The Blues City Gives Local Investors All the Love
Two years ago, Memphis, Tennessee, was one of the hottest real estate investing markets in the country. Media outlets like CNN Money gleefully described the “hordes of real estate investors…snapping up foreclosures and other cheap housing, rehabbing the homes, and renting them out for handsome profits.” Then, in a way that long-time residents of the city nicknamed the Birthplace of Rock and Roll and Blues City likely found familiar, the media spotlight moved on. The focus shifted to other markets as the looming impact of the country’s burgeoning affordable housing crisis became increasingly clear. In Memphis, one of the most affordable metro areas in the country, the housing market kept chugging along.
“Memphis may not be the most exciting real estate market to watch, but it’s one of the best rental markets in the world,” said James Wachob, a real estate investment broker with local turnkey provider Memphis Investment Properties (MIP). “We’ve got moderate rent prices, low entry-price points, and high rent-to-value ratios.”
Wachob cited the steady, relatively unexciting pace of the Memphis market as part of the reason his company has been buying, renovating, and managing properties in Memphis for more than three decades. “Of course, you still have to do your due diligence on each property individually, but the Memphis market is pretty steady overall,” he said.
A Market Rooted in Centuries of Tradition
That steadiness stems in large part from a prime geographic location. Powered by a confluence of major highways, waterways, airways, and railways, Memphis, like the Egyptian city for which it was named, has been a gateway city since its inception. Centuries ago, the Chickasaw Indians occupied the area before European explorers encountered the bluff overlooking the Mississippi River and began fighting each other and the tribe for the prime shipping location. Memphis is considered to be largely flood-proof despite its proximity to the river [see sidebar on pg. 40]. As technology and time have added to transportation and shipping options, that advantage has become even more pronounced.
By the 19th century, Memphis was firmly established as a trade and transportation center thanks to its near-perfect geographic location. By the middle of the century, it led the world’s markets for cotton, lumber, and mules.
Just when things were booming, however, the 1870’s hit Memphis hard. A series of yellow fever epidemics ravaged the city, demonstrating just how devastating the combination of water-borne diseases and the total lack of a public water system could be. Memphis, which had boasted a population of 40,000 (double that of Atlanta, Georgia, or Nashville, Tennessee, at that time) lost more than half of its population, including the majority of the middle and upper classes. Those citizens either died or fled the area.
The yellow fever epidemics and associated mortality set the stage for the lowest classes of citizens, mostly immigrants who could not afford to flee the fever, to play an unusually large role for the time in rebuilding the municipal infrastructure. When the epidemics finally ended with a hard freeze in October 1878, the remaining population formed a city government that promptly established the first regional health organization in the country. The local governing body also espoused uniquely (for the time) pro-business policies. Those policies mainly led Memphis to aggressively annex surrounding areas in order to rebuild its population and create a business-friendly climate full of consumers.
The members of that consumer population, while earning relatively low incomes, for the most part, formed a firm consumer- and employee base for new businesses hoping to optimize inexpensive labor and a prime trade location. That base has remained solidly in place since then. In the present day, the city’s prime trade location and the southeast’s relatively low cost of living create a similarly attractive environment for many businesses.
A City of Renters
Even before the housing crash, Memphis boasted a significantly higher proportion of renters in its population than the rest of Tennessee and the country as a whole. In 2015, more than 40 percent of the population in Memphis was renting, compared to about a third of the population statewide and nationally. That number has been trending upward, growing by 2.48 percent from 2014 to 2015 compared to less than one percent state- and nationwide.
The Memphis economy is well-suited to support a large population of renters. With Fortune 500 companies like FedEx, International Paper, and Autozone making their homes in the area and the Memphis International Airport providing a hub for residents employed in the transport business, it seems unlikely that the Memphis rental market will slow anytime soon. In fact, many experts predict that Memphis will see more renters, not fewer, as housing becomes less and less affordable and more households elect to continue renting indefinitely rather than buying.
In the event that the affordability crisis does hit Memphis, Wachob believes that savvy investors will actually be well-positioned to work in such a challenging housing environment. He recommended marketing to homeowners who are likely to need to sell their homes quickly and possibly at a discount. “They could be facing a divorce, job loss, or repairs and maintenance that they simply cannot afford,” he said. “We do this type of marketing to constantly create opportunities for good deals rather than just looking for them,” he added. Some local companies, including MIP, are even building brand-new homes as rentals to expand available affordable housing inventory for the renting population. Often, turnkey investors find this type of rental attractive as well.
“There is very little maintenance; the properties are energy efficient, and there is an abundance of qualified renters who would love to live in a new home,” Wachob explained. His company purchased dozens of buildable lots for about 20 cents on the dollar during the housing crash. They have been developing those lots for rentals ever since. “Lately, however, we have also been focusing on multifamily properties because the supply of discounted and undeveloped land is vanishing,” he said.
Taking Turnkey Into Consideration
Individual investors just getting started on the rental side of things in Memphis may find the going a bit tough at first. The city is known for its thriving turnkey rental sector, of which MIP is a part. Turnkey rentals are rental properties sold to investors as a performing package. Usually, a turnkey rental will have a tenant lined up and vetted or already installed and paying rent before an investor buys the property. These properties often have property management in place. They may sell at or above market value because the new owner can truly take ownership with the turn of a key. Turnkey properties are popular with passive real estate investors interested in building a real estate portfolio but not in managing it.
Investors should not automatically view the presence of these turnkey giants in Memphis area as a negative, however. The presence of turnkey rental providers means that there is a strong support system in place for rehab and renovation companies, property management companies, wholesalers, and even, in some areas, flippers. Furthermore, many turnkey companies have scaled their operations to the point where certain deals that might appeal to an individual investor no longer meet their criteria. Identify these deals, and you could find yourself very happily investing, alone, in niche properties.
Getting Specific in The Bluff City
Niched or otherwise, your success in the Memphis market hinges on knowing as much as you can about the little things, said Sean Carpenter, CEO of Shamrock Development Associates. Carpenter, a development consultant as well as a developer himself, emphasized that in his experience, Memphis properties are often not as similar as they appear at first.
Out-of-towners, in particular, may have difficulty obtaining good comps and applying them to deals correctly. “An investor from out of state may look at that market and say, ‘Oh, I can get $800 per month because other projects are getting that, but in reality, they can’t get $400 a month,’” he explained. “You’ve got to know every single detail or be working with someone who does.”
In Memphis, just as in any other market, it is essential that investors understand exactly what they are looking at before they buy. Verify that properties presented as comparable to each other are located in close proximity to each other and roughly the same in terms of style and structure. Watch local trends. One neighborhood could be transitioning to a more valuable area while another adjacent development declines. Wachob calls Memphis a “street-by-street market,” meaning that things can be very different from one street to the next.
Sometimes, Lagging Behind Can be a Good Thing
On a positive note, remember that Memphis’ recovery curve has lagged behind other metro areas. While the idea of a market lag might sound negative, in Memphis it could be construed as positive because the market may have a few quarters of above-national-average appreciation left before it levels out. In 2016, Memphis boasted appreciation rates of more than 8.5 percent, well over the national average and ahead of many similarly-sized metro areas.
In 2017, despite some warnings from analysts that an affordable housing shortage could be looming in Memphis as elsewhere around the country including southeastern neighbor Atlanta (see p. 35 for our market update on that location), both sales volume and sales prices continued to rise. The Memphis Area Association of Realtors (MAAR) reported that the first six months of 2017 were banner ones in Memphis. The volume of homes sold between January and June increased by 8.9 percent, and the average sales price increased to about $187,000. Notably, that median sales price is vastly more affordable than most of the rest of the country.
Only Good Blues in Memphis
Despite being home to the international headquarters of the Blues Foundation and site of many blues music festivals throughout the year, Memphis real estate market investors are not likely to be singing the blues anytime soon. At least, not if they tailor their strategies to fit their local market. “I don’t love Memphis personally because I feel the market is somewhat saturated,” said Carpenter, who lives in Boston, Massachusetts and works with large, often government-funded development projects throughout the country. “You’ve got to know the market,” he repeated.
MIP’s Wachob takes full advantage of his local knowledge in his Memphis investments. “We focus on areas that we know our tenants will want to live in: safe, close to large employers like FedEx, St. Jude’s Children’s Research Hospital, and the Nike Worldwide Distribution Center,” Wachob explained. He believes that MIP’s local presence gives him an edge over investors working without a local contact. “When you are working in a street-by-street market, you can never generalize,” he added. “However, over time, you’ll find that Memphis is a very predictable, non-volatile market.”
Incoming by Land, Sea, Air, and Rail
From the beginning, Memphis’ location on the Mississippi River made it a prime spot for shipping and freight. It was the location of the only east-west railroad built prior to the Civil War, boasts three interstate highways already with four more in the works, and is served by seven additional U.S. highways, more than any other city in the Southeast. The Memphis International Airport is the world’s second-busiest cargo airport, trailing only Hong Kong, and the city is the second-busiest cargo port on the Mississippi River.
Here are just a few of the major corporations taking advantage of Memphis’ location:
• Hilton Hotels (Hilton IT World Headquarters)
• Wonder Bread
Is Memphis Truly Flood-Proof?
One of the things that made the Memphis area attractive to the Chickasaw tribe and later to European colonists was its proximity to the Mississippi River and location on relatively high ground. Some writers have gone so far as to describe the city as “flood proof.”
Think Realty Magazine asked Affinity Loss Prevention Services (ALPS) assistant vice president BreAnn Stephenson about this description and how it should affect an investor’s decision to buy properties in the area.
“First of all, even if Memphis or any other area is considered ‘low risk’ for flooding, that doesn’t mean that purchasing a flood policy is unreasonable,” said Stephenson. “Every investor should be aware that Flood coverage is not included in any standard property policy.”
Stephenson cited a 2011 flood in the area as an example of one of the rare times the area has experienced flooding.
“The big issue seems to have been Heavy Spring Rains combined with melting snow run-off from northern states,” she said. “This combination caused back-ups in the tributaries, and there were some evacuations and homes damaged to the north, in Tiptonville.
“I didn’t find record of any other recent floods in Memphis, so it looks like their system of levies has held the river at bay,” she added.
Note: Notice some unusual punctuation or capitalization in this insurance article? These anomalies are not typos, but deliberate. When covering insurance-related topics, we capitalize intentionally to indicate types of coverage, exclusions, or policy formats. For example, Water Damage, when capitalized, refers to the coverage in your policy for water damage. Without the capital letters, you are simply discussing damage done by water, which may or may not be covered.
BreAnn Stephenson is the author of ALPS’ series, “It’s Not Covered,” which educates real estate investors about the intricacies of property insurance in order to help them avoid disasters. She may be reached at www.affinitylps.com.
Why People Rent in Memphis
Given local levels of housing affordability, why is Memphis such a solid rental market?
One reason certainly lies in local employment options, many of which hinge on an employee’s ability to travel or be otherwise mobile. Another may be the local culture, which attracts a number of young professionals who are either unwilling to buy a home or unable due to student loan debt or other barriers to obtaining a conventional mortgage. The local film industry also brings in a large population, including Millennials, who simply prefer renting over owning.
The local film industry, which is largely powered by the Memphis & Shelby Film and Television Commission, has attracted production for a number of major films over the years. Those films include The Firm, The People vs. Larry Flynt, The Silence of the Lambs, Cast Away, Black Snake Moan, and The Grace Card.