The Wall Street Journal recently ranked Memphis as the number one city in the country for investing in single family residential homes. The rating is based on the cap rate. Memphis has a cap rate of 10.38%, which slightly topped the second ranked city of Saginaw, Michigan which had a cap rate of 10.32%.
The cap rate is used to determine the net operating income an asset produces compared to the cost or current value of the asset. The higher the cap rate, the more income the asset is producing compared to its cost or value. You would use the cost of the asset when analyzing a property to purchase. Once you own the property, you would use the current market value for the calculation. The simple formula is: Capitalization rate = net annual income / cost (or value).
The Memphis numbers used by the Wall Street Journal showed a three bedroom house with a medium purchase price of $72,605 and a monthly rental income of $1,047. This is typical of for a house in a good neighborhood where working people can be relied on to make the monthly rent payment.
Trends in Memphis Real Estate
With a declining foreclosure rate and institutional investors moving into the market, mom and pop investors are expecting to make fewer new investments going forward in 2013. Forty eight percent of small investors expect to buy new properties in the next 12 months. A majority of investors say that the investments they have made over the last couple of years are paying well and they plan to hang on to them for at least five years.
As the inventory of houses on the market decreases, forced appreciation is likely to kick in at some point. Currently, investors are reporting there is still an ample supply at good prices. However, there has been an influx of new investors and the current strategy to nailing down good deals is moving quickly. In the not too distant past, even low priced houses sat on the market for months. That is no longer true. Well maintained houses priced right are quickly receiving offers in today’s market.
New Construction On the Rise
Existing single family home inventory has dropped about 50% since it’s height in 2006. As happens in almost every market, this is bring on growth in the new construction market which for Memphis is up 34.3% from last year. More new inventory will help stabilize prices. Appreciation is expected but at a moderate rate. As appreciation happens, more under water mortgages will begin breathing again and owners will again have equity. Under water mortgages are the last pent up demand from the real estate melt down. Once these houses move through the Memphis market, the city will have reached it’s “new normal”.
About the author: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.