A Wall Street Journal article rated Memphis as the number one city for investors buying and holding single-family homes. The study was based on data from the foreclosure tracking firm RealtyTrac. The rating is based on the annual rate of return investors are realizing by renting out a typical three-bedroom house.
The average three bedroom single family home in Memphis is selling for $72,605 but these numbers are steadily increasing. The average rent is $1,047. The average monthly positive cash flow is $628. A very generous rate of return that has mostly held steady for the past four to five years.
Buying and holding isn’t the only successful Memphis investment strategy. Memphis is ranked as the fifth most profitable market for flipping single-family houses. According to RealtyTrac, 1,331 single-family houses were purchased and resold within six months of the original purchase. The gross profit averaged $28,552 or 42% of the original purchase price.
During the height of real estate flipping, the FHA made a policy change making it more difficult to obtain financing to flip houses. It would not underwrite a mortgage for a property that had been sold in the previous 90 days. This policy was suspended during the real estate down turn to encourage sales. Continuing to make financing available for flippers.
The averages only give you an indication of what is going on in the market. Each deal is unique and you need to do the math to determine which deals are best for you. For instance, the average flipping transaction above is based on gross profits. Reality is you will have to invest in repairs and remodeling to make a profit. The final return on investment is more likely to be half of the gross.
Besides investing in remodeling and repairs, there are holding costs that you must pay between the time you purchase and sell the house again. Typical holding costs include property taxes, insurance, and utilities. If you take out a mortgage to make the investment, a monthly mortgage payment will probably need to be made.
Also, be sure to consider the available inventory of houses in Memphis has dramatically shrunk. In 2008, there were 13,000 houses for sale on the market. Today there are only 1,800. However, there are another 6,000 in the pre-foreclosure, auction, or bank-owned stages of the foreclosure process. Year-on-year, 4,629 houses have sold.
As is typical in a buyers’ market, investors jumped in with enthusiasm, snatching up the lowest priced houses first. While there are still great deals available, these are fewer and further between. Additionally, there are now more investors going after fewer houses. If you want to get in on the best Memphis deals, you can’t afford to wait any longer.
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