Why is my Memphis investment property losing money?

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Why is my Memphis investment property losing money?

Jackson Long
Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes

Hey @Bob Beach and @Xiao Xiao here is the post I promised.  I am happy to talk more about any of this at any time.  I am traveling at the moment though so you can also fee free to reach out to Ken Klingler or Jack Inman.

Also I am making up ALL OF THESE NUMBERS because I am typing from a Motel 6 in the middle of nowhere.  They are representative though.

Why is my Memphis investment property losing money?

Answer, you are probably using the wrong property manager. Let me give you a quick breakdown of the problem. The traditional property management business model is inherently broken. For a successful partnership (client/provider) you want synergy. You want aligned interests. This is exactly how traditional PMs do-not-work.

Ideally it should look like this- you have a 1k a month rental and they charge you 10% a month. In a year the property earns 12k. Property manager takes 1.2k and you keep 10.8k. Great. But sometimes you lose tenants and putting in a new tenant requires work and the PM should get paid for this- they usually charge half a month's rent. So if the property turns once a year and you lose a month of occupancy (best case) it looks like this instead property earns 11k. PM makes 1.1k but PM also makes 500 for the lease up so now their annual take goes from 1.2k to 1.6k 30% increase!!! And the owner profit goes to 9.4k (1k*11-10%-500) a reduction of 13%.

This is just the tip of the iceberg but shows how right from the start a traditional PM wants a different set of things than the owner.

Now the PM is ALSO going to manage the rent ready. And say that rent ready might cost a local owner with his own team something like 500 paint, 250 carpet cleaning, 250 in miscellaneous repairs. The PM will say something like “we use our own people to get the best cost”. Instead of 500, 250, 250 it will be 475, 225, 225! Except that they will charge a 10% service fee so instead of 1k total you pay 1,018. Now wait- the property was vacant for a month- so it needs the lawn cut twice and a visit from pest control. And with every transaction the owner’s profit goes down and the PM profit goes up. It gets hairier too! Previous tenant never reported a leak issue. On the walk through mold is noticed. (btw this is a true story) so a remediation specialist is called out. Well they make their money selling moisture barriers and whatever else. You may get lucky and they say nothing needs doing- but in all probability they will come up with 3k in work that should be done. A PM should be the one to say “hey wait, do we really need to spend that money?” except that if you agree to that work- they just made another 300 dollars. 300 dollars is 25% of what they would make in a regular year in our ideal scenario.

At this point the property manager has increased their revenue on the property by 100% and the owner has lost about 35%.

So, YES it is important to think about “how much does it cost to paint” and “how often do you need to replace the flapper in the toilet”, but what is far far more important to consider is who is making money off of what transactions. A property doesn’t go from 2% cash on cash return to a loser because the paint cost 20% too much. It goes from 2% Cash on Cash to a loser from a thousand conflict of interest cuts.

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Account Closed
Member since 2020 · 983 posts · 1k+ votes
5y

The solution? A few years ago, I spent two years looking into the Memphis market when I could buy 20 homes 100% occupied for $40,000 per home. I was ecstatic and ready to jump on an airplane buy 80 rental units. The problem I found with Memphis is everyone tells me it is the Eviction Capital of the World because the income is so low that when the average tenant loses his job he doesn't have enough money in the bank to pay the next month's rent.

So, I did the math over and over and realized that even if the tenants had the money to pay their rent the monthly rent they paid would not cover the cost for a management company and maintenance. So, the story your told is absolutely true, proves my math was correct and confirms my belief that properties are cheap in Memphis, but there is a reason.

In 2004, I turned down a 108-unit property in Klammath Falls Oregon. The property was beautiful. It was on 5 acres, came with 5 beautiful townhomes built with Oregon-style beams inside and it came with an additional 5 acres that I could build units on. The entire property was for sale for $3.2 million. I offered $2.8 million and the seller accepted, but I backed out. In California at the time that property was worth about $6 million.

This is why I backed out and the same is true for Memphis. The property was cheap and 100% occupied, but the problems with the math is when a tenant moves out of a unit in California, I collect $1800 per month for rent and the I can re-paint, install carpets and I will still have a little cash in my pocket. When a tenant moves out of a unit in Memphis and the rent is $950 per month it takes almost two months of rent to clean, paint and carpet an apartment. So, when the rents are half as much that always makes the operating costs twice as much and that is why Klammath Falls and Memphis are not good places to invest with the exception of when properties appreciate in value. 

If your Memphis properties appreciate in value then you can bite the bullet, lose money that results from your expenses and maybe the appreciation and depreciation on your taxes will earn a profits, but when you have low-income tenants and cannot raise the rents than you cannot earn a profit in Memphis.

You will never get rich from buying properties and living of the cashflow from rental income because rental income barely keeps up with inflation. You get rich from buying properties that appreciate in value. I don't watch Memphis any more and I will guess that this housing epidemic has caused properties to increase, significantly, but you still need to do the math to see how much more you can increase rents because rental income determine the value of multi-unit properties and how much banks will loan when you want to sell your properties and capitalize on appreciation.

What would I do in your case. I would manage the properties myself to save not only the management fees, but to save from the mistakes management companies make e.g. paying too much to contractors and vendors.

If you can't manage the properties yourself then I would sell them before your management company digs you into a hole you can't get our of, meaning bankruptcy.

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  • Ken Klingler
    Investor · Lincoln, CA · Member since 2017 · 14 posts · 2 votes
    5y

    I work with Jackson, and he is on an extended road trip. If anyone has questions, you can ping me.

    0Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Jackson Long:

    Hey @Bob Beach and @Xiao Xiao here is the post I promised.  I am happy to talk more about any of this at any time.  I am traveling at the moment though so you can also fee free to reach out to Ken Klingler or Jack Inman.

    Also I am making up ALL OF THESE NUMBERS because I am typing from a Motel 6 in the middle of nowhere.  They are representative though.

    Why is my Memphis investment property losing money?

    Answer, you are probably using the wrong property manager. Let me give you a quick breakdown of the problem. The traditional property management business model is inherently broken. For a successful partnership (client/provider) you want synergy. You want aligned interests. This is exactly how traditional PMs do-not-work.

    Ideally it should look like this- you have a 1k a month rental and they charge you 10% a month. In a year the property earns 12k. Property manager takes 1.2k and you keep 10.8k. Great. But sometimes you lose tenants and putting in a new tenant requires work and the PM should get paid for this- they usually charge half a month's rent. So if the property turns once a year and you lose a month of occupancy (best case) it looks like this instead property earns 11k. PM makes 1.1k but PM also makes 500 for the lease up so now their annual take goes from 1.2k to 1.6k 30% increase!!! And the owner profit goes to 9.4k (1k*11-10%-500) a reduction of 13%.

    This is just the tip of the iceberg but shows how right from the start a traditional PM wants a different set of things than the owner.

    Now the PM is ALSO going to manage the rent ready. And say that rent ready might cost a local owner with his own team something like 500 paint, 250 carpet cleaning, 250 in miscellaneous repairs. The PM will say something like “we use our own people to get the best cost”. Instead of 500, 250, 250 it will be 475, 225, 225! Except that they will charge a 10% service fee so instead of 1k total you pay 1,018. Now wait- the property was vacant for a month- so it needs the lawn cut twice and a visit from pest control. And with every transaction the owner’s profit goes down and the PM profit goes up. It gets hairier too! Previous tenant never reported a leak issue. On the walk through mold is noticed. (btw this is a true story) so a remediation specialist is called out. Well they make their money selling moisture barriers and whatever else. You may get lucky and they say nothing needs doing- but in all probability they will come up with 3k in work that should be done. A PM should be the one to say “hey wait, do we really need to spend that money?” except that if you agree to that work- they just made another 300 dollars. 300 dollars is 25% of what they would make in a regular year in our ideal scenario.

    At this point the property manager has increased their revenue on the property by 100% and the owner has lost about 35%.

    So, YES it is important to think about “how much does it cost to paint” and “how often do you need to replace the flapper in the toilet”, but what is far far more important to consider is who is making money off of what transactions. A property doesn’t go from 2% cash on cash return to a loser because the paint cost 20% too much. It goes from 2% Cash on Cash to a loser from a thousand conflict of interest cuts.

    So we’ll said

    Fox watching the hen house 

    SO what is the solution?

    1Reply
  • Account Closed
    Member since 2020 · 983 posts · 1k+ votes
    5y

    The solution? A few years ago, I spent two years looking into the Memphis market when I could buy 20 homes 100% occupied for $40,000 per home. I was ecstatic and ready to jump on an airplane buy 80 rental units. The problem I found with Memphis is everyone tells me it is the Eviction Capital of the World because the income is so low that when the average tenant loses his job he doesn't have enough money in the bank to pay the next month's rent.

    So, I did the math over and over and realized that even if the tenants had the money to pay their rent the monthly rent they paid would not cover the cost for a management company and maintenance. So, the story your told is absolutely true, proves my math was correct and confirms my belief that properties are cheap in Memphis, but there is a reason.

    In 2004, I turned down a 108-unit property in Klammath Falls Oregon. The property was beautiful. It was on 5 acres, came with 5 beautiful townhomes built with Oregon-style beams inside and it came with an additional 5 acres that I could build units on. The entire property was for sale for $3.2 million. I offered $2.8 million and the seller accepted, but I backed out. In California at the time that property was worth about $6 million.

    This is why I backed out and the same is true for Memphis. The property was cheap and 100% occupied, but the problems with the math is when a tenant moves out of a unit in California, I collect $1800 per month for rent and the I can re-paint, install carpets and I will still have a little cash in my pocket. When a tenant moves out of a unit in Memphis and the rent is $950 per month it takes almost two months of rent to clean, paint and carpet an apartment. So, when the rents are half as much that always makes the operating costs twice as much and that is why Klammath Falls and Memphis are not good places to invest with the exception of when properties appreciate in value. 

    If your Memphis properties appreciate in value then you can bite the bullet, lose money that results from your expenses and maybe the appreciation and depreciation on your taxes will earn a profits, but when you have low-income tenants and cannot raise the rents than you cannot earn a profit in Memphis.

    You will never get rich from buying properties and living of the cashflow from rental income because rental income barely keeps up with inflation. You get rich from buying properties that appreciate in value. I don't watch Memphis any more and I will guess that this housing epidemic has caused properties to increase, significantly, but you still need to do the math to see how much more you can increase rents because rental income determine the value of multi-unit properties and how much banks will loan when you want to sell your properties and capitalize on appreciation.

    What would I do in your case. I would manage the properties myself to save not only the management fees, but to save from the mistakes management companies make e.g. paying too much to contractors and vendors.

    If you can't manage the properties yourself then I would sell them before your management company digs you into a hole you can't get our of, meaning bankruptcy.

    11Reply
  • John YuePro Member
    Investor · New York City, NY · Member since 2020 · 2 posts · 7 votes
    5y

    This is actually pretty spot on in terms of what is currently happening with me and the PM I am using in Memphis (which I just gave notice for termination yesterday after using them for just 6 months, DM me if you would like to know who). It has pretty much been a nightmare from day 1, and the PM keeps using garbage contractors with poor craftsmanship. I've paid for stuff that was part of their "rent ready" turn after acquisition and they STILL have still not been completed 6 months later. We have a leak where they've sent their HVAC technician, then followed by an outside HVAC vendor and just when we thought the leak was addressed and had the ceiling repaired... lo and behold, the leak returns.. (i.e. - More money down the drain). The situation got so bad that the tenant actually found me on FB to inform me of how poorly the property was being managed. At this point I am so sick and tired of "managing" the PM that I've decided to self-manage myself. I honestly think with so much innovation that is happening in the RE space, it should be a lot easier to self manage now than before. The biggest problem I have now is just finding good quality licensed vendors (plumbers, electricians, GCs, etc.) that is available when you need them. Everyone I call is either backed up or doesn't respond or worse, they sub-contract out the work to unlicensed/sub par vendors. 


    @Jackson Long @Ken Klingler - If you guys have any recommendations or know how to find quality contractors, please let me know. I could really use some help! Thanks in advance.

    6Reply
  • Jackson Long
    OP
    Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes
    5y

    @Michael Plante You find a partner who aligns your interests with theirs.  Message @Ken Klingler

    @Account Closed You sort of took a bit of a left turn there about not investing for cashflow.  The stories of people who had dramatic success with appreciation plays are super exciting and everyone loves to hear them.  But so are stories about winning the lotto.  The cashflow route works and is highly "plan and execute to-able" and what I mean by that is there is a formula and if you follow it you can do well.  **** can happen of course, but it is like getting a degree in CS and becoming a programmer.  If you follow the steps you are HIGHLY LIKELY to succeed (just watch out for wolves) but you don't "become rich".  But to extend from that and say "that is why I write hit songs" is a little silly in the form of advice.  Even though you can make a list of things that mitigate your risk and increase your odds of success- you are still gambling.  Lots of people love to gamble.  Those people buy stocks or properties on the coast.  There is nothing wrong with it- but even though they are both "real estate" they are not remotely comparable.

    2Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    The real problem is the price/rent ratios these days do not support a PM. When you could buy closer to the 2% ratios, a 1K per month rent was achievable on a 50K house. When that drops to 1% your mortgage payment doubles. The model is not sustainable with remote management at typical 1% ratios. And now people are buying the same rents at 0.7% and less. There is simply no margin if you pay 10% of rent to PM monthly plus the inflated maintenance and turnover costs. 

    6Reply
  • Jackson Long
    OP
    Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes
    5y

    @Account Closed okay last reply before I head into Yellowstone!  This is something that I think can be debated quite a bit.  Just off the top it is a totally different set of maths depending on your debt service strategy.  Further, I use 10% because it is "common" and easy to work with.  You can easily pay anywhere from 6-12% and there are even other models.  Unless you are super conservative (and that is okay if you are) your spreadsheet should look fine even at 10%.  That is why people buy these houses.  The problem is that that the 10% isn't representative of the actual cost- and that is why the properties fail.

    2Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Account Closed:

    The solution? A few years ago, I spent two years looking into the Memphis market when I could buy 20 homes 100% occupied for $40,000 per home. I was ecstatic and ready to jump on an airplane buy 80 rental units. The problem I found with Memphis is everyone tells me it is the Eviction Capital of the World because the income is so low that when the average tenant loses his job he doesn't have enough money in the bank to pay the next month's rent.

    So, I did the math over and over and realized that even if the tenants had the money to pay their rent the monthly rent they paid would not cover the cost for a management company and maintenance. So, the story your told is absolutely true, proves my math was correct and confirms my belief that properties are cheap in Memphis, but there is a reason.

    In 2004, I turned down a 108-unit property in Klammath Falls Oregon. The property was beautiful. It was on 5 acres, came with 5 beautiful townhomes built with Oregon-style beams inside and it came with an additional 5 acres that I could build units on. The entire property was for sale for $3.2 million. I offered $2.8 million and the seller accepted, but I backed out. In California at the time that property was worth about $6 million.

    This is why I backed out and the same is true for Memphis. The property was cheap and 100% occupied, but the problems with the math is when a tenant moves out of a unit in California, I collect $1800 per month for rent and the I can re-paint, install carpets and I will still have a little cash in my pocket. When a tenant moves out of a unit in Memphis and the rent is $950 per month it takes almost two months of rent to clean, paint and carpet an apartment. So, when the rents are half as much that always makes the operating costs twice as much and that is why Klammath Falls and Memphis are not good places to invest with the exception of when properties appreciate in value. 

    If your Memphis properties appreciate in value then you can bite the bullet, lose money that results from your expenses and maybe the appreciation and depreciation on your taxes will earn a profits, but when you have low-income tenants and cannot raise the rents than you cannot earn a profit in Memphis.

    You will never get rich from buying properties and living of the cashflow from rental income because rental income barely keeps up with inflation. You get rich from buying properties that appreciate in value. I don't watch Memphis any more and I will guess that this housing epidemic has caused properties to increase, significantly, but you still need to do the math to see how much more you can increase rents because rental income determine the value of multi-unit properties and how much banks will loan when you want to sell your properties and capitalize on appreciation.

    What would I do in your case. I would manage the properties myself to save not only the management fees, but to save from the mistakes management companies make e.g. paying too much to contractors and vendors.

    If you can't manage the properties yourself then I would sell them before your management company digs you into a hole you can't get our of, meaning bankruptcy.

    Don’t leave us hanging with all the deals you didn’t do

    what did you invest in with your millions? 

    also how did you make your millions to begin with?

    4Reply
  • Account Closed
    Member since 2020 · 983 posts · 1k+ votes
    5y
    Originally posted by @Jackson Long:

    @Michael Plante You find a partner who aligns your interests with theirs.  Message @Ken Klingler

    @Account Closed You sort of took a bit of a left turn there about not investing for cashflow.  The stories of people who had dramatic success with appreciation plays are super exciting and everyone loves to hear them.  But so are stories about winning the lotto.  The cashflow route works and is highly "plan and execute to-able" and what I mean by that is there is a formula and if you follow it you can do well.  **** can happen of course, but it is like getting a degree in CS and becoming a programmer.  If you follow the steps you are HIGHLY LIKELY to succeed (just watch out for wolves) but you don't "become rich".  But to extend from that and say "that is why I write hit songs" is a little silly in the form of advice.  Even though you can make a list of things that mitigate your risk and increase your odds of success- you are still gambling.  Lots of people love to gamble.  Those people buy stocks or properties on the coast.  There is nothing wrong with it- but even though they are both "real estate" they are not remotely comparable.

    Sorry, but I don''t quite comprehend what you are saying. I thing you are saying that if investors follow a formula that can do well, some people like to gamble and 'poop' happens.

    0Reply
  • Jackson Long
    OP
    Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes
    5y

    @Account Closed Let me try again a bit more direct.  You are giving some anecdotes about your experience that loosely translate into "it can be tough to pay the bills with a regular job- I am smarter than that and so I invest in internet start ups! Its the only way to get rich!"  Speculating for appreciation has made A LOT A LOT A LOT of money for a lot of people.  You can also lose your shirt with a single bad choice.  No matter how smart you are, no matter how much you know, no matter how careful you are- it is at its heart a lottery.  Its not a business it is a game of chance.  Investing for cashflow can be a business.  It is much less exciting- but has a much higher probability of success over time.  It is repeatable. 

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    Good discussion, fellas! I jumped in because someone mentioned Yellowstone which is one of my keywords. Jackson, not sure which gate you're hitting in but I am in Cody if anyone ever swings through and wants to meet up. Of course, I'm in Hawaii this week so it wouldn't matter.

    I'm living proof that cash flow can absolutely work, although I also benefit from appreciation in my market. I started seriously investing in 2016 and last year reached financial independence. My cash flow could support me the rest of my life without ever having to work another day or sacrificing lifestyle. I think that's a better play for most investors. Once you've reached financial independence, then you can go u more on the appreciation play which is subject to larger swings and less controllable.

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    3Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    A lot of these single family "investment properties" in low or no growth markets are doomed to fail even if self-managed and purchased for cash. Consider from the start that the price you pay today for many of these "cheap" homes is lower than the original sales price back at the time the properties were built in the 1940's-1960's (when the prices are corrected for inflation). Moreover, the ratio of rents to property taxes and insurance (which, unlike mortgages, are forever and will tend to increase as the neighborhoods/properties deteriorate) seldom provides enough cushion to cover properly reserved capital expenditures. Throw in an 80% LTV mortgage and a management fee and you're guaranteed to be under water in 5-10 years. It's painful to see 5 years of "cash flow" disappear with a failed roof or furnace. Been there.

    6Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    5y
    Originally posted by @Jackson Long:

    @Account Closed Let me try again a bit more direct.  You are giving some anecdotes about your experience that loosely translate into "it can be tough to pay the bills with a regular job- I am smarter than that and so I invest in internet start ups! Its the only way to get rich!"  Speculating for appreciation has made A LOT A LOT A LOT of money for a lot of people.  You can also lose your shirt with a single bad choice.  No matter how smart you are, no matter how much you know, no matter how careful you are- it is at its heart a lottery.  Its not a business it is a game of chance.  Investing for cashflow can be a business.  It is much less exciting- but has a much higher probability of success over time.  It is repeatable. 

    So when does an anecdote stop becoming an anecdote that's akin to winning a lottery? So many people have invested in primary markets on a long-term basis and have made a crapload of money. Anyone can lose their shirt when making a bad investment...it has nothing to do with investing in CA vs. the Midwest or South. If investing here is nothing more than gambling, why are syndicators so active here? There is development going on in literally every block in my neighborhood. Like Account Closed, I now only invest in CA after I realized that investing OOS just isn't for me. And the deals that I invest in cash-flow and generate long-term wealth. It's not gambling, it's not taking a chance... it's an investment strategy that's been backed up with nearly a century of data. 

    What I consider real gambling is buying TK properties and underestimating PM costs, underestimating long-term cap-ex costs, underestimating tenant turnover costs and also believing everything the provider says....not to mention, purchasing an SFR in an area with demographics primarily composed of renters and a median income that will never drive up SFR prices (which typically happens when neighborhoods are predominantly owner-occupied), and in the middle of neighborhoods whose appraisals are artificially inflated by other TK property transactions.

    9Reply
  • Prashant Sheth
    Rental Property Investor · Member since 2017 · 75 posts · 19 votes
    5y

    @Jackson Long this is a phenomenally detailed response. Thank you for presenting this so candidly

    0Reply
  • Jackson Long
    OP
    Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes
    5y

    Appreciation investors- not going to bother calling out names.  You don't need to be defensive- what you are doing is awesome.  But the road is littered with the corpses of guys who tried it and failed- and they aren't represented here because they are just gone.  Probably trying to day trade now.  Was 08 so long ago that we are just pretending the markets will always rush upwards?  And yeah "just hold onto it until the price goes up" is swell if you can afford it.  If you have infinite money and infinite time it close to a guarantee.  Nobody has that.  And your WONDERFUL AND I AM VERY JEALOUS OF THEM success stories just means that you had enough of each to make it through.  Power to you.  Now- to circle back to the actual point you seem to be trying to dismiss...  What about the guy who has 20k and wants to start?  Explain to me your "I only invest in CA" appreciation play for him.  Actually don't.  Because everybody on here has heard a podcast or read an article or whatever about how you can syndicate with 10 other guys and do a bunch of research and see the trend in how every 7th month along a particular access in this city a new Starbucks opens and that means all you need to do is put your life savings on the line and in 9 months you will quintuple your money and then you can buy your first apartment and blah blah blah.  This is the Memphis forum guys.  If you Memphis is your best appreciation play market you are probably doing it wrong (although, we are booming) and if your whole thing is just hanging schtick is just hanging out telling other people your way is better.... go get a more productive hobby.

    5Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    @Jackson Long A person with 20k to invest should buy an index fund. Even cash flow investing needs a portfolio and significant capital to succeed.

    8Reply
  • Curt Smith
    Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    5y

    @Jackson Long and others

    I quit my day job buying rentals but it was but it was here in Atlanta you're in Atlanta where I can both get solid solid cash flow and appreciation. 300 plus per door or after PITITI and since I rehab my maintenance costs per year is nearly 0 and because I bought 3 bedroom 2 bath houses in decent neighborhoods close to a freeway I have 0 vacancy as well and I self manage 35 doors some remote that I self learned and some off BP.

    Today those through rent raises I'm making I'm making over 500 plus perdoor and you can live off 500 per door.!

    :)

    But I agree with everything that's been said about buying rough houses in rough areas with low rents. Cheap does not make a deal and Jackson has done a great job with the math that cheap low rent high turnover costs poor jobs is hard to make money.

    For a solid business model on how to buy a great rental portfolio go to my BP profile and read the file called how to buy a bulletproof rental portfolio. Today I have to admit you can't buy any good school districts because you can't afford it so remove school districts from my list and focus on 3 bed 2 bath decent neighborhood close to a freeway where the rent is middle blue collar basically basically $25 an hour combined income times 2 people working times 40 king times 40 hours week times 4 / 4 is what the rent should be and an Atlanta that's around 1500 a month.

    6Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Account Closed:

    The real problem is the price/rent ratios these days do not support a PM. When you could buy closer to the 2% ratios, a 1K per month rent was achievable on a 50K house. When that drops to 1% your mortgage payment doubles. The model is not sustainable with remote management at typical 1% ratios. And now people are buying the same rents at 0.7% and less. There is simply no margin if you pay 10% of rent to PM monthly plus the inflated maintenance and turnover costs. 

    It becomes a do what you can to break even and let the tenant pay for your house  investment  at that point break even is  a great result your profit is tax write off and mortgage pay down and the anemic appreciation many of those markets have  since appreciation is basically like commerical property only there if income rises from rents.. Not like CA were appreciation happens no matter the income.

    I was just down in Los Altos on Friday and stayed in Cupertino and drove around my old hood..  LOL.  and those predicting the death of Silicon Valley simply have not been there. its just incredible to see the BILLIONS and BILLIONS of dollars of new construction and the latest and greatest tech ideas and companies..  

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Tony Kim:
    Originally posted by @Jackson Long:

    @Account Closed Let me try again a bit more direct.  You are giving some anecdotes about your experience that loosely translate into "it can be tough to pay the bills with a regular job- I am smarter than that and so I invest in internet start ups! Its the only way to get rich!"  Speculating for appreciation has made A LOT A LOT A LOT of money for a lot of people.  You can also lose your shirt with a single bad choice.  No matter how smart you are, no matter how much you know, no matter how careful you are- it is at its heart a lottery.  Its not a business it is a game of chance.  Investing for cashflow can be a business.  It is much less exciting- but has a much higher probability of success over time.  It is repeatable. 

    So when does an anecdote stop becoming an anecdote that's akin to winning a lottery? So many people have invested in primary markets on a long-term basis and have made a crapload of money. Anyone can lose their shirt when making a bad investment...it has nothing to do with investing in CA vs. the Midwest or South. If investing here is nothing more than gambling, why are syndicators so active here? There is development going on in literally every block in my neighborhood. Like Account Closed, I now only invest in CA after I realized that investing OOS just isn't for me. And the deals that I invest in cash-flow and generate long-term wealth. It's not gambling, it's not taking a chance... it's an investment strategy that's been backed up with nearly a century of data. 

    What I consider real gambling is buying TK properties and underestimating PM costs, underestimating long-term cap-ex costs, underestimating tenant turnover costs and also believing everything the provider says....not to mention, purchasing an SFR in an area with demographics primarily composed of renters and a median income that will never drive up SFR prices (which typically happens when neighborhoods are predominantly owner-occupied), and in the middle of neighborhoods whose appraisals are artificially inflated by other TK property transactions.

    That about sums it up nicely..  !!!   OOS can work every city has its areas that work..  OOS investors for whatever reason focus on NET cash flow day one after expenses as a must have..   when in fact if those same investors would buy at the median or higher cash flow may not be there day one but it will be there day 900 and owner occs are buying in the area who will pay more for the same home than if the ONLY buyer is a landlord..  Bottom line.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Nathan Gesner:

    Good discussion, fellas! I jumped in because someone mentioned Yellowstone which is one of my keywords. Jackson, not sure which gate you're hitting in but I am in Cody if anyone ever swings through and wants to meet up. Of course, I'm in Hawaii this week so it wouldn't matter.

    I'm living proof that cash flow can absolutely work, although I also benefit from appreciation in my market. I started seriously investing in 2016 and last year reached financial independence. My cash flow could support me the rest of my life without ever having to work another day or sacrificing lifestyle. I think that's a better play for most investors. Once you've reached financial independence, then you can go u more on the appreciation play which is subject to larger swings and less controllable.

    I think Jacks points are valid for sure.. but we also have to define what is RICH  and what is enough monthly cash flow to live on.. while one can live on their cash flow  and thats a great goal  but you spend it each month living.. where I think ( and I could be wrong) Jacks assessment of rich is having a net worth in the 10s of millions..  from my cheap seats some of the biggest wealth generators I see is.

    1. Farmer selling to developer..   Take my Canby project  I paid 7.3 million for it.. Farmer bought it for less than 50k  decades ago he is now rich right..  do this all over the country to thousands of people. 

    2. Built up a business and took it public or got bought out..   

    3. pert near anyone who bought  high value areas 30 to 50 years ago and held..  

    4. Syndicators who pool others money kind of like hedgefund managers.   think Cardone and his G 5

    And on and on ..  heck even working in the early days of tech with stock options  so many of those folks made millions and got rich just working their day job.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    @Tony Kim a couple things to remember. First, the big investors you speak of are already wealthy and can afford to wait out a market for the big win. Second, this forum is primarily designed for the amateur investor, so discussions tend to be focused on what's best for them, not what's best for Grant Cardone.

    I have personally worked with investors that started investing in California property in the 80's and now they've sold every property they own and moved that money to Wyoming. It's only a few, but they represent about $10 million in real estate coming to my small town of 9000, so I have to imagine there are many others like them moving all over the country just like this "migration" we're experiencing right now. Maybe they don't know what they're doing. Maybe they do. 

    My bottom line: I'd take the advice of someone that's been in the game for 40 years over someone that's only been involved during the last 10 when we've had favorable weather and the wind at our back.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Nathan Gesner:

    @Tony Kim a couple things to remember. First, the big investors you speak of are already wealthy and can afford to wait out a market for the big win. Second, this forum is primarily designed for the amateur investor, so discussions tend to be focused on what's best for them, not what's best for Grant Cardone.

    I have personally worked with investors that started investing in California property in the 80's and now they've sold every property they own and moved that money to Wyoming. It's only a few, but they represent about $10 million in real estate coming to my small town of 9000, so I have to imagine there are many others like them moving all over the country just like this "migration" we're experiencing right now. Maybe they don't know what they're doing. Maybe they do. 

    My bottom line: I'd take the advice of someone that's been in the game for 40 years over someone that's only been involved during the last 10 when we've had favorable weather and the wind at our back.

    I think a lot of CA money comes to WY for the tax benefits I know a few that bought in Jackson Hole for that single reason.  West coast equity going east is NO DOUBT a boon and a market maker for many many areas of the country..  especially the so called cash flow markets of the mid west deep south without out of state investors the prices of those homes would be stuck in the mud and never move because the locals simply would not pay more than what THEY think they are work given the risk.

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  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    Too many new investors with very limited capital are willing to throw a dart at a map because they are looking for "cheap" markets because their home market is too "expensive."   More often than not, this is a recipe for disaster.  As @Account Closed pointed out above, the best answer for these folks may be to (i) grow your capital through an index fund or, if it has to be real estate, through a REIT or real estate oriented ETF, (ii) continue to develop your knowledge base through study, and (iii) continue to develop your network of investment mentors/partners. There is no easier way to drop $40K or $50K than by buying "cash flow" in a distant, poorly analyzed market where sales activity is driven not by actual demand for housing but by investors furiously trading derelict houses among themselves on greater fool theory. That $100 or $200 or $300 "per door" can easily become $100, - $200 or minus $300 per door when the repair bills start piling up.

    Buying in a carefully selected growth market where prices have historically outpaced inflation and where economic indicators are strong on the theory that you can achieve a substantial total return over time is not "speculation"; buying a run-down property in a "cheap" market where healthcare is the only growth industry because of an aging, industry-era crippled and/or opioid addicted population on the theory that monthly rents will unexplainably outpace the deteriorating housing stock certainly is.                  

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  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    Appreciation vs cash flow is like the old tortoise and hare story.  Cash flow is the slower tortoise, but should win in the end.  The hare may hop faster, but it is not forever sustainable.  The hare will take a nap and the real estate market will crash.

    I manage myself.  Whoever is telling the newbies that  they should budget 10% for a PM should be much more honest.  It always ends up with at least 20% between turnover and maintenance.  And if they think that the 'extra' cost should be put into the maintenance category, well, that is just wrong.  It inflates that category.  Plus turnover is a PM charge with or without maintenance.

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  • Jackson Long
    OP
    Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes
    5y

    I don't advocate throwing darts at maps.  Throw them at globes- it is much funnier.

    Also I think I slipped into RANT MODE because housekeeping is knocking and I am late.  Didn't actually make yellowstone- they don't let you enter the park from the west.  Even though the MVUM shows trails going in it is verboten.

    None of this was intended to be about being rich.  That was a reply to someone trying to interject a totally different conversation as if it were a valid argument.

    Investing low income vs medium...  This can be argued both ways and both ways are valid- but pound for pound you are going to make more money in a D+ neighborhood than a C+ neighborhood.  You revenue will be more erratic so you need steady nerves and to be able to handle an unfortunate misstep early on if you get unlucky.  And you are EVEN MORE at the mercy of bad PM if you are using them.  That's it.  Otherwise it is sticks and renters and a spreadsheet.

    Everyone who is saying buy funds and keep your day job is confused about why this website is even here- or a troll.  You look silly- stop it.  This is a corner quick mart (the Memphis sub forum in particular) and you are ranting about how you sometimes will shop at home foods, but really one must insist on farm-to-table.  This is a place for people doing a thing and wanting to do it better or wanting to do a thing and trying to get enough information to feel comfortable doing it with, OFTEN 20k or less.  Everyone thinks you are awesome for buying something for 10m and welling it for 50m.  That story is not relevant to ANYONE who is getting tricked out of their money by a dishonest PM.  Which is what this topic is about.  I repeat there is NOTHING WRONG with what you guys are doing- but it isn't helpful to shout about it here.

    So back to the topic- people can do this wrong in a hundred ways.  Those ways are not intrinsically tied together- if they were we would count them in chunks.  Buying low income for cashflow does not necessarily mean the house is in ill repair, the tenants are bad, that there is no process or oversite, that maintenance is ignored, that the area has no future, that the buyer just wants to collect a couple hundred bucks a month and then sell it to the next chump.  Those are all bad things and can be done one at a time-

    Sorry I need to interject this as well- often people are trying to get into remote markets either completely remotely or with just one or two trips to the market in question.  In the case of Memphis there is an entire side of the industry here that exists 100% to take advantage of these people.  One cannot- over the 4 day trip they planned to do boots on the ground research- learn enough to outsmart the guys who AS THEIR FULL TIME JOB are trying to trick them out of their money.  And anybody who says "buyer beware" or "should've done more research" is either clueless about the world or also a shark.  When Bubba gives you a firm handshake and tells you about how all he does is help people and you are scared as you prepare to make one of the biggest decisions of your life- it is NEAR IMPOSSIBLE to not be influenced.  And when you meet four different flavors and they all say the same thing it is so close to impossible to avoid that that it is probably mathematically indistinguishable.  And the only reason this sub market of vultures exists here (yeah yeah there are con artists everywhere- but in Memphis it is industrialized) is BECAUSE there is so much money to be made in the rental market here.  You don't setup your... uh...  What is the thing where they move the cups and you need to track which one has the ball in it?  You don't setup your con table in the middle of skid row- there is no money to be made.  You setup at the train station where the eager prospectors are disembarking with their shovels and dreams.  Also there is no shame in getting taken advantage of- just learn from it.  I had my lunch eaten repeatedly when I got here.

    Where was I?  Oh right- each mistake is its own thing- and yes there are people who like to make ALL of them- but it is a disservice to be in a discussion about how to identify and avoid one of them and say the entire business model is bad and people who do it are dumb because how can you ever expect to be successful if you make ALL OF THESE MISTAKES.  And also- maybe most important to this whole thing- THOUSANDS AND THOUSANDS of people are already invested in Memphis and struggling so even if your buy an index fund and a condominium development in Miami advice wasn't silly (in this context) it would also require time travel.

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