Market Spotlight: Little Rock, Arkansas | PREI 059
On today’s episode we take a look at the great “under the radar” market of Little Rock, Arkansas.
Little Rock has a great economy, and terrific number in terms of purchasing and rates of return. It’s also one of the most landlord friendly states in the country with average eviction times of only 21 days!
- Why invest in Little Rock, AK?
- What is the local economy like?
- What is the local housing market like?
- What is the local rental market like?
- What are the typical turnkey rental properties like in Little Rock?
If you missed last week’s episode, be sure to listen to the Investing in Turnkey Properties — My Journey, Setbacks and Advice.
Enjoy the show!
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Market Spotlight: Little Rock, Arkansas
Today, we have an exciting show for you because it’s another market spotlight. The market I’m talking about was ranked the fourth strongest economy in the US by Business Week in 2013. This market that I’m talking about has been under the radar. It is a gem that most investors don’t know about or even talk about. Those that know about this market are doing extremely well there. The market I’m talking about is Little Rock, Arkansas. On today’s show, I have two of the principals of the company that we have a relationship with and do work with down in Little Rock. They are our provider of course. They’re going to be here with us today to talk about the market and why it makes such a great market to invest in, why invest there, what the economy and the housing is like, the types of investment properties that are available there. Although they are in somewhat short supply, we have a revolving inventory. It is fairly consistent and we will have something for everybody if this is a market that is of interest to you.
It’s my pleasure to welcome Jeremy and Brian to the show. Jeremy and Brian are two of the principals and partners of our Little Rock, Arkansas provider. Jeremy has a background as an Electronics Engineer and is a full-time real estate entrepreneur. He owns and manages a portfolio of his own properties. Brian, his partner, is a lifetime native of Little Rock and owns 27 properties out there. Guys, welcome to the show.
This is a little overdue because we have been keeping our eye on the Little Rock, Arkansas market. It really is under the radar. I wanted to get you on today to talk about it. This is going to be our market spotlight. We’re going to start pushing some inventory. Let’s begin by you telling us a little bit about yourselves and how you got involved in real estate. Maybe Jeremy, we could start with you.
I got started in real estate about ten years ago. Again, I come from the corporate world, nine years of experience in the semiconductor industry. I started buying rentals in Memphis, managing them, going through the process of learning how to be an investor, got involved through a local area and met my current partner in Memphis. We started building a company there. Through a mutual connection on his end, we met, we hooked up with Brian in Little Rock and started business there about three years ago. That’s how things got started. Brian, of course, has been investing in Little Rock for about twenty years. He’s a lifetime native. In the last two or three years, we’ve just seen extraordinary growth in the Little Rock market.
Brian, what about you?
I’ve been investing here since 1997. I became an accidental landlord. It worked out. I bought another property and networked out and bought another property. I’m self-taught from the school of hard knocks for the last twenty years in real estate investing in Little Rock.
Little Rock is a market that most investors don’t really talk about for whatever reason. It just seems to be under the radar. Kiplinger recently rated Little Rock as the number one place to live. I’m not sure how they came up with that, what their criteria was, but it’s an interesting accolade. You tell us, why should investors look at Little Rock? Why invest there?
I grew up in Western Michigan in a town very similar to Little Rock in terms of size. In terms of the number one ranking by Kiplinger in 2013, it was ranked the number one market in the United States for places to live for populations under a million people. When you go to Little Rock, it’s a really nice town. The average commute time is about seventeen minutes anywhere in the city. Just the way it’s laid out, it’s very convenient. It’s got a very scenic place to live. The downtown river market on the river is very nice. In terms of market fundamentals, it’s a capital city and you’ve got a plethora of government jobs there, over 32,000 state government jobs. You’ve got a strong healthcare presence there, about five major hospitals that employ over 80,000 people. The population growth has been very strong, 15% population growth in the past decade. That’s always a great indicator for a market to live in. Population is about just shy of 200,000 people. Within 550 miles of Little Rock is 40% of the nation’s buying power. Similar to Memphis, it’s centrally located throughout the United States. Two of the statistics that really put my antenna up as an investor are the cost of living is 12.2% lower than the national average. Little Rock was ranked number two in terms of the lowest cost of doing business in the United States. It’s an attractive destination for companies to do business. You see a very diverse economy in Little Rock. It’s not dependent on any one market segment necessarily.
When you think of Detroit, you think of automotive. As the automotive industry grows, so does Detroit. Memphis, again, when you take Memphis, you think of FedEx. There’s other things going on in Memphis but FedEx is the primary driver. Little Rock is not like that. You have a very diverse economy: government, healthcare, you’ve got two major Fortune 500 companies that are headquartered there, a strong military presence, 5,000 academe military and civilians in the northern part of Little Rock. There’s a major army and National Guard base in Camp Robinson in the northern part of Little Rock. Caterpillar’s headquartered there. Stifel Bank, the largest investment banking firm off of Wall Street. I could just go on and on. Diversity equals risk and mitigation from the standpoint of being a real estate investor.
One thing I want to point out though is you mentioned that the population in Little Rock is around 200,000. For our listeners’ sake, I want them to understand that whenever we talk about a city’s population, we’re generally talking about the population within the borders. When we’re investing in the Little Rock market, it’s really a greater geographic area. Correct me if I’m wrong but the population of the entire metropolitan statistical area is probably closer to 700,000 or 800,000, right?
That is correct. In fact, I’m looking at 893,000 as the most recent number for the metro area, not just the city of Little Rock, but the metro area encompassing Little Rock, North Little Rock, and in some of the southern suburbs. Brian can shed some light on that as a lifetime native also.
Brian, what you can do is probably add to what Jeremy is talking about from an economic perspective. I know there are some Fortune 500 companies there. Maybe you can talk about who and how many, what the job growth and the population growth has been recently, stuff like that.
As Jeremy said, we’ve got a good diverse economy here. He mentioned a lot of different things. The economy has been strong even through the recession. We really didn’t suffer a huge unemployment number like a lot of places around the country. In fact, right now, our unemployment is just under 4% as the latest statistic there. We do have a very diverse economy and lots of different job opportunities here.
In fact, the projected growth of jobs in Little Rock is about 32% over the next ten years. In terms of the unemployment rate, 4.2% lower than the national average. Investors are going to love this statistic also, rents have been up. In fact, we released an article six months ago showing an 11.4% increase in rents over the period of time, December of 2014 to December of 2015, 11.4% increase in rents. That’s the ninth largest increase in the country during that period of time. Low unemployment, low cost of living, diverse economy and an increase in rents; those are the statistics that are very attractive if you’re going to be a buy and hold investor.
Why is that happening? Typically, you don’t see that happen. When it does happen, it’s usually because there is a shortage or a lack of inventory of housing units or rental properties. Is that the case in Little Rock right now?
Not really. I don’t think there’s necessarily a shortage here. As Jeremy mentioned, in 2015, RentRange said that Little Rock had the largest increased nationwide in rents, 11.4% increase. That was on single-family homes, not necessarily on apartments. That’s what I like about that statistic. Of course, that’s what we’re mostly focused on are single-family and small multi-family under four units. No one’s creating that type of rental inventory out there. People are creating apartment complexes and apartment communities but no one’s really creating these single-family and small multi-family properties anymore. There are more renters in the market that puts a lot of demand on those properties. The rent rates are just really starting to catch up with that demand. If you’re a tenant, you’re not looking right now and there’s certainly inventory out there if you want single-family or small multi-family.
The ratio of homeowners to tenants in Little Rock is two-thirds to one-third. That’s the start contract of what we’re seeing in Memphis which is really an aberration around the country; over 50% of the population rents in Memphis is opposed to buying. In Little Rock, you have about 64% home-ownership rate versus the difference which is 36%. It’s about two-thirds, one-third ratio. Two-thirds are homeowners, one third are tenants. The tenants that are out there looking, there’s going to be more demand for housing. That’s driving the rental rates up.
That matches national averages too. That’s pretty much in lockstep. How has the increase in average rent compared to the increase in property values? In other words, are the rents increasing more and faster than property values are going up?
Property values definitely are on 11.4% per year. I’d say they’re more on average of probably 3%. Little Rock is a very linear market with home values. We don’t have the huge ups and downs that you see in other parts of the country. The rent increase that we saw in 2015 is a pretty big jump. They’re not in lockstep with one another.
Do you have any comments about the housing market in general? How does it compare to the rest of the country? What about the cost of living there? I understand it’s lower than the US average.
Our median market value of a home here in Pulaski County, that’s the county that Little Rock and the Northern Rock area, is about $145,000. I’m not exactly sure how that stacks up with the rest of the country as a median value, but it gives you an idea. That’s a pretty good price point. That holds pretty true here. We continue to see 2%, 3%, even 4% depending on what neighborhood you’re in. Neighborhood can make a difference too in what area of town. In an average, this holds pretty true year-over-year unless we get into a real downturn.
In terms of the rental market, here’s an interesting fact, if you will. It seems that you in Arkansas have probably the most aggressive laws when it comes to a landlord-friendly state. You have a 21-day eviction. Can you explain that and why that’s such an advantage?
A lot of people have interest in that. Of course we’re just used to that here. That’s just the everyday life for us here. Arkansas has been said to be almost a landlord-friendly state in the country. Here, the way it’s used, if you had given a proper notice to your tenant, they can go on a lease or maybe be evicted and you give them a proper notice, you should be able to get them out within 21 days. Part of that process, the way the law views it, is that if they continue to occupy your property after you’ve given the proper notice, the law looks at it as almost unlawful detainer, almost like they’re trespassing on your property at that point. The legal side gets more involved in evicting them. It makes a really quick process. As I understand, compared to other parts of the country, it’s extremely fast.
Is 21 days an average or is that just what is written in the law?
That’s actually just based on what we’ve been able to do it for. There is a process for this. You typically get a lawyer involved. There are several lawyers here that are the go-to legal or attorneys for this type of deal that deal with a lot of landlord-type issues. Those guys, depending on which one you go, they’re really efficient at getting this turned around. An eviction like this, a legal process can cost you around $1,000. It’s what we say is an average. To get a tenant out, you actually have to go the whole way through the process. The thing is, in Little Rock, most tenants know that the outcome is known. Generally, when you serve an eviction notice to the tenant, majority of time, they just comply with it and just go on. You don’t have to go through the full legal process of actually getting them escorted out of the home. These numbers are based on our experience, what we’ve actually seen.
I know the laws in Little Rock have changed a little bit recently. They’ve took it down a little bit more in favor of the tenant because they were so widely skewed in favor of the landlord. Until recently, if a tenant was one-day late on rent, a landlord could file an eviction. The landlord laws were written in such a way that even the landlords didn’t have the obligation necessarily to keep the property up in terms of renovation. In other words, the tenant could not withhold rent because the air conditioner was broken or a furnace was out or they had a leaky roof. They were still obligated to pay rent. I don’t know, Brian, if things have changed recently but it just shows you how in favor of the landlord the tenant laws were in Little Rock until recently.
It’s not completely unfair to the tenant. They have a right to protest and get the city involved and complain on their owners as well. At the end of the day, the landlord certainly has the upper hand here as compared with the tenant.
That’s good news for a landlord. My belief is that if you have great property management managing an asset, in other words, a property that’s in a good neighborhood, you’ve probably licked 80% of your tenant problems or your downside risk. Let’s get into that a little bit here. Let’s talk about what kinds of properties you look for, what is your buying criteria, the types of neighborhoods, the amenities maybe that you look at, if safety is a criteria, maybe the age of the property. Let’s paint the picture of what these neighborhoods look like in the areas around the Little Rock, Arkansas marketplace.
We use our own investment strategy if we’re buying our own properties. That’s the way we learned about this. We’re doing it for ourselves. I never target an area that I wouldn’t myself spend the night in until a close relative stays, getting out of my car, going into the home. Your gut feeling can tell you a lot about a place. We tend to stick to areas that we classify as B areas. I’d say 80% of the properties we buy are in a solid B, B+ area. We touch and do some A’s and rarely ever get into any C’s at all, but mostly B’s in that area. We feel like the better areas combined with better finishes just attract better tenants. Those things equal better investments. Those are our strategies: better areas, better finishes or renovations equal better tenants. That’s what our strategy is. Majority of the properties that we target are single-family. We did into some smaller multi-family. The majority is single-family. Those houses tend to be three-bedroom, two-bath, tend to be around 1,500 square feet. They’re very conducive to family living.
Location is important. In Little Rock, like most cities, is grown in the downtown area out and has a midtown area. That’s what we’ve got here in Little Rock. We have a midtown area that’s become popular again. People are starting to move back from the edges of the city and sprawled out and come back into the midtown area. That’s where we really focus a lot. A lot of our properties are in that midtown area. Most of those properties are properties that were developed in the 1960’s, 1970’s. That gives you an idea of the era of the houses. We like that era. Those houses tend to be more modern and in tune with houses that are being built today as compared to houses built in the 1920’s or 1930’s. These houses have insulation, have updated their modern wiring, have updated their modern plumbing already, have sheetrock and not plaster, have great exterior and not wood siding exterior. A lot of these houses were well-built and really compared to today’s construction, still fairly modern.
Jeremy, do you want to just touch on the price point or the price range of these properties? What’s the low-end, the high-end? Also, one of the metrics we look at all the time, it’s just our starting point, but we look at the rent-to-value ratio. Take that price point and tie that back to what those properties rent for so we can get an idea of what that RV ratio is in our head.
Most of our properties sell between $80,000 and $130,000. I would say, the bulk of our inventory is going to sell between $80,000 and $100,000. That’s where our sweet spot is in Little Rock. There are a few outliers. We just sold one recently in the low $70,000’s. We got one that we’re selling now that’s in about the $150,000 to$160,000 range. We’re across the board. Most of our stuff is going to sell between $80,000 and $130,000. In terms of rent-to-value ratios, we can consistently beat the 1% rule. Of course the 1% rule is you want the gross monthly rents to be at least 1% of the sales price of the property. If you buy a property for $80,000, you want it to rent for at least $800, just a hypothetical example.
In the price points that we operate in, we can consistently beat the 1% rule. When you get over $120,000 to $130,000, that ratio begins to breakdown. When we’re selling properties in the $150,000 range, you’re going to get slightly lesser than the 1% rule. However, there are investors in our network and in your network who may like that because it’s a long-term value play. You own a property like that, typically you’re in a premium A class neighborhood. People want to live there long-term. You’re going to attract a tenant that either may stay long-term or they do turn it over and you can get it re-rented quickly because people are looking specifically for that property in that area. If you buy and hold a property like that, as an investor, your mindset is, “I’m willing to sacrifice some short-term cashflow for long-term value.” Again, it’s just different strokes for different folks. Some people want those types of properties, the $150,000 range, but there are a lot of investors, majority of them, who want the cashflow now to take care of today’s cash needs. They want to be buying in the $80,000 to $90,000 range, which is where most of our properties operate. We feel like Little Rock is one of the premium markets in the country for those types of properties because we can consistently beat the 1% rule and because property taxes in Little Rock tend to be lower than they are in other markets throughout the country. One of the advantages also of Little Rock is low property taxes.
The numbers in Little Rock are very attractive. Our clients are typically buying $80,000 to $130,000 properties. They typically have a 1% RV ratio. I’d say, the bulk of what our clients are buying today are between $90,000 and $110,000. The low property taxes that you have there is almost a bonus. It’s just great because it makes the cashflow and the overall rates of return very attractive. The challenge we’re seeing today with the level of activity across the country in real estate markets and the velocity of sales is that inventory levels tend to be low because the properties turn over very quickly. For example, as of today, as we’re recording this, we have two properties that are about to be posted up on our website. There’s zero there right now, two will be coming up probably today or tomorrow. I know we’re working with you to get that ramped up. There’s going to be a lot of interest in Little Rock just because the market is conducive. It’s healthy. There are a lot of great drivers pushing up the demand. It’s keeping that rent-to-value ratio high. The rates of return are attractive. The price points are great. The only bottleneck, if you will, is just supplying enough inventory to keep up with demand, which is obviously a good problem to have.
We will be making a couple of properties available to you. One of them I actually floated out a couple of weeks ago to our list note takers. I say that because we’ve always got and we always try to have a few properties available to people who are ready to buy right now. The challenge on my end, working the disposition part of the business, is oftentimes I’m trying to market a property that’s in the early stages of renovation, maybe have a front of the house picture and then a limited description in terms of the location of the property and of course the numbers and the fundamentals. A lot of investors, especially those who have never done business with us before, they want to see a completed property. They want to see pictures of the inside when it’s done. Oftentimes, if you have to wait until that stage in order to make a decision, it’s probably too late because the property’s going to get stashed up. Most of what Brian and I sell, we sell in the early stages of renovation because we have investors in our network who have either done business with us before or they’re ready to buy now and they can make a decision quickly even when a property is early in the stages of renovation and we only have a front of the house picture. Just something to keep in mind.
We’re seeing this in other markets too like Kansas City. We will post properties up right after they’re acquired. There’s no picture yet or maybe it’s an old pre-renovation photo. It’s there and we can post the numbers. If investors are interested, they can put it under contract or reserve it subject to everything. It’s subject to the completion of the renovation, subject to their inspection, subject to their financing. That way, they have the opportunity to control that property and ultimately buy it instead of losing it to someone else who’s willing to put it under contract subject to everything that they need to put it subject to.This is what I recommend to investors because the fact of the matter is, real estate right now in many markets around the country is very active. There’s a strong turnover and good high demands. This is sometimes what you have to do in order to lockdown a property and build a portfolio in a market you like, for example Little Rock. We’ll work with clients on that. That’s not a problem.
If you’re reasonably confident that you’re ready to go as an investor, if you’re willing to put a property under contract with earnest money, I would say pull the trigger even if you’re only maybe 50% sure because of the things Marco’s talking about. You do have an inspection. You can always get out of that contract with a refund of your earnest money if at some point in time the property is completed and you see something you don’t like in the inspection before or maybe you just get cold feet. Obviously don’t make a habit of this. I would rather have investors take action, put a property under contract with earnest money and then if down the road they changed their mind, get out with a refund and move on, than to wait and miss out on an opportunity. Just a tip here, don’t be afraid to take action. We want to work with you. We’ll do whatever we can on our end to make you comfortable with that investment. If you’re not comfortable with that particular property, get you into the right property because we want you to be successful.
It’s better to take action than no action at all because you’re just not going to get ahead. You’re not going to get to where you need to be. We work with everybody to help them get to the next step. If you put a property under contract with a deposit and you change your mind a day later because of cold feet or whatever, most of the people that we work with are very good about it. We know that that property will sell very quickly to the next person. It’s really no skin off our back or your back, it’s just, we just want to help you. I have one more question for you regarding property management. Do you want to make any comments about the management side of things? To me, that is critically important.
I’ll turn this over to Brian because he is the boots on the ground. He’s the lifetime native in Little Rock and he is working very closely with all the property managers.
Our property manager here is a guy named Jamie Hoffman. He is a second-generation family business property manager. The two has been working together. His father has been in this business for close to 40 years. He’s built up a good sized clientele and a lot of processes over the years. He’s very well-respected in the property management business. Jamie, we get a lot of good feedback on Jamie. He’s very accessible to the clients. He’s easy to talk to, very straightforward. He takes the property management part very personal. He’s not just a guy in an office somewhere with a team of folks and a pickup truck running around checking the properties out. He is actually out in the field and he’s very hands-on, and very involved with the property management. He does an excellent job. They’ve been doing it for a long time. They manage somewhere around 450 properties altogether. He does an excellent job, very hands-on approach in the property management.
We joke in our office once in a while that somewhere there’s a mad scientist who put together a plan to build a mannequin that was the ideal property manager and that turned out to be Jamie Hoffman. Just look at the way he works and the way he operates, he was just simply wired to be a property manager. It’s not out of necessity, it’s out of task. He really loves what he’s doing. He’s very good at it. He’s very connected, very personable, not only with clients but also with tenants. We have our full confidence in Jamie and his team in Little Rock.
Is there anything I did not ask you that maybe I should have?
I can’t think of anything. We’ve covered everything. Brian lives in Little Rock. He’s a lifetime native. He went to school there. There are a couple of major universities there. His wife actually works as a doctor, I believe, at one of the major hospitals. I’ll just turn it back over to Brian for those comments.
We want our clients to come here and get a feel for the city, take a look at some of our finished products. Take a look at our quality of work. Just get comfortable. We’re always welcoming, always glad for clients to come here and do that. We really encourage that.
We always encourage clients to go out. Statistically, only about one in twenty or 5% go out there but when they do, they’re always impressed. They get a great education. They meet with the team. They get to see people face to face, talk to the property managers and some of the crew. It really helps them to understand the market, the property type, the tenant class, etc. We always encourage it. We don’t insist on it. If they can do it, we really, really like when they go out. You’ve provided me some updated information about the economy housing, the rental market. We’ll post that up on our NoradaRealEstate.com website. Other than that, we’ll certainly be in touch with you. We’ll have clients for you and we’ll put them in touch with you as well. I really want to thank you for your time.
We’ll talk soon. Thanks.
There you have it, another market spotlight on Little Rock, Arkansas. If you haven’t downloaded and read our free report, The Ultimate Guide to Passive Real Estate Investing, please go ahead and do that. You can do that at PassiveRealEstateInvesting.com or our key website where we have all our properties at NoradaRealEstate.com. I know that report has been downloaded thousands of times. I am not sure how many people have actually read it. I know they download it. It is chock-full of great information. It is more than just a primer. I encourage you to take a look at that and start reading it if you haven’t. It’s only about 40 something pages.
If you have any questions about this episode, the Little Rock market, or questions in general, contact one of our investment counselors or your investment counselor if you’re already working with one and we’ll be happy to give you more information and putting you in touch with our team in our network. That’s about it. Remember to subscribe. We enjoy having you here. Thanks for listening. We will see you all on the next episode.
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