preparing to begin my first REI with a SFH in Memphis, TN (because properties here on Maui are too expensive for regular guys with regular salaries like me!) I've been fascinated with REI since I became an appraiser out of high school in 2002 and have been dying to get started since, but always convinced myself I didn't have the capital to do it. Well now I have a little bit of savings after working hard and saving like crazy for a LONG time and I've decided to buy a home cash in Memphis so that I have less risk (vacancies, HOA fees, mortgage payments, etc. all scare me, being a newbie, so I see this as the lowest risk way to get started because even if the home sits vacant for a year I would only have to pay taxes and insurance). I'm currently comparing buying a home for around $30,000 that has not really been renovated and rents for around $600 VS. a home for around $65,000 that has top to bottom renovations and rents for around $750 ( possibly through a REI company like Mid South Home Buyers, Memphis Invest, etc., or just finding one on my own through an agent). Obviously I would expect higher maintenance costs; but let's figure instead of an average of $30 a month on maintenance I may have to spend $90 or even if it was $120 a month on maintenance, I still see the $30,000 house as a better ROI... am I missing something? I'm also curious if anyone with experience in multiple markets has any suggestions as to whether another market might be best for my situation and trying to start off with the smallest possible out of pocket investment? I only happen to be looking at Memphis because another investor suggested it and I can afford to buy a home cash (not a renovated one though!)Hope my questions don't sound dumb, but I gotta start somewhere, right?? Thank you all in anticipation for your feedback!

Daniel Weaver · Answer

I think what you are failing to factor into your analysis between the 30k home and the 60k+ home is the quality of tenant you will be able to attract for each type of home. The lower the home price, the more likely the potential tenant pool is going to be less than satisfactory. I live in Memphis, but even living in Memphis, I prefer to focus on homes that are worth $80k+ ARV and $1,000+ monthly rental value. There is a lot of competition for these homes but sometimes you can still get a deal. Cash talks, and sometimes will get you a discount - though being out of state, it might be hard to find the best deals. A reputable wholesaler might be your best option there. But since you are investing out of state, I would recommend finding the property manager you want to work with first, then find a house second. It's not going to do you any good to find a house via realtor if you don't already have a team set up to manage it.

Curt Davis · Answer

Your not going to find a nice move in condition home on the MLS with an agent for $30k. You would be better off buying one renovated for more. Also in the price range you are considering you are running a high risk of having a low quality experience. You should be considering homes in the $75-$80k minimum range. If you were local then sure buy a cheap junker and roll the dice. Just my opinion. Good luck

Jackson Long · Answer

Yo Greg- wrote you a big ol reply, but hitting a weird issue with sending it. If you still want info message me so we can figure out what broke.

Greg Gaudet · Answer

Thank you everyone for your input. Daniel that is a good point that I haven't really been giving enough weight to in my factoring. Although I have seen a few properties with long term tenants in place, and just to clarify I wasn't looking at fixer uppers; the listings I had considered in the 30-40k range were move in ready and most of them already had tenants in place, just not newly renovated. But the quality of tenant may be a big factor that hurts my monthly cash flow. To get into the 70k range I'll have to either save for another 6-8 months or finance part of the purchase price. However I'd really prefer to pay cash so that I'm not hurting paying a mortgage on any months that my property is vacant. Does everyone out there finance their investment properties or wait until you can pay cash?

Verna Littleton · Answer

You definitely want to look at a property that is already renovated and rented vs a lower cost home that needs repairs. A $30k home needing repairs will be a challenge for an out of state investor. You have to take into consideration the amount of repairs that will be needed, finding a reputable contractor, and keeping your fingers crossed that the house is not vandalized before you can get a tenant in the home, etc.

Elaine Presley · Answer

I agree with, Curt!

John Caviness · Answer

I agree with Curt. Memphis is a great place to invest but areas can vary and one block can make a difference. I have gone with many out of town investors when they finally visit and they have not realized what they have bought. Buying something for $75,000 over something for $30,000 can make a huge difference