All Forum Posts by: Gary P.

A great source for data on house investing in California is The Norris Group. They have podcasts you can gain a great deal of historic information from to help understand the trends and where California is now.

https://www.thenorrisgroup.com/radio_show/

Welcome to Bigger Pockets.

Gary

Originally posted by @Joe Gravelle:

Gary,

 How do you think millenials will change your thoughts on the long term appreciation in the memphis market?

 tl/dr: bring hip back to Memphis

I do not think anyone can say for certain what changes millenials will bring. Or even if it is the millenials that bring it or just the millenials that made up the largest portion of the populace when the changes occurred. Anyway, some governments and merchants have started working together to revitalize cities and neighborhoods (appreciation), walking distance is becoming more popular (appreciation in small pockets), internet allows for more distance (unfettered) based jobs, unfettered jobs allows for more travel (airBNB and rental markets in higher demand), high unforgivable student debt suggests renting longer than previous generations. 

If one buys into the revitalization areas becoming popular with a population that is in debt and thus under pressure to rent instead of buy. And, that this population would prefer to be in walking distance of the revitalized area (constrained space), then one might consider that the rent prices in those revitalized areas and closely adjoining neighborhoods would go up. If the rents go up then investors are willing to pay more (appreciation) because the numbers still work.

Look at some historic house values in a neighborhood outside of Indianapolis

http://www.zillow.com/homes/for_sale/Fountain-Squa...

Note how the prices increased dramatically over the last 15 years (price tax history tables).

Consider areas in Memphis such as the Cooper-Young district that is seeing revitalization. Buy with an eye for positive cash flow, consider the potential for the neighborhood and maybe, just possibly, one could experience that mythical beast - appreciation in the rust belt market.

When you were first buying houses with Midsouth and memphis invest, did you go visit them to see their operation and did you visit the cities and neighborhoods where you eventually purchased?

Yes. I flew to Memphis and met the Midsouth and Memphis Invest teams. In both cases they were happy to introduce me to all the available team members, walk through the processes that make up their business, show me available before during and after houses, and share the direction they are aiming to go and what they are doing to go there.

I also visited with several other Turnkey providers in the Memphis area and appreciated all the knowledge and experience shared: Curt Davis, Jeremy Veldman, Alex Craig, Craig Jennings, and a special shout out to Ryan Tucker who happily spent a whole day with my wife and I showing us several of the transitional lines between neighborhoods as well as shared decades of observed knowledge from a real estate agent/investor perspective (also introduced us to Corky's BBQ). I was kind of blown away by Ryan's depth of knowledge and the firehose of detail he shared in the 8 hours or so we toured Memphis, as well as humbled and grateful.

Hello @Joe Gravelle

There are many turnkey companies in Memphis. I have looked into both Memphis Invest and Midsouth and like the work they both do on the rehab side and would be happy to own properties from either of them. At this point I have 4 properties through Midsouth due primarily to entry price point and an added bonus that they wait patiently for financing to complete (my credit is over 800, my DTI easily covers the cost of all of these mortgages without considering the rents… but still, financing takes more time then I anticipate). I prefer the properties at the higher end of the Midsouth scale and am choosy about the neighborhoods.

Both companies take a process approach to the business and make effort to refine their process.

Memphis Invest farms the work out to contractors that specialize in the field: electricians for electrical, HVAC for HVAC, plumbers for plumbing… etc.

Midsouth maintains licensed staff on the payroll who perform or oversee the work.

As property managers, Midsouth has been responsive. I have had a couple of tenants get behind and one of them get caught almost back up to current. The other one had some life events and was experiencing financial distress. Midsouth demonstrates care and concern for their/our tenants and works with them through rough patches avoiding turnover. The financially distressed tenant was able to move in with family and, if all goes well, pay down the arrears and expenses. The unit was quickly prepared and leased to a new tenant.

Midsouth can be patient because they work with the starting point of the rent and figure backwards to sales price to investors and buy places that will meet those criteria and still make them at least the minimum profit they are looking for. As an investor the ratios remain consistent and predictable. As such the inventory seems to have a high demand. Midsouth uses a mail list, like waiting in line so everyone who is interested (new investors or investors with multiples) has an unrushed opportunity to become an investor.

I do not think of Memphis as an appreciation market, perhaps that is changing with millennials moving in. I will keep my projection strictly on the cash flow until proven otherwise.

@Ben Dunning

Hi Ben, welcome to Bigger Pickets!

I also live in California and have invested in TK properties in Memphis, I went with Midsouth. I started by flying to Memphis and meeting Terry Kerr and the team and reviewing his operation and listening to his plans of expansion.

Midsouths' visible plan to keep the expenses down and make money is two staged. First they completely renovate the property so they expect light if any maintenance costs for the first 10 - 15 years. Second they work with houses that fit their criteria such that they can get volume deals on materials, which they warehouse locally, and they are working towards implementing streamlining procedures for picking and shipping for maintenance and rehab jobs. Keeping the maintenance rehabers in the field rather than in the homeDepot or their own warehouse.

Less visibly they make more than the 10% fee you pay them because their/your tenants tend to pay late giving them an additional 10% late fee, so they really get 20% for many of their properties - my personal experience is 2 out of 3 tenants pay late consistently.

You should read the Bigger Pockets published book by Amanda Han for a more detailed explanation on why you should consider umbrella insurance over legal entities until you have a larger portfolio, say $40,000 after expense net income from your rental business. Also it would help reduce your risk if you leverage all your initial properties so they are less of an equity target to frivolous lawsuits.

I can also recommend purchasing more than 1 TK property to help level out the income stream - those late rents could become very inconvenient if you are on the edge with time constraints. I am currently using a 4% of the value of the property as my reserves to keep me or my wife from stressing about missed rents or possible turnover costs. Sometimes this seems like a lot of cash sitting around. We hedge the cash-sitting-around feeling by using Mutual Life insurance policies as the holding vehicle for the reserves. 

Bigger Pockets Blogger Jeff Brown alludes to also using a type of Mutual Life Insurance as an investing strategy which I think is similar (not enough public details) to what we do with regard to borrowing the purchase price from our policy rather than a mortgage company.

As a California investor be careful about legal entities, California wants a piece of everything you make no matter how it got into your pocket - must feed and house the masses. I did find one alternative where if you have a second residence in the state that your legal entity is filed, that you might have a case to not be subject to the $800 LLC tax but I think the caveat is that you may have to prove all your business activities were performed while you were out of California. Verify with your CPA and also check with your CPA if an International Airport or Indian reservation would be far enough out of California jurisdiction, my CPA never answered on the topic and I asked sort of whimsically so I do not hold it against them.

Do your homework.

I wish you the best!

GaryP

One can put whatever CD rate they want in that line. With shopping I can get .7%... oh man.

At a 2% inflation rate.... still a guaranteed loss.

@Matt R.

Thanks for the tip and acknowledging my post.

Advice on how to make tables work would be appreciated ... PM with a link or something.

Wow, the tables all went away :-(... sorry for the mess. 

Newbies, what are you gonna do...

A post in the landlording section inspired me to review and post numbers. One thing to think you are being honest with yourself, quite another to put it out there for critique by more seasoned investors.

Putting my numbers on the web is more than a little uncomfortable. Please indicate if this is/was helpful with a PM, +1 response, or insightful comment.

This is a pretty good time for this post since our options account and REI numbers are close in value and thus have comparable returns.

Before we get into the numbers I wanted to cover the options strategy at work so as to not give an impression that anyone can start selling options with any strategy and see similar performance.

The options strategy generates cash 3 ways: selling the "put", collecting dividends if we are "put" the option, and selling "calls" if we are "put" the option (notice there are no buying of options in this strategy). At another level, choosing the stocks: the stocks are chosen from a small pool of stocks that pay dividends, are not very volatile, and companies with strong financial statements. These stocks are ones that we like owning anyway because we like dividend paying stocks with strong financials at good to great prices. However, the strategy is meant to generate cash rather than purchase great stocks, so the focus is on selling the "put".

I know, just show you the numbers already....

turnkey numbers (scroll -> for narrow screens):

table { }td { padding-top: 1px; padding-right: 1px; padding-left: 1px; color: black; font-size: 12pt; font-weight: 400; font-style: normal; text-decoration: none; font-family: Calibri,sans-serif; vertical-align: bottom; border: medium none; white-space: nowrap; }.xl63 { }

price		dwnpymnt	cashdwn	mortgage	rate		closingcost	rent	management	pi	piti	capex	vacancy	cashflow	modified cashflow	coc projected	seller financed payment for 12 months
90,850		17000	2925	68000	4.75		25413.33	1050	105		538.34	105	52.5	249.16	44.99	0.103636742	204.17
82700		16540	0	66160	4.75		22445.62	900	90	345.12	499.78	90	45	175.22	175.22	0.127124547
79700		15940	0	63760	4.75		20505.91	875	87.5	332.6	476.82	87.5	43.75	179.43	179.43	0.135079046

Some back story on the financing, The first property appraised for less than the agreed upon price. There is some fancy financing to cover the difference, seller financed over 12 months half the discrepancy and I brought cash to the table for the other half and had included in the closing docs/cost. So the actual cashflow for the first property for the first 12 months is reduced by the seller financing payment  - there will be anoticable cashflow increase in month 12 assuming all remains equal. 

Money was added to the options accounts throughout the year, similar to but not exactly consistent with down payments for the investment properties.

With interest, possibly only my own, I can check in and provide these numbers again next year.

The real comparison

table { }td { padding-top: 1px; padding-right: 1px; padding-left: 1px; color: black; font-size: 12pt; font-weight: 400; font-style: normal; text-decoration: none; font-family: Calibri,sans-serif; vertical-align: bottom; border: medium none; white-space: nowrap; }

month	options returns	options annualized	REI	REI annualized	CD annualized
January	382.71	0.176	na	na	0.005
February	298.28	0.135	na	na	0.005
March	800.6	0.359	na	na	0.005
April	1050.59	0.232	na	na	0.005
May	966	0.194	94.5	0.0044	0.005
June	618.78	0.089	97.5	0.0045	0.005
July	1055.55	0.147	44.99	0.0023	0.005
August	202.98	0.027	225.22	0.056	0.005
September	569.34	0.073	348.4	0.061	0.005

Where the annualized REI returns are calculated on the cashflow value at that month x12 and divided by the cumulative closing costs. The options account varied up and down throughout but the annualized number is calculated the same as the REI. Not shown in the closing cost is the home inspection done by a third party for each house. The May - July REI numbers are from partial month rent and variance in the seller financed payment.

I am interested in where this going, not just because it is my money, because the large drop in August was due to the market downturn which "put" a great deal of stock in my options account - this is/was an interesting time to be comparing REI vs options returns. Note: The September options return is about half "put" sales and half dividends.

Perhaps on my next update I will have an idea of the tax implications of each asset type included into the table.

Putting my numbers on the web is more than a little uncomfortable. Please indicate if this is/was helpful with a PM, +1 response, or insightful comment.

I like the REI trend far better than the CD returns currently offered. Let me now if you think I should have kept the money in CD's.

Cheers

@Ellie Hanson:

"For future properties the IRA route would not be an option" should have been

"For future properties the IRA route would be an option"