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Brett
0:00:41 – All right, welcome to another episode of It’s 5 O’Clock Somewhere Real Estate Podcast. I’m Brett Bernard, Jeff McNett, Matt Wheeler, and Jerry Zickman. I’m here. We are sponsored by Tile Assurance and Escrow, 901-737-3332, and the Stamps Real Estate Company, which we are the investment division of. You can give me a call at any time at 901-692-7401. Today we are just going to discuss what tips we can give you as a new investor to get started in real estate and investing in the market, give you some good information and things that you probably aren’t thinking of right now. My first tip is forget about everything you learned in a real estate seminar you just spent two grand on. Forget all of that.
Matt
0:01:23 – I cannot stress that enough.
Brett
0:01:27 – Forget it. Forget it. Get a good agent, pick their brain, and don’t be afraid to listen to them and follow their advice. Let’s talk about this because we’ve all experienced this. We all get investors that call us and tell us what we should be doing and what we should understand and what we should know and how we, they need to educate us.
Matt
0:01:43 – Yeah, I love learning about other markets and how they do everything wrong.
Brett
0:01:52 – Well step one, and Jeff agree with me if I’m wrong, step one Memphis is in California. So what you’ve done or learned in California, what you’ve done or learned in Arizona, it’s not the same thing here. Memphis is a very unique market. So when you come into Memphis, whether you’re using us, which by the way, we are probably the best investment team out here. We do a lot of volume. We deal with investors around the world and across the country. And our investors are very successful at it because they listen to us and follow our advice. But what we do in Memphis, you can’t do in California. Can’t do it in Arizona. You can’t do it in Fort Walten beach, Florida or Miami, Florida. Memphis is such a unique market that you’ve got to understand how this market works. It’s different markets that are available to you, what the different levels of risk are. So listen to your agent. It doesn’t mean you have to do everything your agent tells you, but if you’re going to ask your agent for advice and questions and then refuse to listen to them and go do whatever this clown told you in that investment seminar, then you’re not going to be successful. Because I always say, if someone’s selling you their million dollar idea, it’s because it doesn’t work. If it worked, they’d be making millions of dollars themselves, period. I second that. Instead of making a ton of money off selling you that idea.
Matt
0:03:03 – So just kind of elaborate about, like, listening to your real estate agent and talking about all the different markets that you invest in, everything shy of Memphis. I have learned that some of the markets are actually renting their properties out on a month-to-month. So one thing that separates the Memphis market versus other markets around the country is that we have a more stable, versatile type of market because our leases and things like that go to a year, to 2 years. So that is constant money over a long period of time and the longevity is the reason why people are successful here. You know, you’re not running your tenants out after a month because you want to jack up their rental prices. You have that constant cash flow on a month-to-month basis for as long as you want to own that property. And that’s what differentiates the Memphis market to other markets that I’ve kind of looked into myself and have heard from other investors that are investing in markets around the country. And that’s the difference between Memphis and other towns. That’s what I’ve really kind of come across to try to force that on my investors that I’m trying to get to listen to me and stop listening to the seminar.
Brett
0:04:05 – Well, that puts me on my next topic. Identify and learn everything you can about the market, its history and its trends. That’s so important because if I hear another guy tell me, well, I bought this property in Vegas for $200,000, it’s worth $500,000. Well, what’s it worth today? $200,000 again. I mean, understand the trends and histories of these markets. Vegas, California, Miami, all these big markets where you could have a huge upswing also have horrendous and large downturns whenever the economy shifts slightly. Memphis doesn’t do that. Memphis stays pretty steady. It’s like a blue chip investment market. So identify that market first. Look at its histories. Look at its trends. If some guy in California tells you you need to be buying real estate in Arizona and gives you all these markets and this great formula to use to do so, understand those markets because I can tell you you’re not going to make the cap rate or the rate of return you want in those markets. Also when you get into that market, let’s say you pick Memphis. Memphis inside the Memphis market there are another 10 or 12 sub markets from anywhere from B plus neighborhoods down to D neighborhoods with rate of returns from 15% gross annually down to four or five percent annually. So understand your market you’re buying in. Don’t just think, oh, I’m buying in Memphis. Because I can tell you there’s places in Memphis that if you bought and didn’t have an agent, particularly in one or two zip codes, you’ll end up losing way more money than the house is even worth.
Matt
0:05:29 – And that’s something that we do for our clients, is we vet out the neighborhoods. We go physically look at them. We look at the properties. And then we give you our honest, best professional opinion on whether or not that property is even worth purchasing and investing in. You know, that’s kind of part of our boots on the ground type of mentality that we have to help our people out and that’s why our clients are so successful is we’re not putting them just in any property just to have doors. We’re putting them in properties not only to have the door but to also make the most amount of money in our Memphis market, and we understand that.
Brett
0:05:59 – You’re investing for one reason, to make money.
Matt
0:06:00 – To make money.
Brett
0:06:01 – The next topic would be, or the next point would be, set your bottom and your top rate. What do you desire to be on a rate of return? Right?
Matt
0:06:10 – Within reason.
Brett
0:06:11 – Within reason, right? I mean, you can’t 18, 19, 20 percent, that’s never going to happen. But if it’s say it’s 10, 11 or 12 annually or maybe 14, that’s good. And then have a bottom, all right? In every market, one in particular here, East Memphis or Belair, you’re only going to end up with an 8 or 9 percent, maybe a 7 percent, but you’re in a market that is appreciating at a very rapid pace. So the equity is growing, the values have outpaced the rent, so your rate of return is less. But eventually those rents catch up with value. So in the short term, you’re making about 7 percent, but you’re gaining 7, 8, 9 percent equity every single year on top of that year in, year out. So set your bottom, set your top. What’s the lowest rate of return you’ll accept in a great market gain in equity? What’s your dream rate of return? Understand that before you get into real estate.
Matt
0:07:01 – That explains the longevity of the actual gain. It’s not on a month-to-month basis. It’s on a year-to-two year, maybe even five-year basis to where the properties that you get, especially through us, we’re going to put you on those properties that are going to start as high as they possibly can and then just go up from there.
Brett
0:07:19 – Yep. What is your risk level? Jeff, this is one you and I talk about all the time. Memphis, like every other market, there’s D neighborhoods, C neighborhoods, B neighborhoods and A neighborhoods. A, very, very, very little risk, but extremely low returns. B, moderate risk, not much, maybe a mid-range type of return. C is a sweet spot. That’s where you end up with a $100,000 house renting for $1,100 or $1,200 a month in a C-type neighborhood. I personally do not put any investors in D and F neighborhoods, I just won’t. Because the headaches, the cost, the damage, all the things you have to deal with as an investor just far outweigh any 14 or 15% return you get. You might get 15% on paper, but by the time you’re done rehabbing and replacing and fixing, evicting, re-renting, you’re getting probably a net of 4 or 5%. Well, hell, you might as well go to a B neighborhood and get 7. And then the last thing is understand the different types of tenants. In our previous episode we talked about MHA Section 8 versus the self-pay. Are you in a market where it’s heavy distribution type employment? Are you in a market where it’s heavy medical employment, like in the medical district? Understand the market and the tenants that you’re in so that you understand what your realistic outcome will be. Everybody starting out always is more optimistic. In other words, they put that 14 and 15% up there. I’m never going to have an expense. I’m never going to have to repair anything and this is how much money I’m going to make. And a lot of these seminars will pitch it to you that way. Buy that house and get $1,500 a month out of it. Well, they forget to tell you, you’ve got to take out a couple hundred bucks a month just for your maintenance fund. You’ve got to take out your taxes. You take out your insurance. You’ve got to take out your mortgage payment if you’ve got a mortgage. Property management fees. Property management fees. So understand the formula that you’re investing and how you’re investing. And this is why I want to tell you to call us at 901-692-7401. Call us so that we can help you understand that just because it looks good on paper doesn’t mean it looks good in the real world. A guy at a seminar’s job is to pitch you on this idea that they have on how you can make money in real estate. Like I said, I have a problem with that. If I had a million dollar, two million, ten million dollar idea, I’d be in a dark room in a closet making money with that and not share with anybody. I’m not being an ass, but the truth is, if my system was that great, I would make tons of money doing it. I wouldn’t have to go out and pitch it to everybody else and sell it.
Matt
0:09:48 – Yep. Why create competition for yourself?
Brett
0:09:51 – Correct. So anyway, anybody else got any other tips?
Matt
0:09:54 – Well, let’s just kind of touch on the 1% gross that me and you talked about the other day. Just kind of explain to the investors on the market that we’re in, and with all the fees and stuff like that, it comes with owning a property, with a mortgage, the lender, all that stuff like that. Breaking it down, the 1% rule and why it works here.
Brett
0:10:14 – The 1% rule. So for those of you who just got into real estate and you’re hearing all these terms and lingo, 1% rule is pretty simple. It’s 12% annual gross return, meaning the 1% rule says if you are all in on a house at $100,000, it’s got to rent for at least $1,000 or more. If you’re all in on a house after repairs and whatever for $150,000, it’s got to rent for $1,500 a month or more. So that means your base where you’re starting out at is 12% gross. So once you’re done, typically about 40% of that’s going to go to expenses.
Matt
0:10:50 – And that’s annually. We’re looking at annually, not monthly.
Brett
0:10:52 – No. Annually. So 12 percent gross is 1 percent a month and that’s a solid way to view property. If it starts out at the 1 percent, it’s only going to grow from there. So you may come out with a net 7, 7.5 maybe 8 percent annual return on that investment. Next year, it’s going to be 9 percent and you’re going to probably put in about seven or $8,000 equity, then the year after that it’s gonna be 10 and then 11, and then it will grow from there. I’m selling a house right now for an investor who’s owned it for 20 years. I did the calculation on his current rate of return because the house is paid for after his maintenance. He’s making 22 and a half percent on that property.
Matt
0:11:34 – Yep, and that’s the longevity that I was talking about earlier. It’s not a month-to-month game. It’s a year, two-year, five-year, ten-year game. And that’s where you actually start seeing your investment pay for itself.
Brett
0:11:45 – It’s worth $190,000. He paid $55,000 for it. It was renting when he bought it for $495. It’s renting for $2,200 a month now.
Matt
0:11:53 – But that’s not even just a lucky catch. If you’re in it for the long haul like that, that’s every property.
Brett
0:11:59 – Now, if he had bought 20 of those over the last 20 years…
Matt
0:12:02 – You wouldn’t hear from him if he retired.
Brett
0:12:05 – Yeah, exactly. Think about that. He have, you know, 2, 3, 4 million dollars in liquid asset plus probably a good 7, 8 thousand dollars a month in income.
Matt
0:12:12 – Right. And that’s the goal.
Brett
0:12:14 – Yeah. The investment seminars try to pitch these young guys on get out there in 12 months, buy 20 houses and become a millionaire. Nope. You’re going to buy 20 houses and you’re going to be in bankruptcy court because if you don’t do your numbers right, you don’t pay attention to the market you’re in and what you’re doing, you’re never going to succeed.
Jeff
0:12:34 – My advice to a new investor just getting started, the first thing you got to understand, this is not about cash flow. This is about a long-term investment building equitable income over time. If you purchase a house, you put your 20% down, you’re paying a mortgage, basically all you’re doing is putting a tenant in there that’s paying the mortgage, the taxes, the insurance, everything. You got to put your reserve in there for any repairs or maintenance issues. Brett tells me all the time he has investors that will take any money left over and pay that mortgage down straight towards the principal. You start out small, grow, and then just diversify.
Brett
0:13:12 – Good tip, Jeff.
Jeff
0:13:13 – Thank you.
Brett
0:13:15 – It’s a good point. We’ve discussed this on previous podcasts. When you talk about cash flow, if you’re a smart investor, you’re building for the future, you’re building asset wealth, and you make an average of $250 net off of five houses, if you took that $1,200 a month and plopped it down on paying down the principal on house number one, then when you get that one down low enough, then start putting it toward the second house and pay those down as soon as possible. You end up with five houses that are 50% equity, so what is that, $250,000 in equity. Now you’ve got leverage to go out and buy five or ten more homes and do the same thing again. This idea like the BRRR method which is buy, renovate, rent.
Matt
0:14:00 – And what, relax?
Brett
0:14:01 – Refinance, I think. Oh, repeat. There you go. Thank you. The whole concept of that is to buy a home for $70,000, put $20,000 in it, it refinances out at $120,000, take that cash, put that down toward another property.
Jeff
0:14:16 – Don’t take the monthly income and buy a brand new car with it. Just reinvest it back into those properties, build equity, equity, equity.
Brett
0:14:23 – Yeah, because the problem I have with the BRRR method, is, you then max out, right? You pull all the cash out of this house and put it into this house. Now you’ve got that home and you’re going to do the same thing again. By the time you’re done you’ve got 10 homes that are completely maxed out on LTV. You really don’t have any exity. They’re going at it from a cashflow. So somebody’s convinced people that if you are all in at $100,000 in this house and you refinance it at $130,000, take $10,000 or $15,000 out, put down on another house, that you’re going to be making all this money. No, because keep in mind, the more money you have in the house, the lesser your rate of return is on the rent. You’re still going to have to wait over time to get equity built up and rents to go up. I don’t know if I completely agree with that method. I think it was great back in the day when you can buy a house for $30,000, put $20,000 in it, and refinance it for 90. Sure, but you can’t do that anymore. It’s hard to do.
Matt
0:15:31 – Well, that’s what’s changed in like the last month and a half or so that I’ve seen, that investors aren’t purchasing properties that you have to spend extra money out of your pocket to fix them. They’re actually looking at properties that have already- Turnkey. Yeah, turnkey, already been fixed up by whoever’s selling the property. They already have a tenant lined up to go in there, or they’re already rented and it’s being sold at the 1%. Why would you turn your nose up to that? All the legwork, all the headache is done. You basically say if you have the $100,000 you’re talking about, split that up into four houses. Take 20, 25% of your bankroll basically and just buy four houses and finance all of them and boom, now you have four properties, turnkey with tenants inside of them. That’s the best way to go. The days of kind of buying a property and renovating it yourself, and especially out of state, it’s kind of pointless. It’s kind of like outdated mentality when it comes to the investment world because it’s shifted so much. And I think what’s kind of caused that is like the whole pandemic. I mean, why would you sit there and mess with a house that you have to put money into it out of your pocket when you can just buy one that’s ready to move into? You know, especially being out of state, it’s less headache, it’s less headache for your agent. And the way I see it is, the less people you have involved in your money, the better. There’s less chances for things to go wrong. As far as contractors and these people and this, that, and the other and plumbers and stuff like that. It’s just an added headache you don’t need.
Brett
0:16:40 – And that’s something, I’ve got four builders that I represent, three of them are building brand new four to 1,300, 1,400 square foot rental properties from the ground up that are renting MHA. One instance, you could buy it for $155k, it’s renting for $1,595 a month, brand new one-year builder warranty. Everything’s brand new. I got another builder that is buying older homes, completely renovating them inside and out, top to bottom. Those are turnkey and he’s renting those out MHA and then selling those starting at the 1% rule or better. A lot of investors don’t want to hassle with rehab work, don’t want to hassle with repairs, they just want to…
Matt
0:17:15 – Immediate cash flow.
Brett
0:17:16 – Immediate cash flow. Correct.
Matt
0:17:18 – And that’s what it gives you. That’s what it provides. That’s definitely what I’ve pushed on my investors.
Brett
0:17:20 – Anyway, we hope that gives you some good tips and please reach out to us, anytime at 901-692-7401. Even if you don’t want to use us because you don’t like my name or you don’t like Jeff’s hat or you don’t like Jerry’s glasses or Wheeler’s beard, you don’t have to use us. But pick up the phone and call us. We love to talk to young investors and teach you and guide you and give you advice on how you can be successful, especially in the Memphis market. We’ve done it for so long. We appreciate you listening today. Thank you a lot. Have a good day.