In this episode Brett & Jeff predict that interest rates may decrease in the near future, benefiting investors, and they highlight Memphis as a unique market with a significant rental population, making it attractive for investment. They advise against expensive properties in favor of diversifying your portfolio with multiple properties for long-term asset growth and equity building. The hosts also debunk concerns about another housing collapse, citing the differences in today’s market compared to 2008.
Predicting Interest Rates: Memphis Market Insights
Brett
0:00:43 – Welcome to the 5 o’clock somewhere real estate podcast. My name is Brett Bernard and with me today is our partner, Jeff McNett. We’re not experts. We actually know what we’re talking about. We’re trying to bring common sense back to real estate investment. We are a team of investment agents here in the Memphis market, West Tennessee, and we specialize and deal with investors around the world and across the country in buying, selling, liquidating, whatever you’re doing in real estate. That’s what our expertise is. So we hope to enlighten you and to give you some information based on our experience in this market and why you should invest, where you should invest, and kind of give you some idea of what we feel the future is going to bring in the real estate market. So I think the first thing I want to talk about is, because I get this question a lot, matter of fact I just had this question yesterday from an investor wanting to know what my opinion is of the future. You know, and there’s all these debates on whether interest rates are going to keep going up, whether they’re going to stagnate, whether they’re going to come back down. Judging from what’s going on in the economy, inflation has stopped growing. So we’re not seeing the inflationary numbers go up, we’re seeing them come down. So that means the interest rate hike did work to a certain degree. But what happens moving forward is if they don’t adjust interest rates and start infusing money back into the economy, we’re going to go backwards and rubber band into a recession. So my prediction for next year is that sometime early next year we’ll watch a slight decrease in interest rates to try to see if they can stabilize the market. And if that happens, we’re never going back to a zero, one or two percent interest rate. But I think next year we’ll get back down to, you know, maybe the mid-fours, low fives would be an average interest rate which at that point is it’s still good because I remember back before 2008 crash the good interest rate was ten and a half percent eleven maybe twelve percent so what I’m predicting is that we get into January as the the market starts to heat up people start buying people already planning their summer vacations and there’s gonna there’s gonna come a time where interest rates are going to have to come down. They’re not going up again. Somebody said there’s going to be one more rate hike. I don’t see a reason for that. The economy or the inflation issue is stabilized now. We’re not watching prices continuing to go up anymore. So when that happens, the next step is we got two choices. We can either ride it like this and then all of a sudden the rubber band snaps and we fly into a recession the other direction or we lower interest rates, infuse some money and kind of stabilize the market. That’s personally what I believe is going to happen.
Jeff
0:03:20 – Brett, what is your answer to the critics out there that say we’re headed for another housing collapse?
Brett
0:03:25 – Morons.
Jeff
0:03:26 – Can you elaborate on that a little bit?
Brett
0:03:29 – M-O-R-O-N-S.
Jeff
0:03:30 – Good enough.
Debunking Housing Collapse Myths
Brett
0:03:31 – Is that enough? I was in the real estate business during the Great Recession, as they call it. You know, they equated it to the recession of the early 1900s, which it was nowhere near that. I mean, it wasn’t that bad. It was bad. You know, Glenn and I helped a lot of people that were in trouble at that time. A lot of investors who were upside down in their investment portfolios who believed the world was coming to an end. Real estate was dead. And if you hung on to your properties, you were going to lose everything you own. Long story short, three years later, Memphis is popping and everybody that held on to those properties saw huge gains in their equity of the property, rent values went up. But what caused that collapse was years of greed, years of bad policy at the U.S. government level with Fannie and Freddie, Wall Street greed there were so many people with their hands in the cookie jar packaging these loans Let’s take a prime example in 2006 I could have a 500 credit score and Work at Kroger for 12 bucks an hour I can go to a broker and say I know I have a 500 credit score But I make four hundred thousand dollars a year and they give me a document I write four hundred thousand dollars a year on it. I sign it they send it in, boom, I’m approved without any income verification whatsoever, the stated income loans. Because what the Wall Street guys were doing is they were packaging these loans in huge blocks and our idiot government and their subsidiaries, Fannie Mae and Freddie Mac, were buying them up and guaranteeing them in droves. So as all of those people who said they made $400,000 a year, moved into a home, packed it full of rental furniture, missed six months worth of payments because they couldn’t afford it, all those homes started going into foreclosure. And you watch the ramifications and the result of bad policy. The idea of what they were trying to do was good. The idea was we need to provide access to loans for people who normally wouldn’t qualify for a traditional conventional loan with 20% down. That was the idea of the whole concept of the community reinvestment act that started back in the seventies. Over the years, every administration expanded it, and then it had to be, you know, they kept adding to it and, and lowering the expectations, lowering the qualifications to the point where you were loaning money to people simply because they got out of bed and could take a breath and had a pulse. And that’s what caused that downfall. We’re never going to repeat that again. So us heading for the same thing in 2008 as whoever actually believes that, just look in the mirror and call yourself Chicken Little because it’s not going to happen. We’ve been through the worst of the economy and the issue and the inflation at this point. And what’s going on in Memphis now? The market’s moving.
Why Memphis Shines for Investors
Jeff
0:06:23 – What makes this market in Memphis more of a stable place for investors as opposed to some of your bigger cities across the country?
Brett
0:06:31 – The population of Memphis is what, close to 700,000, something like that? We’ve got 340,000 of those people in Memphis are renters. You can come up with every analogy why those people just rent the rest of their lives. There’s a number of different scenarios out there, but the truth of the fact is, is they rent and most of them rent for their entire life and never buy a house. We’re a distribution city. Every major company in the world has a distribution facility here. A lot of the big ones, Amazon, Nike, FedEx, I mean, you name it, the list goes on and on and on. So when half of your population, or probably 70% of your population, works in distribution, they drive a forklift, load boxes, drive trucks, work in lower or middle management, they don’t make a ton of money, but they make a steady, stable income. So the amount of renters that are in Memphis, that drives investment money into Memphis because you can buy a house here and you should never have a problem renting it because there are so many people that rent. And that keeps the rental market stable, it causes it to grow slowly, never tank, but it never skyrockets, it just slowly grows and it’s a good place to park your money because of the amount of renters in Memphis. Does that make sense? Richard?
Mortgage Applications Decline: Market Implications
Richard
0:07:44 – Yes, so I’ve been reading that mortgage applications are at a 27-year low.
Brett
0:07:51 – On owner-occupants?
Richard
0:07:52 – Correct, but talk about where the inventory is today and what impact the fact that people are just not applying for mortgages and buying from that sector of the marketplace. What’s that going to do to inventory and interest rates overall?
Brett
0:08:08 – What I’m seeing is there’s financial levels to the change in the market. So from $150,000 to $250,000, people are still buying because you can get a decent loan from FHA with a 1% to 3% down payment and most people in that price range when they’re buying aren’t concerned about interest rates. They’re more concerned, can I afford the payment? Do I have the money for a down payment? So those folks are still buying. When you get over that $350,000 range, that market is dried up. I’ve got two houses listed right now. One of them is Glenn’s. The other is one on Poplar Pike. And they’re in the $490,000 to $500,000 range. It’s been really tough to sell those homes. We’ve had very few showings. Nobody’s looking. So I think the way to determine what the impact is, the impact is being felt on the higher end simply because people with money and great credit and good jobs are just going to wait it out. They don’t have to move. Folks that are in that $150,000 to $250,000 house range are still looking because, again, in their mindset, it’s like buying a new car I don’t care how much car cost can I afford the payment can I afford the down payment if they can they’ll buy it so I think that side of the market is not stable it’s slowed down and as that slows down more then you’re going to watch inventory pick up and you’ll start watching folks sell their homes to investors at a discount instead of it you know paying 150,000 for it, they’ll sell it for $135,000, the investor will buy it and rent it out. Now, that part of it is very similar to 2008. A lot of investors took advantage of folks in foreclosure and purchased their homes in short sales, God knows I did a bunch of them, and turned them into rental.
Richard
0:09:51 – It does seem that the pressure on the marketplace is going to be the houses that are sitting there are going to have to come down in price to sell. But at the same time, something’s got to happen to financing in the private area of the market for private buyers where they can begin to afford again.
Brett
0:10:11 – Right. Well, there’s going to be a bunch of things have to happen in order for that to happen. But understand this about Memphis. Memphis is very different than any other part of the country in this sense. Because of the amount of renters, rental properties are not dropping in value. It may take a month to sell the house instead of two days like it was a year ago, but they’re still selling at asking, sometimes above. So what’s going to happen in Memphis, not the rest of the country, but in Memphis, that rental market is falsely propping up the entire housing market. So I can list a house for $525,000, it would appraise for $550,000. That value is not going to come down because my seller is not going to sell it for $400,000 just to get rid of it. He’s just going to hang on to it. So while I understand what you’re saying, 27% nationally applications are down. In Memphis, applications are down but values are not coming down. And that’s the beauty of Memphis. Now you can attribute your value staying stable during this bad time to whatever you want But the truth is when a thousand rental properties are sold every single month at market or above That affects you in your neighborhood, right? If the house down the street sells above asking it’s going to affect the value of your home Even though yours is not a rental plain and simple because when I do a CMA, I just pull up sales. It doesn’t tell me whether it was a rental sale, whether it was a short sale, a foreclosure or a straight cash sale. It doesn’t tell me that. It just tells me what it’s sold for and that’s how you determine value.
Maximizing Returns: Memphis Neighborhood Guide
Richard
0:11:49 – So in terms of current inventory, what would you say you’ve got right now that could be out there for investors that are looking to buy?
Brett
0:11:58 – Well I know Jeff’s got a couple. Most of what we have, just for our listeners, you know, we’re going to get into a little more detail about the market and a bunch of strategies of investing in a bit, but I want to throw out there what our four-man team has. We do a lot of off-market work, and I’m going to give you some examples. So I’ve got a builder, I actually have two builders that are building brand new 4-2 rental in 38127, 38111, and 38109, which are really good rental markets. These are brand new with a one-year builder warranty from the ground up. And they’re renting, pick them up from 155 to 157, they’re renting from 1595 to 1695 per house. So it exceeds that 1%. I’ve got another builder who got out of building homes and is actually buying older homes, completely rehabbing them, top to bottom, in and out, roof, HVAC, hot water heater, furnace, new bathrooms, new kitchens, and renting them, putting a tenant in, and then we’re turning around and selling that property at that 1% mark or better. So those are the types of properties that we are dealing with right now. I haven’t done a whole lot of deals with other agents because I’ve got so much off-market stuff coming to me every day, and we have plenty of investors that just want that off-market deal because we can negotiate a better deal because they’re dealing with one agent and Jeff’s got two. Jeff, your two are? We’ve got two located in
Jeff
0:13:24 – Raleigh and Frayser, three bedroom, two baths, close proximity to Amazon and Nike facilities, current tenant in place, pays on time right at 1%. One’s renting for a thousand a month, the other one’s renting for $1,035 a month that are currently available.
Brett
0:13:43 – Yeah, so we always have plenty of off-market inventory. So if you ever wanna just call us, talk about our inventory, or you just wanna call us and ask a question about the Memphis market or potentially investing, my number’s 901-692-7401. And Jeff?
Jeff
0:13:57 – 901-570-0654.
Brett
0:14:01 – We just keep in mind, we deal with investors globally and in Memphis. Guys in Israel, Japan, Australia, I’ve got them all over the place, from California to New York. And this is our specialty, our system that we developed or Glenn developed over the last six years, we’re kind of like an A to Z. We handle everything from the initial discussion all the way to the point of management for our investors, which is probably why we’re so successful, because very few agents put the work ethic into what we do, the way we do it, to make people successful. But yeah, just give us a call if you have any questions about anything. We’d be glad to talk to you. You’re not required to use us if you call us and pick our brain about the Memphis market. Let’s talk about the next step of this evolution. So the economy’s doing okay, the housing market’s doing okay, in my opinion. I think we’re headed back for slight interest rate reduction after the first of the year, maybe before Christmas, possibly. I don’t see how they can get by without doing that, just to ensure we don’t end up in a recession. So, with that being said, let’s talk about the type of markets we have here in Memphis, because I really want our listeners to understand how unique Memphis market really is. We have areas that we call Whitehaven, Frayser, Raleigh, Berclair, East Memphis. Those are all part of Memphis, but they’re different markets that we deal in. I put investors in C, C plus neighborhoods because that’s where your biggest return of investment would be. You can still buy a $100,000 house that rents for $1,100 a month and produces over the 1%. Let’s take Frayser for example. Frayser was a very run down, crime infested area of Memphis for quite a while. And quite frankly, guys like me didn’t go to those neighborhoods without carrying a pistol. In the last five years, next to Frayser is a market we call Raleigh. Amazon and Nike built the largest facilities in the city of Memphis next door to each other, they take up a linear mile of real estate on New Allen Road, which divides Fraser and Raleigh. So as soon as that deal was inked, Memphis went in and built a big $30 million library, you know, $20 million police department, tore down the Raleigh Mall and built this beautiful skate park with lakes and redid all the roads. And immediately we started dumping our investors into Raleigh. We’re picking up houses for 60, $70,000 a pop. They’re renting for $700, $800 a month. Five years later, everyone of those houses have a carried value of anywhere from 120 to 130. They’re renting for $1,200 to $1,400 a month. So our investors we dumped in the Raleigh are extremely pleased with their investment because not only did they get a good growth in rent, they got a good growth in equity in their asset. So on the other side of the Nike Amazon plants, because Raleigh picked to a point where it got just over saturated, a lot of those other investors started moving into Frayser next door and picking up those homes and remodeling those and flipping those. Bryson Brown Builders started going in and buying these vacant lots and building these brand new 4-2 homes and rentals. So now we’re watching Frayser go through the same changes that Raleigh went through four or five years ago. So I’m putting a lot of my guys in Frayser so because you can get the best return for investment. You can get the best growth on your equity. You can get the best growth on your rent. MHA, Memphis Housing Authority, is actually paying over market rent for properties in that area right now. So it turns out to be a great location for investment. But you’re in a C, C plus neighborhood. Let me make something very clear. You’re never, ever, ever, ever gonna get a great return, 1% or better in a B, B plus or A neighborhood, period. Matter of fact, a lot of those neighborhoods don’t allow rentals. But if they do, you’re gonna end up spending 250 to $300,000 for a house that rents for two grand a month. Financially, the money doesn’t work if you’re looking for a good cap rate and a good return on your investment. So we try to put people in Whitehaven, Raleigh, Proclair, Fraser, areas like that where you can still pick up a house at a decent price which gives you the 1% return.
Jeff
0:18:13 – Some of our new investors are concerned about going in some of these what we consider less than desirable areas and the first thing they want to do is, you know, if they have two or three hundred thousand dollars, first thing I want to do is go buy a nicer house in a B neighborhood. Can you explain the disadvantage of that and the advantages of taking that money and maybe rolling it into three $100,000 properties in Frayser? Again, they would consider these less than desirable areas. There’s concerns about where the rent payments will be met, how well they’ll maintain the houses. Can you give us some of your experience in some of these C neighborhoods, which you’ve experienced with the tenants and payments and maintenance of the houses.
Brett
0:18:54 – Let’s face it, in a C neighborhood versus a B neighborhood, you’re going to have a different level of tenant. I mean, that’s just facts. I’m not speaking derogatory, but that’s just facts. But 60% of Memphis is C, C plus neighborhoods. I mean, that’s pretty much the makeup of Memphis. And when I say C neighborhoods, C plus neighborhoods, we’re not grading people. We’re grading the neighborhood for instance in a C neighborhood. You may end up with You know three or four remodeled homes and five or six or ten that are in decent shape And then a couple of dogs on the block B neighborhoods you don’t have that a neighborhood you don’t have that So that’s how I classify C or C plus neighborhood how much activity is going on is a remodeling happening on that street? Is that street and neighborhood going the right direction or the wrong direction? And that’s pretty easy to tell just by driving down the block. But going into Cordova, for instance, you got $300,000 cash and you call me and say I want to invest in real estate. First thing we’re going to do is tell you to forget everything you learned at that ridiculous seminar you just paid two grand to go to, get rid of all that, get all that out of your mind. Because before we go any further, let me say this. If someone wants to charge you money to give you their million dollar idea, then the idea doesn’t work. Because if it worked, they wouldn’t be selling it to you, they’d be out making it work for themselves. Just keep that in mind next time you go to a real estate seminar. So I’m going to tell you, don’t waste $300,000 on one house in Cordova. Why? Because yes, you’re going to get a little bit upper, more professional tenant. They may be easier to deal with. You won’t have any, possibly any maintenance, big maintenance issues, stuff like that, but you’re only going to get $1,800 a month out of that. If you divide 18, let’s see what that comes out to you. The gross ROI on that 1,800 a month times 12 months is going to give you $21,600 a year. You paid to say two fifty for that house you’re beginning gross cap is eight point six percent by time you know expenses you can be in the files i have you get that you get better net stock market if you have a brawler Frayser white haven let’s say we pick up a house for ninety thousand dollars and needs ten grand worth of work so you’re all in a hundred thousand that house rents for $1,100 a month. Divide that into your $100,000 all in, and that gives you a gross cap rate starting at 11%. See the difference? You’re not going to get that in Cordova. Now, you can get lucky from time to time and swoop in on a foreclosure deal or something like that where the numbers make sense. But that is a rare event. If you want to build a solid performing portfolio with good numbers and asset growth, then you’re going to have to look in that C and C plus neighborhoods. Stay out of the Ds, stay out of the Ss, but the Cs and C pluses is the sweet spot.
Jeff
0:21:48 – So what you would suggest in order to increase your portfolio instead of buying one $300,000 house in Cordova is roll that money into, say, three $100,000 in a C neighborhood.
Brett
0:22:00 – Well pretty simple. I wouldn’t even do that. If I had $300,000, I would roll that into, let’s say, 25% down. That’s 12 down payments.
Jeff
0:22:08 – So take 20% down, 12 houses. Sure. And now you’ve got a really good portfolio going that’s going to, you know, basically what you’re doing is putting a tenant in it that’s paying the mortgage, taxes, maintenance on the house, and you’re just steadily building equity.
Brett
0:22:24 – Right. That brings up the next topic or the next question I think is going to come for you. Why would I buy 12 homes with $300,000 in a C plus neighborhood versus buying two homes in a C plus neighborhood or B neighborhood or one home in an A neighborhood? It comes down to return for investment. Why would you invest money in something if you’re only going to get a 3 or 4% return on it? You’re better off putting that money somewhere else. However, real estate is the safest place to park your money and diversify your investment portfolio. It’s been proven over and over and over again. Property values have risen. Other than 2008, 2009, and 2010, property values have risen year after year since 1963 when they began tracking property values on an annual basis. So with that kind of a track record, why would you not park your money in real estate?
Jeff
0:23:17 – Well, in Memphis alone, the average increase has been 5% for the past several years. 5% a year.
Brett
0:23:23 – Yeah. So, let’s dive into that a little further. You buy the 12 homes, and they’re all rented for $1,000 a month. That’s $12,000 a month gross coming in. After your expenses, your mortgage, your interest payments, whatever. Let’s say you’re running a 80% cost, all right? For all your expenses, all your taxes, everything. That’s $9,600 a month in your mortgage payments, interest, taxes, maintenance, and all the things you pay for. So that’s still putting, what, three or four thousand dollars a month in your pocket. That’s great, it’s cash flow. Can you quit your day job and live a lavish lifestyle? No. But what do you have also with that?
Jeff
0:24:08 – Well, you’re building equity.
Brett
0:24:09 – You have $1.2 million in real estate that you now own, right? Equity-wise, you probably got $200,000, $250,000 in liquid equity value of that asset. And every year, that asset is growing, that equity and that asset value is growing. So people need to get away from this, I’m going to buy 20 homes and be the next Donald Trump. You’re not going to be. Yeah, you can make some income, but you’ve got to look at it from a perspective of a safe place to build asset wealth, way safer than the stock market, way safer than most investments out there. So every expert and every non-expert who knows what he’s talking about will tell you, you diversify your portfolio, hedge against an inflation, a bad economy by putting your money in real estate. Because when real estate goes down, what’s the next thing it does? What does it always do?
Jeff
0:25:00 – Oh, it’s always going to come back up. Right. It’s never going to go down to zero.
Brett
0:25:04 – The lesson many people learned in 2008, I’ve heard this a million times. I wish I’d have just held on to my real estate. I shouldn’t have sold it. I can’t believe I sold it. I should have held on to it. But people panic and make dumb decisions and pay for it down the road. Now there are smart people out there in Memphis, I know a few, who capitalized on that and built a huge portfolio during the 2008 recession. And one of those guys just sold his portfolio two years ago. I’ve represented him. I think he probably had $600,000 invested and sold that portfolio five years, eight years later for $2.8, almost $3 million. Look at investing in real estate as asset wealth building and get away from this monthly income parameter because you’re never going to make that much money in single family rentals monthly. But you can grow assets and you can capitalize on the equity and build you something that has got a great value in the future that you can use and leverage to do other investments or to cash in and retire, whatever you want to do. That’s how you need to look at investing in real estate, a safe place to park your money. All right, thanks for listening today. My name is Brett Bernard, 901-692-7401. Jeff McNett.
Jeff
0:26:14 – 901-570-0654.
Brett
0:25:18 – Thanks for listening.