Charles Lott, a builder, discusses his new construction properties for rental in the Whitehaven area. The houses are 3-bed, 2-bath, around 1,300 square feet. With a one-year builder warranty, the rental market offers a stable 1% return. Lott emphasizes the appeal of affordable housing in the $90,000-$175,000 range, providing a higher rate of return. The conversation touches on the advantages of polished concrete floors, hardy board exteriors, and the potential of emerging markets like Frayser. Overall, new construction for rentals is seen as a low-risk investment with government support.
Jeff
0:00:43 – Welcome back to another episode of It’s 5 O’Clock Somewhere Real Estate Podcast. My name is Jeff McNett. I’m here with Jerry Ziegman and Brett Bernard. We are the Real Estate Investment Division of Stamps Real Estate Company. Give us a call at 901-692-7401 or MyMemphisInvestmentProperties.com. Brett wanted to talk a little bit today about new construction properties that are being built for rental properties and today we have a guest, his name is Charles Lott. Charles is building new constructions. Give us an idea of what you’re building square footage wise, number of bedrooms, where you’re building them, and the impact you’re making.
Charles
0:01:22 – These two homes are pretty much in the Whitehaven area. Great area, great comps. Whitehaven is an area that has range. You can buy a $50,000 house, you can buy a million dollar house. You know what I mean? So it’s a good area, it’s a good area to build and I’m basically kind of farming that area. And the two current houses that I’ve built are three bedroom, two bath, they’re kind of like bread and butter, about 1,300 square foot. And yeah, nice homes. You came out and took a look at both houses and you know, turned out pretty well.
Brett
0:02:03 – So that’s what I want to get into a little bit today about the location you chose, the type of home you chose, the amenities and so on and so on. We met through David Kincaid who is another guy who’s building some new construction. Right. He’s got a couple going on. I personally believe, I think Jeff does too, that this next year or two the new build rental construction industry is going to catch fire because we’ve all done older homes, you buy them, you rehab them, you know, and then six months later you may have a little problem with this or problem with that. What’s intriguing to me and my buyers and my investors is the fact that you can buy a 4-2 brand new home with a one year build and warranty that gives you the 1% starting out. And in your two, that’s exactly what we did. Well, a little bit less than 1%, but I’m not concerned about, and neither is my buyer, about the 1% because for one year, if the HVAC goes out, the roof gets a leak, the plumbing leaks, the hot water heater blows up, furnace goes out, whatever happens, you’re covering that under the builder warranty. A lot of people don’t understand in Tennessee, you don’t really have to have a builder warranty in writing. It’s state law, right? New construction, the builder has to warranty that property for one year, 12 months. So let’s talk about Whitehaven. Because we talk about Whitehaven, Frayser, Raleigh, majority of those areas are C, C plus, would you say? Kind of mid-range, which is where you typically get your highest value, your highest ROI. And we always preach, you know, yeah, you can buy in Cordova, buy in Bartlett if you want to, buy in 3117 East Memphis and pay 250, 300 grand for a house, but it’s only gonna rent for 15, 1800. So what kind of investment would that be? It’s not a good investment. But when you get into markets where you can buy a home for $90,000 to $150,000, maybe $175,000, that rents on the 1% comparable, 1% being pay $100,000 for it, it rents for $1,000 or more, pay $150,000, it rents for $1,500 or more. That’s where you get your biggest rate of return. So the two that you built are three bedroom, two bath. Very nicely done, by the way. They have great elevations. They have beautiful bathrooms, granite countertops. And in this scenario, my buyer picked up both of those at $165 a piece, and they’re both rented at what?
Charles
0:04:12 – $1,600.
Brett
0:04:13 – $1,600. Right. So he’s getting a little bit under the 1%. Right. But he has zero maintenance for the next 12 months, maybe even 24 months.
Charles
0:04:22 – Everything is brand new.
Brett
0:04:23 – Right. Right. So let me ask you, did you start these properties as rentals or did you start them as, I’m going to sell these owner-occupant and then all of a sudden, Joe Biden got in the office,
Charles
0:04:35 – interest rates go up and the market goes to crap? Well, the way it started, I was building during the inflation, right? And the material use just shot up. At the same time, comps shot up too. So I made great money during the inflation. The thing about it, that middle income was left out. That $150 to $200 price range was left out. And so when things were starting to top out as far as prices, with the inflation rates start going up and things of that nature, it was time for me to make a transition. I try to think ahead a little bit. So I just started thinking about affordable housing because that was one price range and one market that was left out. And I was like, well, if I want to keep busy and continue to build, I need to tap into that market. And so I sat down with my architect, sat down with lenders. They had different programs out there for that middle income, one 50, 200 range that were geared toward helping out with down payment, closing costs and that nature ran figures, you know, lumber and everything started to come back down. The numbers started to make sense as far as the construction side of it. So I was like, Hey, it was a go spoke with my architect, we, uh, which was dead. David K K K that. And, uh, came up with some great bread and butter. Very nice plans, great elevations and things in that nature. Cause I like to, you know, buyers like to drive by and sometimes you want to give them a good curve appeal, you know. And so we picked those plans and I played with the numbers with construction costs and everything just made sense. Lumber came back down because you know before doing inflation a 1,500 square foot package I was paying about $40,000. Wow, that’s a big drop. Huge. And so everything started to make sense. And then I was just like, hey, let’s just tap off into this market. And then I was going to put in a great product with panel doors, granite tops, very nice cabinets, great tile work. In my country.
Brett
0:06:42 – Very modern, very modern glassed in showers.
Charles
0:06:44 – A modern look inside. And modern vanities. I just wanted to put together a great product. And you know, I was just gonna sell to market buyers. And I got approach from David and he said, hey man, I have a guy in town that may be interested in looking at your homes for his investors and things of that nature. They love the new construction market. I said, hey man, send him by. It’s fine with me. You know, I just want them sold. You went by, I saw you on camera. You know, I got…
Brett
0:07:12 – He’s got a camera mounted to the tree in the backyard. And I’m walking around the house and I hear somebody talking to me. I turn and look at the tree and the tree’s talking to me. Then I look up and see a camera up there. Yeah. Yeah.
Charles
0:07:21 – I got a large screen at home. I got about 16 cameras total and I control it from my phone. And I just kind of keep a witty cause I get a ding when they get a motion. Sure. Sorry. Yeah. They’re taking a look. I was like, okay, he may like it. It was fine. And so David was like, hey man, my guy’s heading out of town. Let’s try to set up lunch next week. And I was like, hey, set it up. And that’s when my first message was, we had lunch and whatnot. And that’s when you go, hey man, I may have a couple investors interested. And I was like, okay, that was pretty fast. Yeah, so I was like, oh, I mean, that could be a good fit. And you know, my background is, you know, since the market crashed, I really jumped off into the investment side. Sure. I’m a real estate agent at heart. Okay. I retired my license in 2012 because, you know, I was working.
Brett
0:08:11 – Nobody was making money selling real estate back then.
Charles
0:08:13 – Number one, no money. And then, you know, the commission in Nashville, they’re real strict. You have to disclose on every deal that you’re a realtor and, you know, and the broker want a fraction of the action or whatever. But you know, I didn’t, I felt differently. Like I’m going to be doing all this work. Why should I have to jump through those hoops? So I retired my license and I start working with banks, lenders, private sellers to pick up inventory. So my background the last 13 years has been dealing with investors I work with. Any big company you name here in Memphis I work with. Memphis and Red Vest, Jim Reedy, Blackstone, Hedge Fund, just a lot of those guys. But investment, I rather stay, it is non-traditional real estate. You know what I mean? And that can go on and on and on and on and on because you’re not doing the same thing that everyone else is doing.
Brett
0:09:05 – In the investment world, Glenn always said, it was his famous line, in investment real estate someone’s always buying and always selling. Always regardless of the economy, regardless of the interest rates, someone’s always moving inventory.
Charles
0:09:16 – And the money is always available. And so I just kind of thought that it would be a good fit.
Brett
0:09:22 – I don’t know of any other builders in town that are building 150,000 to 200,000 brand new homes. They’re all in the Collierville, Germantown markets building these $4,000 or $5,000 McMansions and selling them for $700,000 and making a huge spread per house. In the new build construction, then obviously you’re making your money in volume. That’s how you’re going to make your money. But this past year alone, I personally sold 27 brand new constructions from Bryce and Brown and then I added three more between you and David with those three. So that put me at 27 for the year in brand new construction. I sold all of them prior to being completed because investors find, they’re looking at me going, so wait a minute, I can buy a brand new house with a one-year bill of warranty and I can still get the 1%, the same 1% I was trying to get from this 1950s home that I’m going to put 10 grand into to get it rent ready. Basically it’s a very low risk investment. If you want to get into investing in real estate, we talk about new investors a lot and getting in the real estate and trying to coach them in the do’s and the don’ts of starting out investing in real estate because let’s face it, a lot of guys jump into real estate, think they’re going to make a ton of money, they go bankrupt in two years and they get out of it and never go back to it. New construction for me and for Jeff, actually for our team, we see as a great ground floor opportunity for brand new investors that have never invested before but want to have a good safe investment that’s not going to cost a lot of money in maintenance, get a good 1% return. Adding the MHA part to that makes it even better because now you’ve got guaranteed income coming in from the government. It’s safe. At the end of the day, it makes sense. What was your choice? You’re on Grenada, the two on Grenada. You’re going to build how many more? You said you’re starting here, what, this week or next week since we closed?
Charles
0:11:03 – I’ve got about two more that I’m just about ready to break ground on. I’ve just bought some more land out in the East Memphis area. So really don’t know about those because we’ve got the winter coming up. It’s kind of hard to predict the weather. And Memphis is weird. We may not get snow. We may get snow. And it may be 70 degrees on Christmas. It may be 80 degrees. Just don’t know. But on the average, from breaking ground, 120 days.
Brett
0:11:35 – 120 days.
Charles
0:11:37 – Up to closing. And your next round, Bill, is going to be four twos, right? We’re going to go with the four twos.
Brett
0:11:42 – Polished concrete floors?
Charles
0:11:43 – We’re going to do that too. Yeah, we did. I got that squared away. It just makes sense, especially once you’re dealing with Section 8 also. And it’s great for the investors also because, you know, you get an extra point or two, cap rate or whatever. You get a little bit more money out of it dealing with Memphis Island Authority. And most of the tenants that I’ve met over the last 30 days, they prefer four-bedrooms. Sure. So, like I said, it just makes more sense. It’s the most popular size. Yeah, yeah, it’s just like, even when I did three-two, those were just gonna be market. Sure. And then when I, you know, talking to David and talking to you also, it just makes more sense to do four-twos when you’re dealing with the rentals or what not.
Brett
0:12:25 – We’re pretty dialed in on the investor and the investment game from an investor’s point of view. Pretty dialed in on the MHA, like understanding what they’ll pay for certain size. And for some reason, they’re not really wild about 3-1s and 3-2s. 4-2s are their sweet spot. When you get into a five bedroom, I’ve got a five bedroom that I just sold and it’s renting for $19.95 a month. And my investor only picked it up for $155,000. But it’s an older home, it’s not brand new. So it’s got a great return on it. Well let’s talk about Whitehaven. Whitehaven is the home of Graceland, Elvis Presley, which is probably what it’s most known for.
Charles
0:13:02 – Yeah, you know, Whitehaven is, you know, I didn’t really do a lot of business in Whitehaven. And I try to farm areas that I like to work in, but you know, I worked uptown Memphis. That was a project that was about 100 blocks. It was a 100 million dollar project that I worked on. And I was gonna build in that area, but something just pushed me out to Whitehaven. And I was just kinda doing comps and doing my research and doing a price range of housing. And if you drive down Elvis Presley, you just see the potential on the commercial side and the comps are strong out that way. That’s the number one thing that I try to look for is strong comps. Just like I said Whitehaven has range. You can find a $50,000 house or you can find a million dollar house. I was just like this is a great opportunity and it has a lot of strong history. And so we just kind of narrowed it down and just like Whitehaven will be the area. It just kind of started by a lot of little infield lots in the area. And plus it brings value and it makes areas look better also. So that played a part of picking Whitehaven. And the way things look, I may be out of this area in a couple of years. You know what I mean?
Brett
0:14:17 – Well, there’s a lot available in Whitehaven. There’s a lot available in Raleigh. Now, Frayser is an emerging market. I see Frayser kind of where Whitehaven was about 10 years ago.
Charles
0:14:26 – Frayser reminds me of Whitehaven. All of my personal rental homes are in Frayser. Frayser’s like a smaller version of Whitehaven, you know, to me. I love Frayser.
Brett
0:14:34 – We preach Frayser, Frayser, Frayser. Look, you can still buy an $80,000 house that…
Brett
0:14:40 – Brick, brick home. Brick home. With the direction that Frayser’s going currently, you can pay 80 grand for a house that’s going to be worth about $105,000 to $110,000 in a few years. Same thing happened in Raleigh seven years ago, six years ago. We dumped a bunch of investors in there and they all have seen 30, 35, 40% growth in their values. So Whitehaven started that. Now Whitehaven’s kind of mellowed out a bit. They’re still increasing in value but not at the pace that Raleigh was doing it and what Frayser is doing now.
Charles
0:15:09 – Blowing up.
Brett
0:15:10 – Oh yeah, definitely. Yeah. So you’re going to have two more properties available, you think, by mid-January, weather permitting?
Charles
0:15:18 – Like I said, during this time is really up to the weather.
Brett
0:15:22 – Worst case, end of February maybe.
Charles
0:15:24 – Yeah, I would say worst case, end of February. The construction is not that difficult on these, and they’re smaller too. Smaller crews, you can pretty much get these 11, or 13, 14-hundred square foot houses done in a nice, fairly fair amount of time. Just kind of contingent on the weather. Around this time. That’s it.
Brett
0:15:47 – So, in your four twos you’re going to be putting up, are you doing vinyl wrapped outside?
Charles
0:15:52 – We’re going to do the hardy.
Brett
0:15:55 – Hardy board, and then on these and overhangs, you’re going to vinyl those and aluminum? Yeah. So, they’ll be… And that’s what I tell investors. I said, you’ve got polished concrete floors, you’ve got hardy board, you’ve got vinyl and aluminum rapids and overhangs, you’ve got a 25-year roof. So pretty much your exterior is damn near maintenance-free, pretty much, other than maybe a tree limb falling on the roof or someone shooting a hole in the window. Your exterior is pretty much maintenance-free. Interior, the polished concrete floors, I’ve never met a tenant yet that could destroy concrete floors. They can scuff them up. What would it cost somebody to refinish a polished concrete floor versus putting in LVP or carpet?
Charles
0:16:33 – For me or just in general? I mean, well, I get contractor prices, so. I negotiate a little bit tougher than the market. But it’s not expensive and it’s very good on maintenance. You know, it’s really preferred, I think, rentals. You know, so, and I thought it was a great idea.
Brett
0:16:56 – The more maintenance-free you can make a property, the better rental it’s going to be. And building new construction, you have the ability to do all that without costing an arm and leg. It’s during the construction process. Doing it to an older home that you’re rehabbing, it gets more expensive.
Charles
0:17:12 – No, because you have to pull and replace.
Brett
0:17:13 – Well, Charles, hey man. Yeah. Thanks for coming today and for those of you who are interested in getting your feet wet in the real estate market and rental market, in a very hot market called the Memphis market, but in this situation, if you’re interested in getting your feet wet, buying a brand new construction rental that produces 1% is probably a good way to start. Then you can venture out into some of the older homes and some rehab projects and stuff like that. So we appreciate you listening to us. Don’t forget we are sponsored by Title Assurance and Escrow, 901-737-3332 and The Stamps Real Estate Company, which we are the investment division of. Our website address is mymemphisinvestmentproperties.com. My number is 901-692-7401. Give me a call, talk to Jeff, talk to me, talk to Jerry about anything real estate. We’d love to hear from you.