Memphis Rental Property #21
Last updated: 2024
NOTE: All figures and statements in this article were accurate as of the time of initial publication in 2022. Check out the Annual Updates section at the bottom of the post to see how the property has performed since then.
In December 2022, I closed on four (!) new properties in Memphis. This was directly on the heels of Property #20, which closed a month prior. This house, Property #21, is the first of those December closings, and the second property (out of four) that were part of the 1031 exchange I did when I sold my last remaining NYC rental condo this past summer.
This one is a 3 bed/1.5 bath house that I acquired through a turnkey provider, using a conventional mortgage. I have only one other home in this area of Memphis — this is in the extreme southern part of the Whitehaven neighborhood, just a few blocks from the Tennessee/Mississippi border.
Let’s get into the details of this deal!
Property #21: The Deal
This house was bought from a turnkey provider, so it was sold directly through that provider’s sales channel. It’s a very typical home for this B/B- neighborhood: a 3 bed/1.5 bath house containing just over 1100 square feet, with brick construction, originally built in 1966.
Because this was a turnkey property, I knew that everything would be newly rehabbed: new roof, new mechanicals (HVAC, furnace, and water heater), new or refreshed kitchen & bathroom, new flooring and paint, etc. Even as an experienced investor, I appreciate the ease & simplicity of buying turnkey properties, especially when I already know and trust the provider based on previous purchases. In fact, I worked directly with this turnkey provider during the 1031 exchange, to make it easier to find and close on multiple properties in the prescribed timeframe without any surprises or headaches.
The purchase price was $121,000, which I thought was fair for this area. The expected rent was $1100, meaning this would fall slightly short of “the 1% rule” — but that’s typical for turnkey properties.
Inside, the house looks very much like my previous turnkey properties (Property #17 is an example). I didn’t get a great set of completion photos for this one, but here’s a small sampling of what it looks like — I especially like that they also redid the exterior of the home with white paint and new shutters, which gives the home a clean & modern feel:
I closed on the property without delays, using funds from my 1031 exchange for the down payment. The property got strong attention from prospective renters, so my PM had a tenant in place within two weeks of closing at the pro forma amount of $1,100/month. (My guess is that the house would have rented pretty easily for as much as $1200.) So everything went smoothly here, and the property was stabilized and cash-flowing very quickly.
Since there was no due diligence or rehab on this property, let’s jump right into the numbers.
Property #21: The Financials
I financed 75% of this purchase with a conventional loan at 6.75%, so my down payment was $30,250, and I incurred $6,386 in closing costs including buying down the rate a bit with points. I used the RIA Property Analyzer to run the final numbers on this property – here are the key metrics that the analyzer calculated for me:
Purchase Price: $121,000
Monthly Rent: $1,100
Monthly Cash Flow: $147
Cap Rate: 7.30%
Cash on Cash Returns: 4.82%
Total Returns w/ 2% Appreciation: 13.99%
(Want to use this calculator yourself? You can!)
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While these numbers aren’t going to blow anyone’s mind, they are solid enough, especially for a turnkey property. In the long run, I will benefit from the low maintenance costs and CapEx on this house in the first decade of ownership; I think I also have some room to grow the rent over time, given how easily this house rented at $1,100. If the market rent on the house is actually $1,200, that increases the Cap Rate to 8.16% and the cash-on-cash to 7.68% — quite a bit healthier.
Also, this is a great illustration of the tradeoffs inherent in using higher-interest rate mortgages. I recently published an in-depth article reviewing those tradeoffs, and why it’s still beneficial for most investors to use leverage. With this house, I’m giving up a bit in my cash-on-cash returns when I apply the mortgage (4.8% CoC vs. 7.3% cap rate), but the long-term financial benefits of the mortgage far outweigh this cost. (I needed to use some leverage in any case to maximize the tax benefits of the 1031 exchange, but I would have preferred to use a mortgage even if that dynamic were not in play.)
Using the multi-year model in the RIA Property Analyzer, we can visualize some of the main long-term trends (assuming an inflation rate of 2%):
Cash flow increases over time. This is because rent and expenses are expected to rise with inflation, but one major expense (my mortgage) is fixed.
Cash Flow Year 1: $1,767
Cash Flow Year 10: $3,489
Cash Flow Year 25: $7,139
Mortgage paydown accelerates over time. This is because of the way banks amortize loans – each month, a little bit more of your fixed payment is principal, and a little bit less is interest.
Mortgage Paydown Year 1: $967
Mortgage Paydown Year 10: $1,773
Mortgage Paydown Year 25: $4,865
Total returns on cash increases over time. This is a consequence of the first two points – I will make greater total returns over time on the same initial investment of cash.
Total Returns on Cash Year 1: 14.1%
Total Returns on Cash Year 10: 22.3%
Total Returns on Cash Year 25: 43.4%
Overall, I’m happy with this purchase. It’s just very solid: solid construction, solid neighborhood, solid turnkey rehab. The numbers aren’t exceptional, but they’re (you guessed it!) solid. It rented very easily, which is always a good sign, so I’m reasonably confident that this house will be a winner in the long term.
And though the ~$150/month in average cash flow isn’t an earth-shattering number, it nonetheless meets the goal of my 1031 exchange: to get out of my NYC condos (that actually lost a few hundred per month on average), and trade them in for properties that have positive cash flow. Mission accomplished here — and there are still two other properties to come to complete the 1031 exchange…
Property #21: The Deal Sheet
Finally, to sum up Property #21 and its financials, here’s the full “deal sheet”:
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Annual Updates
For all Property Spotlights, I come back at the end of each year to provide a brief narrative of what happened at the property that year. I also update my annual and cumulative figures for the property, including cash flow, equity growth, and occupancy.
2023
It was a pretty smooth first year for this property. The tenant has been great so far, with timely payments each month. Their initial lease was for two years, so they’re not up for renewal until Fall 2024.
I did have an unfortunate incident where a falling branch damaged the electrical equipment affixed to the outside of the house, and I had to repair all that at a cost of ~$2K — otherwise, my cash flow would have been much stronger.
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
