Memphis Rental Property #7
Last updated: 2024
NOTE: While this article was published in 2024, the house was bought five years earlier, in 2019. Check out the Annual Updates section at the end of the article to see how the property has performed since then.
Time to take a close look at Property #7 in my Memphis portfolio! As you’re probably getting sick of hearing me say, this was part of the group of 16 properties I bought in rapid succession after I left my office job, sold my primary residence, and used the proceeds to invest in a portfolio of cash-flowing rental homes.
This one has a few distinctions worth mentioning at the outset:
First, it is among the oldest of my properties, built in 1954. The age of the home may be a factor in some of the maintenance work I’ve had to do in the years since I purchased it.
Second, it was the cheapest home I’ve ever bought, with a purchase price of just $45,000. The low purchase price impacted how I chose to purchase the house, and will also be relevant as we think about my returns on the property. I’ll talk about more of both of these factors later in the article.
Honestly, this house has been a bit of a pain so far. (I won’t go so far as to say it’s cursed, as I don’t believe in such things…but it kinda feels that way.) Still, despite all of it, it’s positioned well to be a big long-term winner for me.
Alright, let’s get into the details of this house!
Property #7: 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.
Because the purchase price was so low, I chose to buy this one outright in cash and save my “golden tickets” — the limited number of conventional mortgages I can access — for pricier homes. I’ve never taken a loan on this property, so I still own it outright.
This one was a 3-bed, 2-bath home in the 38108 zip code (the only house I own in that zip, btw.) The neighborhood is a C/C- pocket, so I viewed it as a more aggressive cash flow play than many others in my portfolio. It’s ironic, then, that this neighborhood has experienced some of the fastest price and rent increases of any where I own homes, as you’ll see in the Annual Updates at the bottom of the post.
Here are some facts about this particular house:
Built in 1954
Central air
1320 square feet of interior space
Tenant in place paying $650/mo.
Carport
Oversize windows
The property was offered at $49,900. My initial offer was $40,000. After a few rounds of back-and-forth with the seller, we agreed on a price right in the middle, $45,000. I felt this was a strong deal on the house; the value was driven down because it was only in fair condition, and the tenant in place was below market rent, which was closer to $800 at the time. With a very strong price-to-rent ratio already, and the chance to raise rents in the future, I figured this would be a slam dunk even if the house DID end up requiring quite a bit of work.
Property #7: 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 was less than perfect. Here were some of the learnings from it:
The roof likely had only ~5 years of useful life left
Exterior trim/fascia damaged in multiple spots on the roofline and around windows, allowing water penetration
The HVAC system relied on ductwork underneath the house that was aged & worn
Worn carpets and other areas required cosmetic upgrades when the tenant vacated
Based on this due diligence, I was clear that I was buying a home that would likely require upgrades in the first 5 years or so to bring it up to standard. Still, I expected to cash flow strongly during that period because I wasn’t carrying a mortgage.
I don’t have great photos of the property from the time I purchased it, but just to give you an idea, here are some photos from 2021 after my inherited tenant moved out and I rehabbed the property in preparation for the next tenant (more details on that in the Annual Updates):
Of course, the house is significantly improved/cleaned up compared to when I bought it, and it was quite the saga to get it into this condition, as you’ll see later.
Property #7: The Financials
As already mentioned, this was a cash purchase at $45,000 — and because it was a cash deal, my closing costs were very low at just $825. 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: $45,000
Monthly Rent: $650
Monthly Cash Flow: $361
Cap Rate: 9.63%
Cash on Cash Returns: 9.45%
Total Returns w/ 2% Appreciation: 11.42%
(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 a long-term inflation rate of 2%. Some of these trends are noticeably different from other Property Spotlights due to the fact that there is no mortgage on this property:
Cash flow increases over time. Both rent and expenses are projected to increase with inflation, but the gap between the two still grows each year:
Cash Flow Year 1: $4,332
Cash Flow Year 10: $5,177
Cash Flow Year 25: $6,968
Without leverage, total returns are lower, but the vast majority of the returns are in the form of cash flow. The only other form of returns are appreciation, which are a much smaller portion:
Appreciation Year 1: $900
Appreciation Year 10: $1,076
Appreciation Year 25: $1,448
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. But total returns on equity remains flat.
Total Returns on Cash Year 1: 11.4%
Total Returns on Cash Year 10: 13.6%
Total Returns on Cash Year 25: 18.36%
Overall, the numbers looked very strong on this property. And given it’s low price, I don’t regret my decision to own it in cash. But the struggle to stabilize this property has been tougher and longer than I anticipated. Going forward, this will be a lesson I apply when I evaluate (or help clients evaluate) older homes that haven’t been maintained at a high standard.
Property #7: The Deal Sheet
Finally, to sum up Property #7 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
Not much happened in the year I purchased the house, other than a few small maintenance visits. I generated almost $4K in cash flow, exceeding my initial target.
2020
The tenant renewed with a small increase to $676/mo. On the maintenance side, I spent $870, most of which was on the HVAC unit — this is the point in my investing career when I realized how expensive freon is! The unit needed to be charged with new freon (perhaps due to a leak), which was over $500. Cash flow for the year was nearly $5K, closely in line with my target.
2021
It was a bit of a saga at this house this year! During an occupied home inspection in the spring, my PM discovered significant water damage in the house that had gone unreported. We decided it was best to ask the tenant to vacate, which they did (the failure to report the damage was a lease violation, so they were convinced that it was best simply to leave, an option my PM afforded them.) We then embarked on a significant rebuild of much of the home’s interior walls, along with other upgrades to get the property ready for the next tenant. The total cost was over $14K, of which $8.5K was categorized as CapEx; the balance was regular expense.
A new tenant signed for $795/mo., an increase of over $100/mo. from the previous tenant. But while doing a final walkthrough before the tenant’s move-in, my PM noticed that there were bees entering and exiting the house from an opening. A subsequent inspection led to the discovery of a colony of 50,000+ honeybees, which had to be removed by a professional beekeeper. My PM had to come in afterward and repair the wall in which they were living.
Later in the summer, the HVAC unit began acting up again, requiring more and more freon from a leak that stubbornly evaded detection. Eventually, both coils in the unit were replaced (on warranty, luckily), but the ongoing service visits/freon cost me over $1K more.
On the plus side, a payment of nearly $4K from my insurance company on the water damage helped — though negotiating that with my insurer was very frustrating, and I thought the claim should have paid out more. The other silver lining is that (along with all my homes in 2022), valuations rose very steeply, causing a huge increase in my home equity here.
All told, I eked out a small positive cash flow of $900, but this was well below my target and doesn’t count the $8.5K of capex I invested. Very much hope next year is smoother…
2022
The tenant renewed for another year with a small increase to $830/mo. After last year’s drama, I’m happy that 2022 was quite a bit smoother: there were just a few small service visits, though I did have to pay $1K+ to remove some larger fallen limbs following a spring storm.
Cash flow for the year was $6K, just shy of my target.
2023
The tenant renewed for a 3rd year, with their rent increasing to $895/mo. Not much else to report, thankfully, as I spent only $125 on maintenance, and cash flowed nearly $8K, or $2K more than my target. Great year here!
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.
