Memphis, Tennessee: A Hot Market for Investors
Hot real estate markets like Las Vegas and Phoenix can generate a lot of hype in the real estate world, but Jeremy Brandt, CEO of WeBuyHouses.com, would argue these aren’t always the most ideal markets for investors. His most successful affiliates work in secondary markets.
“Not the biggest cities,” explains Brandt, “but kind of the midsize cities…because they’re value investing. They’re buying at a good price. They’re adding value to the property by fixing it up, and then there’s a ready demand of buyers or renters.”
Each year, WeBuyHouses.com surveys its independent business owners about their local market and writes a report with predictions for the following year. The company just released its 2019 Housing Report. Brandt talked to REI INK about the findings and spoke in-depth about one of their favorite secondary markets: Memphis, Tennessee.
General Predictions
The 2019 Housing Report goes into detail about specific submarkets, but it also makes a few general predictions for the housing market as a whole. It anticipates that residential real estate will slow down in most local markets
next year.
“In 2018, we’ve definitely seen the cooling effects of rising interest rates (up 70 basis points since our last survey), and we expect that to continue with similar increases in 2019,” Brandt said. The report foresees 5 percent or more home mortgage rates a year from now (up 75
basis points).
The report also predicts the market will shift from a seller’s to a buyer’s market and that home prices will level out. Prices will likely drop on the West Coast, rise in the South, and level out everywhere else. On average, home prices are expected to rise 3 percent next year, with a year-end median price of $264,000.
The inventory of existing homes for sale will probably rise in most markets, which will result in days-on-market increases and slower turnover rate for invested capital. This will also require more investment in marketing properties for sale.
Renovation costs are likely to rise in 2019 in almost every market. Labor and materials will be in high demand next year, even as home prices soften. The combination of rising renovation costs and declining prices will put margin pressure on real estate investors and push unprofessional players out of the market.
A Look at Memphis
Even with a slowing market, Brandt is excited about the unique opportunities Memphis has to offer. WeBuyHouses.com predicts that Memphis will be a seller’s market in 2019. They anticipate prices increasing, inventory decreasing and prices for contractors and materials rising.
The We Buy Houses Memphis office sold 247 homes last year with a total volume of $26,997,648, making them the No. 3 seller of homes in all of Memphis. Regarding the current market, Sean Tagge, an investor at the Memphis office, said, “If I find a deal, I can capitalize on it easily.”
Brandt said, “The best real estate investing markets are actually ones where you have things like a good ratio between the cost of the house and the rental rates in that market, or a fairly ready labor pool that’s relatively inexpensive compared to other markets and you have a lot of people moving into the area.”
According to the Memphis Area Association of Realtors, in December 2018, the median sales price in Memphis was $138,000 and the average sales price was $174,835. The average rent ranges from $626 for a studio apartment up to $927 for a three-bedroom apartment.
Memphis has a strong economy and job market, low cost of living and high percentage of renters compared to the national average. The large inventory of older existing homes makes it an ideal place
to rehab and rent
distressed properties.
“Memphis has come a long way when it comes to entrepreneurialism,” Brandt said. “I think you’re starting to see more small businesses started…in Memphis because it’s an inexpensive labor market, inexpensive housing market and it’s easy to live there. It’s easy to start a business with lower costs in general than starting a company in Silicon Valley, where almost every expense you have is going to be three or four times as much than if you started in a place like Memphis.”
As more people move to Memphis to take advantage of the strong job market and low cost of living, homebuilders are struggling to keep up with demand. “A lot of homebuilders are more conservative than they have been in the past,” Brandt said, “because when we had the housing slowdown 10 years ago, a lot of homebuilders really got caught with a large number of houses under construction and they weren’t able to sell or had to sell at a discount and maybe a loss when the real estate market slowed down. So, I think homebuilders in general are a little bit more conservative than they used to be. … Inventory is going down just because they haven’t built houses fast enough to accommodate the number of people that are moving into the area.”
The combination of strong demand and low inventory is pushing home values and renovation costs upward in Memphis. Contractors are in high demand right now.
“When you have a market like Memphis,” Brandt said, “where there’s a lot of rehabs going on and a lot of new home building going on, there’s competition for the good contractors, and so the price of contractors goes up.”
Brandt said contractors also get scarcer, so it’s also more difficult to find reliable ones.
When asked if he thinks the new tariffs on Chinese imports will affect the cost of building materials, he said, “It’s tough to gauge what’s actually going to happen. I think we’re hearing about price increases on different things. Certainly, things like steel. I think what I’m seeing a lot of is most of the things we get from China, we can get from somewhere else. It’s just a little bit more work to get it from those other places.
“So, I haven’t seen stratospheric price increases, but I think there have been some price increases on building materials just because it’s a little bit more difficult to source them and, really, uncertainty in business and in real estate. …. I think if there’s significant price increases in materials, it will definitely slow down the real estate market a little bit nationally.”
Turn-Key Investments
Brandt said the rehab and rental market in Memphis is creating a unique opportunity for foreign investors.
“There are a couple of companies that specialize in doing turn-key real estate investment for passive investors, which is very attractive to foreigners because they don’t have to be in Memphis to invest,” Brandt said. “So, the company will identify a property, buy the property with the investor’s money, rehab the property with the investor’s money, rent it out and property manage it for the investor. And so, for the investor, it’s a fairly turn-key, passive investment. And Memphis has a really good ratio of rent rates to cost of houses, so it’s really a good rental market, because rent rates are good compared to the cost of real estate there.”
According to Brandt, investor-owned properties are a big trend in Memphis right now because there are so many opportunities. In many other cities, it may not be as cost effective to buy, renovate and rent out a house as a passive investor.
“Somebody who lives in Los Angeles, for them to buy a house, renovate it and rent it out would cost them $500,000 or more…whereas in Memphis they can do that for $100,000 to $150,000 and then have a cash flowing property that provides them passive income with a property management company there,” Brandt said.
Brandt also noted that it is common to see foreign investors put money into commercial real estate in big cities; however, it’s unique to Memphis to see so much foreign capital in the single-family residential market.
“You know it’s a pretty solid investment, a pretty safe investment, especially if you live in a country with currency fluctuations or other issues, and to the degree that they can be entirely hands off and just provide the capital, but then own a tangible asset in the United States. I think that’s pretty attractive,” Brandt said.
Memphis provides plenty of attractive opportunities to investors in a softening market. Whether you’re looking for a passive, turn-key investment or a house to flip and rent out, Memphis’ strong economy and low prices will be sure to add value to your portfolio.
The Man Behind the Brand
Jeremy Brandt started flipping houses after the stock market crashed in 2001. Today, he is well-respected as an industry leader and has built many successful companies in the real estate field. He is the current chair of the Global Governance Committee for the Entrepreneurs’ Organization, and is a regular contributor to FOX News, “Larry King Live,” CNBC, CNN, FOX Business, NPR, the Wall Street Journal, USA Today and Forbes.
When Brandt bought We Buy Houses in 2012, he wanted to revitalize the company by creating a nationally recognized, credible brand for real estate investors. The company vets all investors operating under the brand license, requiring them to be experienced and capitalized and to adhere to a code of ethics. With more than 60 offices throughout the country, WeBuyHouses.com licensees bought approximately 2,500 homes in 2018.
