Memphis is a consistent and stable market. Mark brings back James, one of their team members out in the local market, to talk about the Memphis market and amazing things on the two-day Memphis investment property tour. He also talks about investing in Memphis and why it’s such a great cash flow market. James and his team has renovated, purchased, and sold over 235 single-family homes in Memphis, Tennessee that cash flow well and rent for very high-dollar amounts, making the cash on cash returns very attractive. Learn more about how you can invest in Memphis on the next investment tour.
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I want to talk about Memphis and our next upcoming Memphis Investment Tour. For many of you, you know that we did a property/investment tour. I believe it was around the September, October timeframe. If you go back to an earlier episode, you will know that we talked about the Memphis Market and why invest in Memphis and why it’s such a great cashflow market. We can actually look back and talk about what we did on this two-day Memphis Investment and Property Tour because it was quite amazing. There was a lot of great content and education. We had some great speakers from all over the country and it was all packed into one and a half days. It’s happening again. We’re having another event in May and it’s an opportune time because they happen to have this world-famous barbecue festival or event that goes on. The timing is purposely done to coincide with that event.
I brought James back on the show here. For those of you that don’t remember, James leads the team that we work with in Memphis. They are a great company and a great provider in terms of putting out fantastic income producing rental properties. In 2017, James and his team purchased, renovated and sold over 235 single-family homes in Memphis, Tennessee. The average prices of those properties were a $101,000. We’re not talking super expensive properties. They’re affordable. They cashflow well. They rent for a very high dollar amount making the cash-on-cash returns very attractive. These are great income-producing properties. James and his team in conjunction with our team here work with investors around the world to help you guys create passive income. As one of our top turnkey providers and partners in the Memphis market, they’ve now ventured out into building some new construction homes. They’ve built 23, 24 and they are ramping that up. That’s going to be a new thing that we’re introducing to you as well as on this Investment Tour. I don’t want to take all of James’ thunder. With that I want to welcome, James.
If you missed our last episode, be sure to listen to From Zero to 35 Rentals in 4 Years – A Client Success Story.
Enjoy the show!
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The Memphis Market and Our Next Investment Tour
Welcome back to the show.
Marco, thank you so much for having me.
I appreciate you being on. I’m glad to have you back on and I’m excited to do this Memphis Investment Tour again with you. This time, let’s flip the show around. Last time, we talked about Memphis first but let’s talk about what we did last year and what we’re doing this year on this on this Investment Seminar and Property Tour because it was really exciting to have all that content. Give us an overview of what’s going on.
Last October was a huge success. We had nearly a full bus. A bus only holds 50 people, so we’re limited to 50 attendees and the tickets are going pretty fast. You brought in a lot of your investors. We had a day of education. We tour properties and we sold 35 top properties that day. This tour is going to be much bigger. More people are coming because of the barbecue that’s available. This year, we’re looking to have a 50 investors come to town. The first day is going to be education. We’re going to have speakers talk about different strategies for investing, lending options, how to set up your LLC correctly so that you’re covered. Then that night, we’re going to board the tour bus and drop down to the Mississippi River. They had the World Championship Cooking Contest for barbecue every year in Memphis, Tennessee. It’s a huge event. The Food Network is there, thousands of people down on the river for the contest. We’ve got a tent where we’re going to have a VIP experience and be able to sample different types of barbecue and network with other investors. Marco, I’ve found that one of the best benefits of coming to an event like this is getting to speak with other investors who are already doing this and see what’s working and what’s not straight from another investor.
You can’t separate the networking part of it, just networking with other investors from different parts of the country as far as Hawaii. There are people from everywhere at different levels of their investing career. Some of them are newbies, just getting started buying their first investment property. Some of them have acquired portfolios of ten, twenty properties and just learning from them through osmosis and just asking questions and finding out how they’re doing it and what they’re doing and what’s driving and motivating them and why they chose Memphis. That in itself is education. You can’t separate that.
You’re right about that. Most of my investors share a similar story, “I want to invest in real estate but it doesn’t make sense where we all live.” That’s why Memphis year-over-year is a great market for investors from across the world. Marco, the second day is exciting. That’s when we meet them at my office. We have a light breakfast then we board the tour bus and we go out and we see Memphis. We see homes that are recently purchased and haven’t even been touched yet, so you can see the before. We’ll see homes under renovation. We’ll see homes that have been fully renovated and a lot of investors choose to buy properties right there on the spot. I’m excited about getting out and seeing some brand new homes under construction and completed that have been built for this rental model.
What made you venture out to new construction? That is not common in our environment and with investors now. The cost of construction typically is much higher than acquiring a distressed asset, fixing it up and making it a completely turnkey rentable property. Why did you go in that direction?
It is a rare opportunity that is going away quickly. In May 2009 to be exact is when the bottom of the market hit Memphis, Tennessee. It took a few years for the next opportunity to come along but 2011, there were about 1,000 bank-owned lots in Memphis, meaning that the bank had foreclosed on either the builder or the developer. Now, the bank owned these lots and they’re willing to sell them at a discount. We were able to step in back in 2011 and 2012 and purchase some of these pieces of lands, of buildable lot in communities that are full of home owner homes. Our average new home is not 100 houses built a neighborhood as rentals. It’s fifteen homes built in the neighborhood of 200 properties. It’s a very small percentage of rental homes being built in each community. We bought these at such a significant discount back in 2011 or 2012, but now it works. To give you an example, the neighborhood we’re building in right now, the lots pre-2009 were $50,000 to $60,000 each. We purchased these lots for $15,000 and that’s the big difference in price. In 2018, it’s more expensive to build a home than it was in 2009 but with that large of a discount on the piece of land, it works great as a rental property.
Are we going to have some that have been constructed to see in May?
Yeah. You’re going to see every space in construction in May. You’re going to see a slab poured, homes that are framed, and homes that are completely finished.
Give us a ballpark idea of the purchase price on these new construction homes and the monthly rent.
These homes are priced at a $140,000.They’re all three bedroom, two bath with a two-car garage and they rent for $1,250 a month. Those numbers aren’t as attractive sometimes to investors as the older homes that had been renovated and beat that 1% rule. I always say there are things you cannot put on the spreadsheet. There are things you can put on the pro forma like the type of renter that you can get on a brand new home. If you are holding these properties long-term, in ten years, a brand new house is going to be ten years old.
Relatively speaking, how does the property taxes compare to the regular refurbished turnkey rentals?
In proportion to the purchase price, they’re the same. There’s no penalty to buy a new home.
Investors have to consider this even though the rent is $1,250 a month, which is about a 0.8%. 0.9% of the acquisition price, the reality is two big things. One, you’re probably going to attract a better quality, more stable, respectable tenant because they’re drawn to these newer neighborhoods, nicer areas with new construction. Anecdotally speaking, you’re going to have a better quality tenant. Number two, it’s all new construction so you definitely have no capital expenditures for awhile. You have no deferred maintenance or maintenance issues to deal with immediately and you probably won’t have wear and tear items to replace for X number of years. You can almost zero out your maintenance and repairs Budget for who knows the first two to five years probably. When you factor those things out, I’m not saying that you shouldn’t budget for them, but when you take them out it almost makes up for that difference in the slightly lower rent compared to a 1% rule turnkey property that you would find elsewhere. Would you agree with that?
Very well said. I don’t want your audience to think this is only new construction that we’re going to be offering on the tour. I’d say 10% of our business right now is brand new homes as rentals. We’ll have homes at all those price ranges.
I just want to put some perspective on what new construction offers in terms of an investment option. A lot of people like new construction because of the fact that everything is new. There is no deferred maintenance, but that’s not taking away from the turnkey rentals because they are like new. Meaning, that often the mechanicals are replaced, the cosmetics had been replaced and there’s nothing that needs to be done. It’s almost like buying a new property. It’s just in a very mature neighborhood. It still has the original foundation which has been checked. It’s just another option. That’s all it is.
The new construction is something that’s going away quickly. The reason for that is these discounted pieces of land, the lots that we purchased at such a discount, are going away and they’re never coming back. If someone develops a new land for this type of house, a three-bedroom, two-bath, with two-car garage, the price is now $50,000 to $60,000 per lot. These few discounted lots that we have available sadly a few years from now, we won’t be talking about this.
You’ve got lucky. You were at the right place at the right time. You’ve got the lots at the right price because the reality is land values aren’t going down. Memphis is a pretty consistent stable market. It’s what we call a linear market. I don’t foresee land values changing much and they certainly won’t go down. That differential between $50,000 to $15,000 is not going to happen. Let’s talk about the Memphis market for some of our newer audience and just to give an overview or a refresher for those that have heard this before. I always say that Memphis is a perennial market. We’ve been there from the very beginning since 2004. The reason we’re always there is because it’s such a slow moving, consistent market. I don’t want to call it a “boring market,” but in terms of market cycles or real estate cycles, it’s pretty flat and consistent.
You can also call boring predictable.
It’s certainly predictable. US News and World Report, I don’t remember the year, ranked Memphis number one as the Ten Best Cities for Real Estate Steals. I wouldn’t call it a steal anymore but I call it deals. There are always good deals in Memphis and if you’re looking for just consistent, predictable cashflowing rental properties, I call them cash cows or cashflow machines. Memphis is definitely on the top of that list. It’s always in the top three in terms of markets we recommend as a cashflow market. Give us an overview of the Memphis economy and the housing market. I always ask the question, “Why should I invest in Memphis?”
I specialize and my passion is providing workforce housing for your blue-collar hard-working Memphian. That’s who our target client is. Right now, we manage 1,700 properties and we have a real problem. Every month we have to turn qualified tenants away because we don’t have what they’re looking for. We’ve reversed engineered that data and we go after buying properties in the neighborhood specific areas that those qualified tenants that we turn away are asking for. Most people know that FedEx world headquarters is in Memphis. FedEx is a big driving force behind what’s going on here. Because of the new tax law, the owner of FedEx, Fred Smith, has recently announced that he’s putting $1 billion into the Memphis hub which is the world’s largest air cargo hub based here in Memphis, Tennessee. A $1billion dollar investment coming into Memphis through FedEx is going to create more jobs. It shows the dedication and how much FedEx is committed to Memphis, Tennessee. That’s just a part of it. The real big is St. Jude Children’s Research Hospital. Are you familiar with that market?
I’ve heard of it. I don’t know much about it.
The St. Jude is also based in Memphis. They are the world-leader in Pediatric Oncology. They’re saving babies from cancer. What an amazing place. Recently, they announced they’re putting a $9 billion investment into downtown Memphis to add onto their campus multistory buildings to help fight pediatric cancer. Any city would be proud of telling people that they had $10 billion coming into town in new construction, commercial permits, pulled. For Memphis, that’s a big shot in the arm. That’s a big boost.
Is that going to drive more employment or is that just facilities expansion?
It’s absolutely more employment, stable jobs, workforce jobs that we’re creating here in town. Then the next one is Nike. Every shoe, every piece of apparel, every piece of equipment sold in North America is shipped from Memphis. It’s not made in Memphis, it’s made in China or wherever. They bring it to Memphis and from this three million-square foot warehouse it’s shipped to North America. That’s the kind of jobs we’re creating in Memphis, stable workforce jobs.
That’s what you need to sustain a rental market.
It explains why our market is in such demand for quality rental properties. I always tell people that too. There’s a big demand for quality rental properties. There are plenty of homes for rent but most of those homes have an old roof, air conditioner that’s on the blink or they smell. If you can provide a quality, clean and safe property to your tenants, they are leased out.
I’ve been saying for a long time that we’re in a renter’s nation with housing ownership dropping from about 69% on the high side to about 63% nationwide where we are right now. Memphis is one of those markets where the percentage of Memphians who rents surpassed the national average. It is such a large pool of renters and that’s a good thing for us as landlords who can provide safe, clean, and functional housing in a market like that to be able to provide that product and that service to tenants. It’s one of the things that make Memphis such a great consistent market. To that point, do you have any updates since we haven’t spoken about this for about six months? Talk about the rental market there. Have there been any major changes? Are you finding that the rental demand is increasing? What’s going on there?
We’re finding a higher demand on our properties. We’re turning away right now close to 100 people a month that are fully qualified to rent one of our homes because we don’t have what they’re asking for. Out of 1,700 properties, we’re 98% occupied. Our average tenant stays 2.75 years and those are great numbers nationwide from what I’ve been told.
Knowing that metric that they stay for 2.75 years, I still budget for vacancy every year. The fact that you can budget a two and three-quarter average stay allows you to have better cashflow than what you would normally budget with a 4% to 7% annual vacancy rate. That’s fantastic.
I believe the way that we have achieved this is buying in the right areas. You can say Memphis is a great market overall.
Neighborhood-specific.
Neighborhood-specific, street-by-street, with laser-like focus, we’ve identified the exact neighborhoods that qualified tenants want to live in. We only buy homes in those neighborhoods. Thousands of homes come through our office every year and we narrow it down by location first and then doing a full renovation on the property so that it is clean and safe for a family to be raised in a home. Then thirdly, we price all of our homes at market rent. We don’t charge extra because they are nicer than other homes in the neighborhood. Our tenants know once they get in one of our homes, they definitely don’t want to do anything to where they can’t stay there because they’d have to go rent the home down the street that isn’t as nice.
Describe those neighborhoods. Give me a snapshot of what a typical neighborhood be?
If you were to look at Google maps and see our airport, it is the world’s largest air cargo hub. Most FedEx employees work right there. To the east of the airport is an area called Hickory Hill. Houses are built in the ‘70s and ‘80s, three-bedroom, two-bath with some parking. It’s not necessary to have parking, but I would say it makes the home more rentable. A covered carport or a garage would be even better. That’s three-bedroom, two-bath, $85,000 renting for $850, $895 a month. I’ll focus on the big three. I call it roof, mechanicals, and flooring. I don’t put a stitched carpet in my houses. It’s all hard surface floors, either luxury vinyl plank that looks just like hardwood or tile. The tile is usually in the kitchen and bathrooms, new appliances, new HVAC and a new roof. Everything else is cosmetic, basic landscaping. That’s my house.
They’re nice looking. They’re pretty on the inside and attractive on the outside. That’s what you want, attractive housing that’s safe, clean, and functional.
We’re blessed in Memphis, most of our homes are brick. There’s not a lot of exterior maintenance on our homes.
You don’t have wild swings in your weather either. It’s not like you have rough, frigid wet winters that create extra wear and tear on not only the exterior but people tracking mud and water and stuff into the house.
Snow is a very rare thing for us to see in Memphis. We didn’t get any coastal weather from back when Katrina happened or more recently when Harvey hit Texas. We didn’t get any of that weather. We’re set in a good part of America for a mild climate. It does get hot.
That’s okay. It’s a benefit. I don’t know what else you want to talk about in terms of Memphis, Tennessee. We covered it at length but we’re going to do the Memphis Tour again and it’s a great two days. In fact, you could literally fly in the night before and fly back out on the end of day two. You’re not gone for very long. What are those dates? It’s May 18th?
18th and 19th. Most people will fly in the evening of the 17th, and a lot of folks will fly out the evening of the 19th. However, if you stick around, you get to come to a special VIP dinner with us.
Basically, it will be a three-night, two-day event.
The only thing I’d like to add is the benefits to coming, meeting other investors and talking to them. That’s always been the highlight. The big benefit is coming to town and meeting my team because that’s what makes all this possible. We’ve got a 22,000 square-foot building in the center of town. Out of which, we have each department that makes up a team that investor thousands of miles away needs to see. We’ve got property management, acquisitions, real estate brokerage. You’ll meet our accounting team, our legal team, our collections team, and you’ll even see our warehouse where we buy everything in bulk from toilets to light fixtures and paint. We buy everything in bulk, warehouse it, and source it out for each job. It saves time and money, and it makes us more efficient to be able to make this process replicatable and duplicable at will for our clients.
It’s a great facility, a great model, a great team. You have a great set up, an operation going on. You forgot to mention one thing. The whole thing is a lot of fun. It’s a lot of fun to hang out with other investors and people who understand their expertise, whether it’s finance or asset protection or 1031 exchanges. I like when you go over the map of Memphis and the good areas and the not so good areas. Those visuals are extremely helpful. It’s a great event. I encourage people to attend if they can take the two days away from family or work. As far as getting registered for that, I know that there’s a cost to the event. However, we can extend some free tickets to them if they register through us. Is that correct?
If someone is a client of yours, if they’d come through Rota, absolutely your tickets are going to be on the house.
In that case, they can just contact our office, send us an email or go to the contact form on our website. If you’re already working with one of our investment counselors here, just contact them and request a couple of free tickets for the event and we’ll get you registered on the list. We’ll go out there and have some great barbecue, too.
Marco, one thing we didn’t cover is inventory. Nationwide, are you seeing a shrinking in available properties for your clients?
Yeah. That’s a sore spot for us right now. There has been an incredible tightening of inventory in virtually every market. The major markets that we work in, the deal flow is there but it’s been tightened up. I know this is true for Memphis as well. It’s what I call the real estate pendulum. It swings one way and you have a lot of inventory and you don’t have a lot of buying activity, and then that pendulum swings the other way and you have a lot of buying activity because people are just very interested in real estate. They’re pulling money out of the overpriced stock market, but then you have the shrinkage in inventory and that’s what we’re seeing right now, maybe address that as far as Memphis goes.
My answer to that problem is to work harder. We’ve put resources in place. I’ve got team members that are out today negotiating to buy properties for us to fully renovate and turnkey. Also, building houses is creating inventory. Instead of finding a deal, we’re out creating opportunities for our clients, whether it’s negotiating with someone who’s suffered a loss of the family. They have inherited a home or they’re going through a divorce or bankruptcy. We’re marketing to those people to buy their home so that we can make them into great rental properties specifically in the areas we want to buy them, and then building the houses. If I need ten properties, I can build ten while these lots are still available. This past quarter, we sold 72 properties. We closed on 71 and we bought 85. We’re keeping up our inventory.
Are you going to earmark or put on hold or reserve a batch of these properties specifically for this event, this tour?
Absolutely. I’ve already started doing that. I will want to have available properties while we’re on the tour, specifically the cream of the crop. We’re holding some of these back for people that come on the tour.
That’s great that you’re doing that. I know that if you’re using other people’s money, there’s a holding cost, a carrying cost, to pay that interest in order to hold those properties. It’s an advantage for those who are going on this particular tour to be able to see those properties and touch them and put them under contract or at least reserve them if they’re interested.
There is a cost for me to do that, but what I hope to gain here is I’m looking to get clients that are clients of ours for ten years that will go back and tell their friends what a great experience they had. That happens more often when they come and they meet the team and they see that we’re real folks with their best interest in mind. We are the boots on the ground, even though they are thousands of miles away. Creating that raving fan, it’s worth it for me to hold these off for some of my people on the tour.
What else do you want to cover?
You’ve covered it all. We’re excited to have you guys out. I hope you can bring a lot of your investment counselors. I know a lot of your clients are going to come.
I heard that one or two of them maybe gearing up to get their bags packed and come on down. Once again that’s May 18th and 19th, right?
Correct.
If anyone is interested, contact our office or contact your investment counselor here and we’ll get you set up with a reservation and some free tickets. If we can help you with anything else, of course we will. James, I appreciate you coming back on the show. We’re going to see you in May and have some barbecue.
Thank you.
Have a good one, James. Thanks again.
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