Memphis Rental Property #6
Last updated: 2024
NOTE: All information was accurate as of the time this article was first published in 2024. The house was bought five years earlier, in 2019. See the Annual Updates section at the end of the article to check out how the property has done year-by-year.
Here is Property #6 in my Memphis portfolio, another one purchased during the sprint of acquisitions that took me all the way from Property #2 to Property #16 in about 9 months. In fact, I closed on this house the same day I closed on four others!
You might be thinking “whoa, that house looks a lot bigger than your other houses.” Your eyes do not deceive you — this is a BIG house, and has a handsome two-story front elevation along with a two-car garage. Very swanky!
Overall, though, my experience with this home has provided insight into why I would NEVER buy this house today. I’ll talk more about why as we move through the article.
Alright, let’s get into the details of this house!
Property #6: The Deal
Like many of my early purchases, I found this deal on Roofstock. As I’ve mentioned in previous Spotlights, this was a new and innovative platform at the time, but they have changed their business model and it’s not nearly as useful as it once was — so much so that I don’t recommend Roofstock to my private coaching clients anymore, as it doesn’t offer any incremental benefit to shopping for properties on Zillow.
Again, this one is a WHOPPER of a house at just over 2500 square feet. This is double the size of a typical home in my portfolio, and because of that it’s not one that I would buy again if I had the chance to do it over. The bigger the home, the more stuff can break in general — for example, this house has 3 toilets, which means 3 different toilets can malfunction (and they have).
Additionally, though, there are several expenses that will scale DIRECTLY with square footage:
interior and exterior paint
a new roof
new flooring
insurance (minimum property coverage per square foot)
you need a bigger HVAC unit to cool that big a home
That’s why today, when I advise my coaching clients, I tell them that extra space is BAD. An ideal rental home is a smaller, single-level, cookie-cutter home with just enough space to get the job done.
As was the case with nearly all my purchases after Properties #1 and #2, I used a mortgage to finance this purchase. (Here’s why.) The rate on this mortgage was 5.03%, pretty consistent with the other mortgages I initiated around this time.
The house has 4 bedrooms with 2.5 baths, and it’s located in what I’d call a B- neighborhood in the southern part of the 38116 zip code, close to the Mississippi border. It’s on two levels, unusual for my portfolio, and sits nicely at the end of a cove. The neighborhood dates from the 1960’s, and has quite a few of these larger 4-bedroom homes, which were relatively unusual for the time they were built.
Here are some facts about this particular house:
Built in 1967
Central air (or so I thought…)
2502 square feet of interior space
Tenant in place for two years, paying $1,095/mo.
Two stories
Large yard
The property was offered at $115,000. My initial offer was $99,500. After a bit of back and forth with the seller, we settled on a price of $107,000. It was the most expensive property I had bought up to that point, but I felt it was a good deal for a house of this size and quality — before the purchase, Zillow had it valued at $125-$130K. Plus, with the current rent of $1,095, this put me above the 1% rule (rent > 1% of purchase price), and my cash flow numbers looked good.
Property #6: Due Diligence
One of the nice things about Roofstock at the time is that they paid for their own inspection report, and made this visible to everyone on the listing page BEFORE you made an offer. In this case, the inspection raised no major concerns, and confirmed that the roof and HVAC/furnace were relatively new and in good shape.
The tenant had been in place a few years, and had a reasonably good payment record — though in the six months before my purchase, they did begin to pay the rent late most months. This is a bit concerning, but wasn’t enough to deter me from moving forward with the deal. (Some tenants will simply pay late for years at a time — in fact, that’s what happened with this tenant, as they’ve stayed in the property for all five years since I bought the house, and paid the rent late most months.)
Because I was using a mortgage, I also had an appraisal, which came in at $130,000, well above the purchase price of $107,000.
I also had quite a few interior pictures, which confirmed the property had been rehabbed before the current tenant moved in. Here’s what it looked like at the time:
One of the other things I failed to realize at the time due to my inexperience was that this house had an addition put on it at some point. There are clues to this in the photos I was provided:
The floor plan for the first floor is larger than the second floor, and has a long back room labeled a “den”, a telltale sign of an addition.
The photo of the back of the house shows a window air-conditioning unit, indicating that the addition was not connected to the existing central AC system.
The addition is one reason why the square footage of the house is so large. Additions are another thing that I would always try to avoid today, due to the extra space, because they often require separate heating & cooling, and because the quality of the worksmanship on the addition is hard to ascertain. (This addition is quite sturdily built and blends with the original home nicely; I’ve seen many worse ones over the years.)
Property #6: The Financials
I used a $30,000 down payment here (28% of the purchase price), meaning my mortgage for $77,000 at a 5.03% interest rate. I also incurred $3,174 in closing costs. 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: $107,000
Monthly Rent: $1,095
Monthly Cash Flow: $193
Cap Rate: 6.82%
Cash on Cash Returns: 6.99%
Total Returns w/ 2% Appreciation: 16.77%
(Want to use this calculator yourself? You can!)
OR
Using the multi-year model in the RIA Property Analyzer, we can visualize some of the main long-term trends, assuming an average inflation rate of 2%:
Cash flow increases over time. This is mostly because rent and expenses are expected to rise with inflation, but one major expense (my mortgage) is fixed.
Cash Flow Year 1: $2,318
Cash Flow Year 10: $3,741
Cash Flow Year 25: $6,755
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: $1,131
Mortgage Paydown Year 10: $1,776
Mortgage Paydown Year 25: $3,768
Total returns on cash increases over time. This is a consequence of the first two graphs – I will make greater total returns over time on the same initial investment of cash.
Total Returns on Cash Year 1: 16.85%
Total Returns on Cash Year 10: 24.34%
Total Returns on Cash Year 25: 42.10%
While the returns looks good, this is one I would not buy today. The bottom line is that it’s just too big to be an ideal rental property. It may still perform decently — as I often tell people, if you hold a rental property long enough, it’s nearly impossible to lose — but nonetheless, this is a pretty good example of a type of property that I now advise clients NOT to buy.
Property #6: The Deal Sheet
Finally, to sum up Property #6 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.
2019
I had a steady drip of small maintenance issues after I closed on the property, including repairing the fence, a sink leak, and replacing the window AC unit (which I hadn’t even known existed when I closed…because I was stupid.) It added up to over $1,500 in costs in just over half a year, which is quite a bit. Still, I was able to eke out a small positive cash flow for the year.
2020
The tenant renewed at $1,145/mo. for another year. My PM opted for a 15-month lease so that the tenant’s future renewals would be in the spring, rather than on January 1st. The tenant paid late most of the time, but never failed to pay the rent by the end of the month (a pattern that would continue for many years.)
Meanwhile, I continued to fix small issues at the house, including a kitchen sink, two toilets (different ones), and an HVAC issue. But those costs were within budget, and with full occupancy, I cash flowed over $4K, exceeding my target by nearly $1K.
Separately, I had a capital expense of $1,125 to replace the water heater; it was the only part of the home’s mechanicals that was not relatively new when I bought it.
2021
The tenant renewed again, with another small increase to $1,190/mo. Small maintenance expenses continued to accrue at a regular pace, but nothing huge that would bust the budget, so my cash flow was again ~$4K, similar to 2020.
Like all my properties this year, huge increases in home prices were registered, and my annual equity growth topped $80K. This was one of the largest jumps anywhere in my portfolio.
2022
The tenant renewed again, but with market rents increasing rapidly during the post-pandemic period, we charged a larger increase to $1,286/month. This still left the tenant several hundred dollars below market rent. They continued their pattern of mostly late payments.
On the maintenance side, things were ugly. There were several leaks around the house, and we spend much of the year chasing down the root causes of that. Was it the roof? Was it the upstairs bathtub? Was it the ice-maker supply line for the fridge? We played whack-a-mole, and it cost a lot: a $2K roof repair; a $2K project to replace the tile surround in one of the tubs; and several other miscellaneous projects including replacing a toilet, fixing the garage door, servicing the furnace, replacing the garbage disposal, and more. My total maintenance expenses for the year were over $6K, which pulled me into a small negative cash flow for the year. YUCK!
2023
The tenant’s rent increased again to $1,340/month, and they continued to pay late most month’s without major incident. It was also the quietest year so far at the property for maintenance expenses, which allowed me to cash flow nearly $6K, or nearly $3K above my target. Best year so far at this property!
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.
