Is it truly possible to purchase turnkey rental properties for about $6,000 total out-of-pocket?
On today’s episode we show you that it is, and we explain how it works and how you too can benefit if you choose.
Join us as we speak to one of our Memphis property specialists about the market and the opportunity.
If you missed last week’s episode, be sure to listen to Ask Marco – Pre-Construction Risks, Evaluating Cash-Flow and Rates of Return.
Enjoy the show!
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$6,000 Total Out-of-Pocket Turnkey Properties in Memphis
Today’s show is a little bit special. I wanted to bring on one of our local specialists, a guy by the name of Nick that we’ve worked with here for a few years. He’s an awesome provider for us as far as building quality turnkey investments. It’s not just that these investments are your typical turnkey property. What we have and what we’ve been selling in the Memphis market now for about a year are investment properties that you can acquire for approximately $6,000 total out-of-pocket. You may be wondering, “How is that possible?” If there’s no down payment, it’s only $6,000 out-of-pocket. That’s what we’re going to explain today. To some degree, this is going to be a market spotlight on the Memphis market, but we’re going to save half the show to talk about how this investment opportunity works and whether it’s right for you or not, because it may not be right for you. With that, I want to bring on Nick, who is, like I said, one of our specialists in the market. He has been a valuable asset. Him and his team have put together some great opportunities for us. Nick has been a real joy to work with. I am happy to have him on the show.
Nick, welcome to the show.
Thanks, Marco. I appreciate it. Thanks for having me.
It’s my pleasure. Nick, we were talking here a little bit about how you got started in real estate. I always like to start with that question of how you got involved in real estate because everybody has a unique story. Some people fall into it accidentally, other people planned it that way. Why don’t you tell us about how you got started and transitioned into real estate?
I never had intentions of being in real estate. It just worked out that way. I moved out to Memphis from Michigan fifteen, sixteen years ago and took a job in the service industry. As I was working, I got married and started a family and had a son and just realized that I was working from seven in the morning until seven at night. I didn’t really get a chance to hang out with my family, so I figured I needed to try something new. I got into real estate, looked into becoming an agent, got my license and just morphed into the whole investment side of things.
Were you investing for yourself personally or you’re actually buying and flipping properties at the time?
At the time, as I was working in the service industry, at my other job, I was buying houses and selling them. I’m basically on the side just onesies and twosies just to try to make a little extra money.
We’ve been in Memphis for a long, long time. It seems that Memphis is one of those perennial markets where you open it up as a market, you invest in it as a market, you build up a portfolio there and there are still opportunities to be found. I never really put my finger on exactly why that is. If there’s just a lot of foreclosures in that market or if it’s just a market that is so large and there’s such a volume of inventory coming through the pipeline that you always have access to distressed properties and maybe even distressed sellers to pick up these deals. Regardless, it’s been on our list of markets that we offer to our clients for probably since we started over ten years ago. Let’s begin with the question of why invest in Memphis. Let’s maybe start at 40,000 foot level, just give us an overview of why an investor should even look at the Memphis market.
Memphis is a strong rental area. You have the outskirts of Memphis that it is what it is. It’s people that need to rent homes. These areas that people are in, they just don’t have the ability to purchase a property and so they just need the option to be able to rent something. It’s a strong realm market out there.
I’ve seen stats where the number of people in the Memphis market exceed 50% that are renters or almost perennial renters. They’ll rent now and forever. You’ve got a massive rental pool there.
It’s been that way since I’ve been here. I have my mentor that helped me in real estate. It was that way when she first got started, which was 20 plus years ago. It’s just the nature of Memphis. It’s going to be here and it’s been for a while and it’s just always going to be here.
When people think of Memphis, one of the first things that comes to mind is FedEx. It’s such a massive driver in that market. It’s a huge employer. As I understand it, over the years, more recently, they have been expanding the airport and bringing in more businesses and more industry. Can you talk about that for a bit here?
Memphis International is the number one airport in the world where packages flow through there on a daily nearly basis. It’s enormous on what it brings to Memphis. FedEx is a huge part of that.
They employ over 30,000 employees. I don’t think that’s in the Memphis market. I think that might be worldwide, but Memphis is the hub.
Yeah, it’s large. Like you said, it brings in companies from all over the nation to bring their headquarters here. Nike’s got a huge presence here. Its headquarters aren’t here, but Nike has a very large presence here. International Papers World headquarters are here. A lot of big companies come in here to utilize FedEx here in Memphis.
Just from the logistical point of view, it just makes it easy to drop off whatever they manufacture and ship.
Correct.
It’s essentially distribution hub. What about the rail system? I know that the Midwest is the logistical hub, but Memphis is something like the third largest railroad center in the US.
That’s correct. We have, I believe it’s five class one railways that come through Memphis to distribute goods. It’s large as far as railroads go. Memphis is known for being a hub for distribution, logistics, as far as trucking companies where warehouses that house product for people so when they do need it, it’s accessible and available. Then 40% of the nation’s cotton is traded through Memphis. There’s a lot going on. Plus, we haven’t even touched on the tourism yet with Elvis Presley and Beale Street and home of the blues and birthplace of rock and roll and all that.
That just adds to your local economy. That’s just revenue that’s coming into the market, it’s not necessarily people moving into the market. Unless that creates jobs, which drives more people into the market.
It can and it has, but yeah, it’s revenue coming in.
One thing I like about Memphis is you guys have one of the lowest cost of living cities in the US, plus you have no state income tax there.
That’s correct.
That must be nice. It’s better than what we’re paying over here in California.
Yeah. It is.
Talk about the housing. I don’t know how much you want to talk about the housing market there and what you want to say about it, but just touch upon the housing market.
As far as the investment side of it goes, like we had said earlier, it’s always been here and it’s always going to be here. People are going to need rental houses to live in. Like I said before, it is what it is. It’s always going to be there.
It’s a very affordable market. People have referred to Memphis as a bargain hunters’ delight. The median home price there, last I checked, I know this has changed probably somewhat, but it was around $122,000, whereas the median income there is about $56,000. Does that sound about right to you?
Yeah, the median income in the areas as far as where we’re investing into the rental properties is right around the $45,000 to $50,000 median income.
Has anybody ever asked you why don’t more people buy their own home if they have an income in the $40,000, $50,000 range? This is just intuitive to ask this question, “Why don’t more people buy their home?” Have you ever been asked that?
You mean as far as other people that were renting the houses to?
Yeah, just anybody in the rental pool. If they’re making $40,000, $50,000 a year household income, they more than qualify to buy an $80,000, $100,000, $120,000 home. That ratio of income to purchase price is about two to three. It’s about three. That’s fairly low. That’s a very affordable market. Having said that, you would think, “More people do qualify and so therefore, they have the ability to qualify and could qualify and maybe they should get a house,” but they don’t. I don’t know why. What was your thought or feeling about that?
It’s a good question. I don’t know that people that are renting these properties truly know how to go about purchasing a property. I think that they view it as being scary and being difficult. It’s hard to find somebody that will take the time to hold their hand per se and walk them through the steps of getting a loan. I think a lot of people don’t think that their credit is worthy of being able to purchase a house. I just don’t even think they ever try sometimes. I think that’s the biggest thing. I think it’s just scary for them.
Do you think it has anything to do with their credit?
Yes and no. When we’re renting these houses, we pull a lot of people’s credit. A lot of people’s credit aren’t as bad as they make it out to be or that they think it is. With a little work and a little guidance, I think people could maybe purchase homes if they had a helping hand to guide them along the way. I just don’t think that these folks get a lot of that help. Like I said, for them, it’s scary and they’re ready to move into a property and not have to go through the process. It’s a little bit easier for them this way.
As far as your economy there, you’ve got one of the largest cities in the US. It was 17th at one time, not long ago. Third largest railroad center in the US. About half your population rents. It seems that the employment base is growing there because of the drive to build out the airport and bring in more businesses to piggyback on top of that logistical hub. You still have a diversified economy; there’s the transportation, shipping, medical. Actually, one tidbit I have here is that you guys have a world class medical center and I think that’s St. Jude Children’s Research Hospital.
That’s correct, and Le Bonheur.
How big are those as far as employers?
They’re huge. I’m not really sure the statistics on how many people they employ, but it’s quite a few people, especially with both of them. People come in from all over the United States to bring their children there.
Are those in the city of Memphis or in the suburbs?
They’re in the city. In fact, they’re directly downtown in Memphis.
When people talk about Memphis as an investment market, and maybe we can touch upon this later as we talk about the opportunities that you’re working on there, are people investing in the city of Memphis proper or a lot of these properties located in suburbs surrounding the city?
The properties that we’re investing in and that we’re purchasing are all considered Memphis. They’re all in Memphis. The city of Memphis and Shelby County. You have downtown Memphis. Downtown is consolidated. There’s a lot going on downtown. As you get away from downtown and move a little bit further out, Memphis expands and it lengthens out a little bit, more in different suburbs and different areas of town.
Let’s talk about what you have going on there. We refer to these as “low down” investment opportunities. The reality is, there’s no down payment, but we do have to talk about some cost involved in these. I can’t take any credit for this. I didn’t create this investment opportunity. I know other people have taken shots at it. Some other people do it, some people offer a similar type of investment, but they work in different areas. Anyway, we’ve got about $6,000 total out-of-pocket. Again, to our listeners, this is not a down payment. The $6,000 out-of-pocket is the accumulation of the closing costs and lender’s fees involved. Nick, I don’t want to steal your thunder here. I’ve come to learn how this program works so well and I’ve explained it to so many people over the last year or two that I have my own canned pitch, if you will. Why don’t you give an overview of what this investment opportunity is?
What we found in the past is that, so many people that are selling, they’re doing what I’m doing and what our company is doing, everybody tries to squeeze all the juice out of that lemon. What we’ve wanted to do and what we’ve done is we want to build consistent relationships with people who want to purchase investment properties. What we’re able to do is we’re able to find these houses that are distressed and need work. We’re able to purchase them at such a deep discount that we can pass that discount along to the end buyer. What we’re doing is we’re able to sell these houses at 75% of the appraised value. In that way, the end buyer is not having to come up with just a ton of money down on it to complete that 100% loan value. We tried to pass that along to the next person.
The magic here, and I think you’re glossing over this and I want to highlight this for our listeners is that, that 20%, 25% discount is equity and it’s there and it’s great. Everybody likes to have equity when they buy a property. What makes this investment opportunity so unique and it’s the magic that makes the financing work is that, that equity that’s in the property is functioning in lieu of your down payment. In other words, it is your down payment.
Let’s talk about the financing first because this seems to be the thing that people when they understand it, it’s a big a-ha moment. The first comment is, “Wow, that’s pretty amazing.” Do you want to explain the financing, how that works, maybe break it down, explain that there’s part one, part two?
When we sell these properties, we’re selling them at 25% under of what the appraised value is. The reason we do that is, like you said, so you don’t have to come up with that huge out-of-pocket expense. What we’ll do is when Joe Smith or whoever decides that, “Nick, I want to move forward on this certain property,” we’ll go ahead and put him on title. In essence, we’re a short-term lender. We’ve already bought the house, we’ve already done the rehab, we’ve already put the renter in it. We’re, in essence, a short-term lender for these people that we’re not charging any points for us. On back end, there’s no hard money fees on it. They may have to accrue an interest payment, but there’s not going to be many points on the back end. We go ahead and put Joe Smith on title and then from there, we can send all the information over to the lender, then he can start what’s the refinance. It’s not considered a purchase anymore, it’s considered a refinance because they’re already on title. From there, they refinance the property, satisfy our lien and then they own the property shortly after.
That’s the reason this works is you’ve got about 25% equity in the property and when you go to refinance the property, you as the investor already own the property at this point. It’s really a two-stage financing. Stage one is to purchase the property using what many people would refer to as hard money. It’s basically a short-term loan that you, the borrower, qualify for to purchase this property. If you’re approved for the refinance, which is step two, then you’re automatically approved for the hard money loan in step one, correct?
That’s correct. We’re not charging any points on the back end for that hard money loan. Most people I think, will charge around five points plus interest payments, but we’re not going to charge that hard money on the back end. If it goes 30 days, which they typically do, typically the investor, the purchaser or the borrower is going to have to make at least one interest payment, but it’s usually around $300, $400. It’s nothing crazy or out of sight.
To simplify this description, it’s a two-step purchase process. Step one is to purchase the property, you close very quickly on this because hard money doesn’t take a long period of time to close on. You, the investor, purchase this property using hard money, which you’re only going to have for about 30 days or so. That hard money will effectively put title in your name to that property so now you can turn around right away and continue with step two, which is the refinance of your property, because again, you just purchased this using hard money. Now, you’ve got this 30-day period or so where you’re going through a refinance process. Here’s where the magic happens. With any refinance, if you have equity in the property, you are required to have equity in the property to do a refinance because the lender is not going to refinance your property unless you have a minimum amount of equity in the property. Usually, that’s 20%, but often it’s 25%. That’s exactly what you have here, is you’ve got these properties that have about 25% equity in them from day one. The refinance will take that property, refinance it, put a brand new 30-year fixed rate mortgage in place for you. It’s a traditional, conventional mortgage like any other purchase money mortgage. It takes out that hard money loan, it just wipes it right out. At this point, the investor has made probably one interest payment towards that hard money loan, right?
That’s correct.
At the end of the day, you have a refinance for a 30-year fixed rate mortgage taking out that first temporary loan, hard money loan that allowed you to acquire the property, take title, do the refinance, use that 25% equity in lieu of your down payment, so effectively that is the equity the lender requires for you to get that loan. Now, you have your basic 30-year mortgage at a competitive interest rate that your tenant will pay for you and amortize over the lifetime of that loan. Is that a pretty good summary?
You hit the nail on the head on that one, yes.
That’s the secret sauce, if you will, that some investors ask us about, “How do you do that? How does it work?” That’s how it works there.
Marco, it’s just that simple. It’s not rocket science. This isn’t meant to be difficult or for people not to understand. It’s just supposed to be plain and simple and easy for everybody to be able to better themselves.
Then we get asked another question, why do you leave so much equity in there? Why don’t you just buy these for yourself? Are you making a profit? If you’re giving away “that much equity” is there still profit to be made for you as a rehabber?
There’s profit in there. I don’t want to sound any particular way, but we wouldn’t be doing this if we aren’t going to turn someone of a profit. It’s just we’re not squeezing all the juice out of that lemon. We’re trying to build long lasting relationships with folks that want to purchase properties. That’s the goal. We want to do things the right way and treat people the right way. We just feel that by being able to pass that savings along and for somebody to be able to purchase an investment property without having to put 20% or 25% down. We just feel like it’s the right thing to do. We’re able to do it and make a little money, in hopes that people are going to keep coming back to invest and make this a marathon and not a sprint for everybody.
Let’s focus on the property here for a minute. Tell me about the typical rehab. In other words, what do you typically find in the scope of work on these properties?
They’re pretty much the same thing for all of them. If it needs a roof, we’re going to put a roof on it. We’re going to go in and we’re going to put new flooring in, new paint, new vanities, toilets, plumbing, upgrade the electrical. We’re going to go through and do a thorough job and make sure it’s rehabbed the right way.
Inspections are typically not an issue.
No. When people have a home inspection done, if there is an issue, it’s usually minor things that we’ll go back and knockout if we need to, but nothing major.
We sometimes get asked about, “What is fixed up? What’s in the scope of work?” In other words, what’s the extent of the rehab? I think you’ve touched upon that. In regards to the neighborhoods that these properties are located in, there’s one of those questions where we can answer, and I know how you describe it and we also send our investors fairly detailed neighborhood profile for the properties that they’re buying so they can understand the demographics and some of the neighborhood characteristics. Paint that picture for us. Tell us the typical neighborhood that these are located in so investors understand and have the proper expectations going in. Obviously, these are not what I’ll call higher end A-grade neighborhoods, but at the same time, they’re also not your low end D or C-type neighborhoods or war zones. How would you describe them, Nick?
Like you said, they’re good, decent areas for blue-collar folks that have factory jobs, however you want to put a spin on it, but there are good hardworking folks that live out there. They’re blue-collared neighborhoods with a medium to low income. Like you said, they’re not in horrible neighborhoods where you’d be scared to go through them or anything like that. They’re just decent little neighborhoods, nothing real flashy about them, just people trying to raise their kids and get their kids to school and go to work.
Another way to say it is these are effectively bread and butter housing for your working class demographic, they’re blue-collar, probably low middle income earners, often they’re factory workers or manual labor tenants, correct?
That’s correct.
Sometimes for simplicity, I like to just refer to tenants as being either Walmart, Macy’s or Nordstrom tenants. I would say, if you were to characterize these tenants, they’re probably Walmart-type tenants, true?
Yeah. FedEx, people that work at the hub, FedEx people, Nike warehouse workers, people with factory jobs like that.
What else do you want to say about this particular investment opportunity that I haven’t asked you about? I know there’s a lot more we could talk about, but what else do you want to add to this conversation?
I just want to let people know that we want to build a long lasting relationship and be able to provide people with nice investment and be able to get into it without having just to spend a ton of money out of their pockets. These are for people that are trying to diversify their portfolio a little bit. We want to help them to get into it as easy as possible.
On our website at NoradaRealEstate.com, if you go to the Memphis page, we often have these posted up on our website. But what listeners will often find is that there will be no photo or maybe one exterior photo, which is the pre-renovation photo. The reason for that is because the turnover is so fast that a lot of times, investors will pick these up before the renovation work is done and put them under contract. We don’t actually have the time to get the post renovation photos up on the site for you to see before they can go under contract, but that doesn’t change the deal at all. Of course, these will always be subject to inspection, subject to financing. The normal conditions are always in there so there’s no risk, it’s just the velocity of sales today in a lot of markets like Memphis and the Texas markets and in some cases, even the Midwest markets. They’re so brisk that investor don’t have a choice but to pick the right neighborhood and the right property with the right numbers and the right management team and put properties under contract before the renovation work is done just because if they don’t, they’re going to lose it out to someone else. That’s typical a seller’s market.
That’s 100% true. It seems like as soon as we have available inventory, whether it’s rehabbed or not, people are snatching them up and ready to move forward on them.
What we should do, Nick, is probably put two or three properties up there that are showing as under contract. In other words, they’re pending, but they’re always there even though they’re not truly available, and just use those as actual examples of properties that were sold so people can see what the interior finishes and whatnot look like.
We can do that, absolutely.
I’ll get my team to work on that. I think I asked you everything I wanted to ask you. Is there anything else you want to add to this particular investment opportunity?
I don’t think so. I think we covered pretty much the basics of everything.
I know this is the first podcast episode you’ve ever done, I think you did a bang up job, Nick. I appreciate you taking the time.
I appreciate it.
Nick, thank you for taking the time today. I’m sure we’ll get a lot of calls from this episode. We’ll talk to investors and answer their questions and make sure their expectations are set correctly and then we’ll put them in touch with you as that interest bubbles up.
It sounds great. I appreciate you having me, Marco.
No problem. Nick, you have a great day. Thanks again.
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