What can you tell me about investing in Memphis?

[Jackson Long]

I am a person who needs to make his own mistakes. Doesn’t matter how much you tell me OR EVEN how much I believe you. I need to burn my hand on the stove, but I get an awful lot of private messages asking questions about investing here. I reply and be as helpful as possible, but I realized today that I am retyping a lot of the same stuff. I decided I would make a post and lay out my thoughts and suggestions. Still happy to help and answer private messages- but this can be a good primer to build those conversations off of.

If you are like me and learned about Memphis from podcasts (for me it was Get Rich Education- Hi Keith!) you heard things like “Memphis is the number one cashflow real estate market in the world”. I am sure this is true, or close to true. The problem is that the worse the area gets the better the numbers get. Of course there are exceptions. Nobody needs to reply that “you can get a great deal in a good area if you just look” or any such. You can pay 10k for a house that rents for 800 bucks a month in parts of town. That is an a-maze-ing ratio. But you will experience massive turnover. Vandalism. When you turn the place it will be trashed. At the end of the decade you might see a bigger return number than in another area- but you had to work very hard to get it and your cashflow will be chaotic. Alternatively you can spend 60k to get that same 800 bucks. But you will do fewer evictions, when tenants move out there will be less damage, etc. So the “Memphis is the best” numbers look really good because of the large number of 800 bucks for 10k type deals.

So lesson one is- adjust your thinking to account for this. I drove here as fast as I could (like, literally) after hearing Keith talk about Memphis. It was the right thing. I am happy I moved my business here. But it is far far rougher and riskier than I expected.

I don’t know the numbers or stats on this, but there is a metric-****-ton of out of state money being invested in cashflow residential real estate here. There are entire businesses designed around it. Some of those businesses are dishonest and completely focused on taking the money out of your pocket without adding value. I am sure that not all of them operate this way. But I will say that I do not know a single one counter example. Suffice it to say that if you spend an afternoon making phone calls you will talk to several Zero Sum Operators.

When I first got here I had my lunch taken several times. I am a bit of a hippie and like people and want the best for everyone. I like to think this is a great way to be- but not for business here. There are just too many people who are happy to stab you and leave you in an alley. I predict at least one comment below to say something like “you just had really bad luck”. I did have bad luck- and you probably will too. A couple of examples- I bought a six property portfolio. Five were in super ****** areas Fraysur (yeah yeah there are a couple of decent nooks) and Orange Mound (there are no decent nooks). The contract was for them to all be occupied. One did not have a tenant so to meet the terms of the contract the seller moved a family with no job into the property. And then removed the air conditioner. I had to evict the person and rehab the property after. Another property he claimed rented for 1150 a month and that the tenant had been there 15 years. The first month the tenant paid half the rent. The next month they were gone- the seller had moved them to another of his properties. I then learned that market rent for that property was about 700 a month. Don’t even get me started on wholesalers… (Again, I am sure there are good ones- I just don’t know any.)

Lesson two is- go read the wikipedia article for “trust, but verify”

Project leadership was my previous life’s bread and butter. I am great at getting people to do stuff. Not in a sales way- in an Amish people building a barn way. I came here justifiably arrogant about my ability to get **** done. I literally have a framed picture that says “Gets **** Done”

Boy when I got here did I fire a lot of people. First there is a culture shock element. This is another adage for you “everyone in Memphis is bad at their job” There is a plague of poor work ethic here. This created a market opportunity for people to charge WAY MORE than is reasonable. And those people aren’t any better. It is hard to get work started. Once it is started people will not finish, or finish wrong, or ask for more money, or… etc. I had a guy out to quote a big rehab job- 50k ish in labor alone. He didn’t take notes when we did a walk through for scope. I emailed him my notes in the form of a worksheet he could just fill out. A few days later I texted asking if he was not going to submit a bid. He told me he would have it to me later that day. Later that day he sent a text saying “about 30k or so”. The amount of effort he was willing to put into getting the contract consisted of texting me a sentence fragment. I often post in some of the local Facebook groups that I am looking for this or that kind of contractor. I will get a bunch of messages. Sometimes the project gets stalled, sometimes I find someone I like right away… whatever. So when I need someone the first thing I do is go back through the people who messaged me the last time I asked. In about three months I observe at least a 75% ghosting. The numbers are no longer valid, the guy moved to new york, whatever. Let me rephrase that for clarity. About 75% of the contractors you will find today will be gone in three months.

My ability to Get **** Done went… well.. Into the shitter here. I am still quite a bit more effective than many people here. To the point where I wind up doing a fair bit of work for other people who are stuck just because I CAN get it done (mostly strategic partners due to bandwidth issues). I feel massively handicapped here in terms of productivity, but relative to the Memphis baseline I am pretty baller.

Lesson three is- buying a distressed property and knocking out a quick rehab here is very different than most other places. Anecdotally, I find running rehabs in other states remotely (from here) to be easier than managing rehabs here while I *AM* here. Don’t bet all your money on one throw of the dice from another state.

BRRRRRR... Man, it all just sounds so easy on the podcasts. And my experience before I came here supported that. I purchased properties in WA for around 80k rehabbed them for 20k rented them for 1200 and then refinanced them at 160k and reinvesting the 120k. Just like the textbook. Here the local banks are all pretty leary of this. I had many frustrating conversations with one of my bankers before I realized what he was saying. In the above scenario the bank has a 160k piece of collateral against a 120k loan. The problem they see is that I have 120k loan collateralized against a 160k property that I basically got for free. If **** goes south it is easy(ier) for me to walk away without my hard-earned-cash being at risk. Translation- the bank views your 25% down payment as stronger collateral than your 160k property. Everyone (you know what I mean) has seasoning requirements- they are just more arbitrary and strict here. So be ready for that. BRRR will be more like B...R…..R………..R.

Lesson four is- whatever you learned through podcasts, websites, books, seminars, youtube, gurus, etc… It is going to be harder and slower than that.

So what is a body to do? You are out of state. You work a day job. You saved some money and believe cashflow residential is where it can grow the most. You hear Memphis is The Place. I just told you it is terrible here. You still want to do it. Fine. This is what I think you should do.

1. Come here. Do not invest remotely without at least visiting.
2. While here meet with multiple types of people- take notes- compare notes- try to see the truth between them
3. If you plan on doing a rehab expect it to take five times as long and cost twice as much as you think it should
4. Unless you REALLY WANT to dance with the dark side to maximize your return don’t invest anywhere you wouldn’t be willing to walk around at night waving a 100 dollar bill
5. Any business transaction you are in do as much outside verification as possible. They say your tax will be X? Go to the county sites, wade through all the crap, do the algebra, and figure out what the tax will be. I would bet you the 100 dollar bill you get to wave that it will be 150% of X
6. Anyone who won’t tell you specific Memphis investor horror stories is probably straight up lying or lying by omission or the person you should get your lotto numbers from
7. Be prepared to spend a long time (like, two years maybe) stabilizing your property. Pick some management company- I suggest a small one, but you-do-you. Watch them like a hawk for a few months. Question every transaction. (maybe not to them specifically- but look at each one and really think about it). If it is vacant look yourself for the ads as if you were a person- don’t just click the link they send or look at their site. There are a lot of conflicts of interest at work here and it is made worse by Everyone in Memphis is Bad at Their Job syndrome. Be ready to fire them and try another company until you get to one that serves you well.
8. Cross your fingers and keep me posted.

Welcome to the trenches soldier,

Jack

[Chris Clothier]

@Jackson Long

Man, you came out with some passion in this post!  

I think it is great that you are posting your experiences and although I feel there is some hyperbole, it is still your view of the experience you have had and it is important to post a counter-view to the cupcakes and rainbows often posted about how easy it is.  

As for Memphis itself, I would only caution readers that what you have shared as advice is applicable to any market and any investment and not unique to Memphis.  Believe me, Charlotte, Dallas, Houston, Birmingham, St. Louis, Little Rock, Atlanta, Los Angeles, Miami, Cleveland, etc....none of these are immune to what you are discussing.  It is not a market issue, it is a people issue.  And by people, I mean it is an issue on the part of the buyer as well as the service provider, seller, etc.  There is nothing you discuss that is unique to Memphis, but I absolutely empathize with you and believe that everything you've shared is your unique experience.  

I too had a very rough go when starting and paid for it over my first few years as an investor.

I have been investing in Memphis since 2003 when I bought my first investment property near Rhodes University and I have since invested in hundreds of properties.  I hope you find it encouraging that someone who has built what I view as a successful portfolio and a company with a stellar reputation has been bamboozled and lied to and sold straight up junk by people who I trusted.

When I started I had a dream that every property would always provide $200 a month per property and I only needed 50 of them to earn six figures and replace my then income.  I was dead wrong.

The price points you are talking about are where I started and I lost my a$$.  I bought properties from people that were presented to me as "church friends" of the seller and pillars of the community and after I purchased their portfolios the same things happened to me.  The houses went vacant, the managers stole money, the deferred maintenance showed up to the tune of thousands of dollars and I lost much more money on my investments than I made.

Those experiences absolutely helped shape my families' company Memphis Invest and our approach to buying, renovating and managing.  I didn't join my dad and brother until late 2008 after the company was already up and going.  We had all experienced some of what you are describing and it shaped the way we built the company.  You don't have to love or even agree with buying Turnkey properties or work with Turnkey companies, but there are many good people in the industry both in Memphis and across the country.  To be fair to the many great people here in Memphis, there are also many investors, Realtors, tradesmen and others here in the city that would help you and any others in need in a heartbeat.

As for service providers,  we have had the same electrician working on our personal and business houses since 2004.  He went from a single operator to having 3 crews.  Same thing with HVAC, general repairs and flooring.  Companies that have been with us for over a decade doing work.  One of our lock companies and lawn service companies have even expanded into other cities that we have expanded into.  There are some fantastic companies out there providing trades and services that not crooks and they show up on time and complete the work they are contracted to complete.  I know it sounds crazy right!

My post has already grown too long so I will just leave you with this.  I'd be happy to share my experiences, trade some war stories and even introduce you to any service providers that may be able to help any time you'd like to meet.  I love that you are here in Memphis and trying to help other investors and sharing your experiences.  I hope that you grow to love Memphis the way a lot of other investors like myself love Memphis.  This is our hometown and we fight for the city and for investors like yourself.  The more successful you are, the more successful we are! 

So, hopefully you take me up and we connect at some point!  Best to you -