All Forum Posts by: Joseph S.

@Abdul Azeez , glad to hear things are getting back on track! Which PM did you decide to go with? How many days did it take for them to rent the property (from management agreement signed to lease signed)? What price did it get rented for?

@Santiago Mejia,

Great call on turning to BP to get some advice! I’m an out-of-state Memphis investor. So far you’ve heard from some locals and out-of-state folks. Personally, I’m a numbers guy so I’ll first focus purely on the figures you’ve provided (lets assume that they’re completely accurate and you're fully renting it out). Here is the breakdown:

Income and Expenses:

Scheduled Rent: $26,400

Vacancy: $2,112

Real Estate Taxes and Insurance: $4,139.04

Repairs/Maintenance: $1,848

Capex: $1,848

Utilities / Lawncare: $0

Advertising: $0

Property Management : $2,376

Debt Service: $11,615 ($209,000 30 year note at 3.75%)

Acquisition:

Purchase Price: $220k

Closing Costs: $8,800

Repairs: $0

Total Acquisition Cost: $228,800k

Mortgage Value: $209,000

Cash Invested: $19,800

ARV: $220k

Financial Metrics:

Net Operating Income: $14,076.96

Cap Rate: 6.4%

Cash Flow: $2,461.96 per year, $205.16 per month, $102.58 per unit per month

Cash-on-Cash Return: 12.43%

Does this match what you’re looking for? Personally, I like to see a cash on cash return greater than 15%, but it does pass most people’s threshold of $100 cash flow per door per month.

That was assuming all the numbers are accurate. Here are a few of my thoughts regarding the accuracy of those numbers themselves:

• Advertising – I didn’t see you mention an estimate for advertising. Even if you plan to find the tenants yourself (it sounds like you do) it’s a good idea to consider the investment at arm’s length. You’ve already done this by including property management costs and every property manager I know of in Memphis charges an additional amount for placing tenants. A good estimate is half of one month’s rent per tenant placement. In your case this would be $1,100 per year assuming you’re writing one year leases (which is typical).
• Maintenance – Your estimate of 7% of rent seems fairly low. I would caution you to use a percentage of the cost to rebuild (or to keep it simple the market value of the property) with the location and age of the building instead. I use 1-3%, 1% if it is in a good (B+ to A) area and built within the last 20 years, then I slide the scale up to 3% as it gets into a bad area and the property ages. The reason for this is that property values are tied much more closely to the cost to rebuild than rent values. I personally don’t let this number drop beneath $1200 per unit per year since I’m a bit conservative (and that’s the typical cost to make the unit rent ready after a tenant leaves – assuming they leave it in fair condition), but if it's turnkey and everything is in perfect condition with all new systems I could be convinced to reduce this number a bit. Most properties in the area you’re describing have some age on them – but they’re in a good area. Without knowing anything about the property other than what you’ve described, I would probably pencil in $1,500 per unit per year (total of $250 per month).
• Capex – Your capex estimate of $1,848 also appears to be fairly low. Here is a good article describing the breakdown of Capex and how much to estimate for it (https://www.biggerpockets.com/renewsblog/2015/10/13/real-estate-capex-estimate-capital-expenditures/). Without knowing anything about the property other than what you’ve described, I would probably pencil in $1,800 per unit per year (total of $300 per month).
• Property Tax - Clearly, based on your numbers the property is assessed at well below market value. I'd simply caution that the assessed value may change and since flyers are going out now (I just got mine for two other properties in the area) you may want to look to see if the new assessed values are listed for your property online yet and adjust your numbers if anything changed. When doing the calculations remember that multifamily is taxed higher than single family in Shelby County. NOTE: I'm keeping your estimate for my calculations below.

Based on these adjustments the financial metrics would update to the following:

Net Operating Income: $10,072.96

Cap Rate: 4.58%

Cash Flow: -$1,542.04 per year, $-128.50 per month, -$64.25 per unit per month

Cash-on-Cash Return: -7.79%

So just purely on those numbers I would pass on the investment.

Congratulations on the purchase @Abdul Azeez!

Companies vary when it comes to their underlying coverage limit requirements, however most of them are either $300k or $500k. Some even allow you to choose between $100k and up and adjust their premium accordingly.

As you’ve seen, most companies require that they ensure the underlying exposures as well. However there are a few companies that offer “stand alone” policies. As @Alexander Price @Curt Davis and @Douglas Skipworth mentioned, the most well-known of these companies is State Farm. Some others you could look into include Allied (owned by Nationwide), Travelers, Safeco, USLI (United States Liability Insurance Company), and AAIC (American Alternative Insurance Corporation). Costs vary based on your underlying exposures, but it’s generally been my experience that State Farm tends to be more expensive while Allied tends to have better rates. It's worth mentioning that while comparing rates you should also review coverages, limitations, and exclusions.

On a related note, when you have enough investment properties in your portfolio (usually three or more), you can consider making a change from single fire policies that include both dwelling and liability coverage to a split policy structure where each property has it’s own dwelling coverage, but all of them are covered under a single general liability insurance policy. Other than the benefit that this usually costs less, it generally allows insurers that would otherwise require you to keep all of the policies under one roof to exclude the rentals from consideration (it won’t cover them, but that’s why you have the general liability policy). Personally, I have all of my insurance not related to my investment properties through USAA, which considers the investment properties as commercial since they are written under a general liability policy. So effectively, USAA writes my umbrella policy, when it otherwise wouldn’t.

Why don't I want USAA to cover my investment properties? Because like some other companies, their fire policies insure the property based off of cost to rebuild and won't let you reduce the coverage limit too far beneath that. In Memphis this means the face value of the policy is much higher than the market value of the property, which means I'd be paying a higher cost for coverage I don't need.

All that said, unless you happen to be in a scenario like me (where you have your personal coverage through a top of the line insurer with very competitive rates, but that same insurer prices investment property insurance too steeply), you may find that it's simpler (and less costly) to hold all of your insurance with a single company that offers multi-line discounts as @Andrew Johnson suggested.

@Abdul Azeez,

Household medium income is generally very well correlated with property classes. A good resource (though it does lag behind the market ~3 years) is CityData. As you'll see, the darker the area marker is shaded the higher the income (you can adjust the opacity by clicking options to see the map easier if desired). Incidentally, the two zip codes you've posted about tonight have medium incomes of $25k and $30k while the medium income for all of Shelby County is $45k. They aren't the worst areas in Memphis but this should clearly indicate that these are C class areas. As you'll see from the map, in general, the farther East you go in Shelby County the higher the property class.

@Alex Craig, you're right! I misread the map in regards to Scottsdale - good catch. Either way, the difference between B and B+ is more of a matter of perspective, but since you're the local I'll take your word for it. Live and learn =)

@Abdul Azeez,

Here are my thoughts:

• Location - I’m out of state as well, but from what I’ve learned there is a B+ neighborhood in that area that is basically visualized as a box between Mt. Moriah Rd, Newberry Avenue, Mendenhall Road, and Hickory Hill Road. From what I understand the closer you get to the center of that box the better. Scottsdale Avenue runs between Mendenhall Road and Hickory Hill Road and is North of Newberry Avenue so it does fall within that zone (though towards the bottom end). Look at the address and see if it’s towards the middle or farther ends (East and West) to evaluate where it’s nestled within the zone.
• Rent – Even if it falls near the perfect area of that location I haven’t seen any houses in that area bring in $1,295. As a gut-check I would look at the expected rents on Zillow and Rentometer. Then I would jump onto Rent.com and see what is actively listed in the area. I usually like to take the lowest number from these sources when I’m first running my analysis. It’s by no means a perfect estimate, but it does get pretty close. If you get serious about the property I would ask your property management company (not the one connected to the turnkey company) to tell you what it will rent for (if you’ve picked a company with a good size portfolio they can look at their own rentals in the area and give you a very good estimate).
• Maintenance - I imagine when you say 10% as a maintenance and capex reserve you mean 10% of rent. I would caution you to use a percentage of the cost to rebuild (or to keep it simple the market value of the property) with the location and age of the building instead. I use 1-3%, 1% if it is in a good (B+ to A) area and built within the last 20 years, then I slide the scale up to 3% as it gets into a bad area and the property ages. The reason for this is that property values are tied much more closely to the cost to rebuild than rent values. I personally don’t let this number drop beneath $1200 per year since I’m a bit conservative, but if it's turnkey and everything is in perfect condition with all new systems I could be convinced to reduce this number a bit.
• Capex – Since you include your capex within your maintenance estimate of 10% I think it's probably too low. Here is a good article describing the breakdown of Capex and how much to estimate for it (https://www.biggerpockets.com/renewsblog/2015/10/1...).
• Property Taxes – I didn’t see you mention this in your breakdown. Memphis has both county and city taxes – this area of Memphis has both. A good rule of thumb is to estimate that taxes within Memphis will be 1.94% of the total value of the property. Bear in mind that certain areas of Shelby County are unincorporated so you aren’t stuck with city taxes (such as Cordova, Barretville, etc.). Just to keep things simple on your initial screening I’d use the 1.94% number and then anything you can save is gravy.
• Insurance - I also didn’t see you mention insurance. A good rule of thumb is $65 per year for every $10k of coverage for a catastrophic fire policy in the area.
• Initial Equity – As an out of state buyer I know that I have greater risk for something to go wrong (and a limited ability to successfully handle it) than somebody who is buying in their backyard. Even if you have a strong team in the area something could always go wrong so buying at a distance presents its own unique set of problems. Thus, you need an exit strategy you can employ without breaking the bank and wiping out whatever earnings you gained while you held the property. Because of this I always look to enter a property with at least 10-15% in equity so I can cover my sales and closing expenses and possibly a bit extra in case I have to provide the buyer an incentive because of the market cycle. I have not yet met a traditional turnkey company that fits this requirement (and based on what I know about this area, this property is marked up and won't provide that).

If you apply the above criteria to this deal you'll likely see your cash flow drop into the red. I'd walk away from this one.

@Steven Gillmer,

I operate in Memphis so I can't speak to the Nashville area specifically, but I'll give my two cents on the analysis:

• I would probably be a bit more conservative with the vacancy rate. I know that the overall vacancy rate for Nashville is ~4%, but duplex's are generally higher. I would put in 10% to be safe.
• Half of one percent of the value of the property is pretty low for estimated maintenance and repairs. I usually put in one to three percent depending on the location and age of the property. Since it sounds like it's in the path of progress (even with the bad apple next door) I would put 1-2% depending on the age.
• I also think that the Capex estimate is low. I'd probably double it (https://www.biggerpockets.com/renewsblog/2015/10/1...).
• You mentioned that it's a duplex but since you didn't include anything in the numbers I imagine the tenants are fully responsible for all utilities and shared lawn care, right?
• Lastly, property management companies generally charge a 10% management fee as you've calculated, but in my experience they also charge a fee for tenant placement. In Memphis it's generally about one half of a full month's rent (I don't know about Nashville). You may want to add this in as well.

I'd go with your gut and pass on this one if you can't get it for a lower price.

@Abdul Azeez

Based on what you're describing, it sounds like you're having a similar experience to what I initially had in Memphis.

In January 2016 I started actively searching for investment opportunities in the area as an out-of-state buyer (I live in California). I wanted a full-service company that could handle everything from acquisition to management.

I called a number of the Turnkey Companies and all of their offerings were at or above retail pricing and none of them provided sufficient cashflow after you adjusted their proformas to include appropriate cost estimates.

So I started to look for alternative options - specifically, I wanted a company that understood that as an investor I would 1) place a lot of offers on prospective properties while having a much smaller close rate than that of a traditional home buyer, and 2) after a property was under contract could provide thorough quotes and picture profiles for the prospective property at no cost to me during the inspection period (I scored it higher if the rehab team with internally or closely held since in those cases the quotes are usually more accurate). So I thoroughly interviewed the top 12 different property management companies in Memphis and I only felt comfortable that a handful of those were able to meet that criteria. Of those I decided to move forward with CrestCore because 1) the company owners have a good sized portfolio themselves and know the local market very well based on both professional and personal experience, 2) they have a good reputation on BiggerPockets (@Douglas Skipworth frequently posts helpful articles and answers questions in the community), and 3) they seemed upfront and honest when I spoke with them.

Since I started working with them they have helped me add three properties to my portfolio. Their rehab costs have always been equal to or less than the quotes they initially provided and to date they have managed them with reasonable care. If I have any questions or concerns they respond quickly and resolve the issue fairly. While I can’t say that they are the least expensive property management company in town, I can say that I trust that they are working with my best interest in mind.

They have a team approach when it comes to property management so I would suggest first reaching out to Douglas as a starting point to get an overall feel for the company and then to Dan Butler to give you more specifics regarding the property management arm.

When I started with them, @Jimmy Kennedy (PM me for his contact information since it's restricted for posting here) was one of their in-house investor agents. As to your exclusivity agreement concern, he initially asked, but when I explained that I wasn't ready to sign one he said he understood and that we didn't need to set one up. I've worked with him to close all three of my deals there. He is exceptionally knowledgeable about all of Shelby County (both SFR and MFR), responds quickly (usually immediately or within a few minutes), and he works late (which makes things really easy for me in the PST time zone). He's got my vote of confidence. So when he transitioned to JASCO Realtors as an Associate Broker I wanted to keep him as my agent. He still works closely with CrestCore and it doesn't feel like anything has really changed (other than the letterhead on the offers).

Feel free to PM me if you have specific questions and I'd be happy to share more of the experience I've had working with CrestCore and Jimmy.

@Abdul Azeez

@Ben Roberts,

FHA loans require you to occupy the property for at least a year so this probably won't be a financing option since you have tenants under contract.

You'll probably need to go conventional.

It looks like a good buy for the area, but I'll be the odd one out and say that I don't know if this would be a good long term buy-and-hold. As you mentioned, you're barely breaking even at $276 for the year. Assuming you get a loan at 25% down and your closing and mortgage origination costs are $4k your cash on cash return is 0.8% ($276/$34,000). You could beat that rate with an online FDIC insured high yield savings account.

My two cents... take the deal, don't renew the tenants after the lease is up, and sell the house. Subtracting the $4k in closing for the first purchase, the $2k in closing for the sell a year from now, and the $8.4k in selling fees from a conservative sale value of $140k leaves you with $125,600 minus your purchase price of $118k and you pocket about $8k. Assuming you sell in a year you'll have a cash on cash return of 23.5% ($8,000 / $34,000).