How a Memphis Builder Builds New Homes Under $185,000
Alvin Taveras sat down with Nicholas Smith, a Memphis new-construction builder, to talk about homes under $185,000 that rent for $1,450. This is the conversation, in their own words. Watch the full episode on YouTube: https://youtu.be/mSmVIMLhiNo
Why Memphis
Alvin Taveras: "Memphis has been a hot market for a while. And when I say hot, I also kind of mean boring in the sense of real estate. It's not a market that changes a lot. It's more of a Midwestern stable play, but it's been cash flowing for 20 years now. And you're able to put together properties that are under 185, which is absolutely incredible for a lot of our investors."
Nicholas Smith: "Honestly, Memphis to me is one of the best markets in the world. Now I'm not just saying it because I stay here. We don't have a lot of new construction houses around here, so when we do, we're able to put a tenant in there for a good price, but as well sell it at an affordable rate for an investor. And it's a win-win at the end of the day. The tenant is happy, the investor is happy, and everybody's just happy at the end of the day."
Nicholas Smith: "The infill lots, they are cheap. Labor costs are cheap. So man, you really can't lose down here, as long as you know what you're doing and you're looking out for the investor and the tenant at the end of the day, and putting out a superb product."
The $185,000 home that rents for $1,450
Alvin Taveras: "We're going to be diving into one of the opportunities in a little bit: a property that's less than $185,000 that's renting for over $1,450. And it's funny, when you sent me those rents, I was like, I gotta double check these numbers. I know Memphis is known for being an affordable market. $1,450 is considerable. But rents have been going up, which is part of that story."
Alvin Taveras: "You showed me the lease. The rent is indeed $1,450. Thank you for confirming that."
Nicholas Smith: "A lot of people don't even know about Memphis. Like you said, you didn't think that we were getting $1,450 in rent, and I had to send the proof for it. That's understandable, because we are behind in a lot of areas, and that's a good advantage for me, a good advantage for builders, a good advantage for investors, because they can buy a lot of different products down here and it cash flows like crazy."
Why he left flips for new construction
Alvin Taveras: "Being a developer, you gotta be a cowboy, right? You gotta have a willingness to take risks. So I want to know from you what got you into new construction development, and what makes you this courageous."
Nicholas Smith: "Honestly, what got me into real estate development is that I wanted to control everything. When you're doing flips, when you're doing rentals, you don't know what's behind the wall or anything like that. But you as well have sketchy general contractors. So I dealt with that. After I think my last flip, maybe two or three years ago, I just sat down with my team. I said, hey, I need to get into new construction."
Nicholas Smith: "I said I want to control everything. I want to be able to sell to a first-time homebuyer, but I as well want to sell to investors at the end of the day. So I built a product that fits well for a first-time homebuyer, but as well fits well for investors."
Alvin Taveras: "When you do rehabs, you buy a property and you anticipate a certain number of expenses, but rehabbers are famous for just putting lipstick on it. There's a hole in the wall, just put some paint on it, caulk it. Now when you do new construction, you can kind of work out all the costs ahead of time. You can pick your team, you know who the roofers are, you know who's doing the stucco, you know every single part of it."
The first build and the mentor
Alvin Taveras: "Walk me through that first build and how you put that team together."
Nicholas Smith: "Honestly, man, my first build, no matter what I'm doing in life, whether that's me wanting to build a house or me wanting to start a trucking company, I always get a mentor, so they'll be able to shortcut my success. That's what I believe in. So with that first build, I went with a mentor of mine, and he sat down with me and taught me the whole game."
Nicholas Smith: "I told him, hey man, I want to figure this out for myself. So he passed me along to the guys with my trades, and they did everything for me, from the foundation to the frame and to the roof siding. So I had to learn. But in this market of Memphis, you can learn, but you really can't lose, because everything is so cheap. The land is so cheap. The labor is so cheap. So how can we lose?"
Why tenants stay
Alvin Taveras: "Memphis has a blue collar feel to it. It has the train line, FedEx is there. You have a lot of workforce jobs, people who've been at the same company 10, 15 years. You might get a tenant for life in a city like Memphis, versus a lot of other cities where people are coming and going all the time."
Nicholas Smith: "We have a lot of tech startups coming up here. We have Elon, he is coming up here. So when Elon comes, everybody else comes. Right now, we're getting tenants that want to stay on a two to three year lease, because it's a new house, it's in a great area. We're building up the whole area. The house is new. They like the amenities that we provide."
Memphis and Nashville
Alvin Taveras: "Tennessee is known by two major cities, Nashville and Memphis, and they're wildly different from one another. Nashville received a lot of speculative money. It wasn't just building an infill lot. These were entire commercial residential buildings, 300 at a time. So they're experiencing the exact opposite of Memphis right now. They're saturated with inventory. You're seeing three months, four months free in cities like Nashville. And in Memphis it's the opposite. You have workforce housing, you have demand for housing, and the homes are kind of just trickling in at an easy pace."
Nicholas Smith: "Honestly, Memphis is a heavy renter place. Nashville, you have million dollar properties. There's people that have a lot of money, there's a lot of jobs. But Memphis is a blue collar place, so there's people that just are staying here and haven't seen new construction houses as much. We're behind Nashville, so we're just now starting it up. There's an opportunity for first-time homebuyers, an opportunity for renters just to stay where they're at, because they haven't experienced what we're giving them. So it's an advantage to us, but it's an advantage as well to the investors."
The price picture
Alvin Taveras: "It seems like it's unanimous nationwide that the country's unaffordable. You can't buy a house anymore. But if you look at the actual details, the average price for a home across the US is $450,000. That's an all-time high. In the city of Memphis, the average price for a single-family home is $150,000. So you're talking about a $300,000 difference for the average single-family home."
Alvin Taveras: "What's it like being in a market that's still affordable, where people are able to have a higher savings rate, people aren't bleeding? Walk me through what it's like to listen to the national headlines when it doesn't apply to what you're seeing every day."
Nicholas Smith: "It's a great thing, honestly, because there's pretty much no change. When things change worldwide, we really don't get that effect, because nothing changes. Regarding affordability, for the past 10 to 20 years the affordability has been where it's at. A $150,000 house, that's pretty much where we're at. $200,000 to $250,000, that's still a great number, because we're lower than every other state."
Nicholas Smith: "When a crisis happens, there's no effect. So we just go on about our day, honestly, and that's a great thing to be at. But eventually things will change. That's why I think it's a good thing for the investor to come on in and buy."
Safety and momentum
Nicholas Smith: "Safety is one of the biggest things here in Memphis. We have this stigma around Memphis. But ever since the National Guard and different other agencies have come down here, they have really buckled down on safety, because they see these big-time companies coming out here. Bigger companies are coming, so that means more jobs are coming, more people are coming, and prices are going up, and that's where we're at right now. It's about taking advantage of the moment and doing what you can to help the community, help the investor, help the first-time homebuyer, help the tenant, and bringing Memphis to the utmost."
No shortcuts
Alvin Taveras: "When you look at your ability to get prices this low in a market that's generating over $1,450 in rents, so the cash flow is amazing, what's your secret sauce to get a property at that price point?"
Nicholas Smith: "It's about building a product that I'll appreciate, but a tenant appreciates at the end of the day. It's about building a product I'll stay in myself. Every product that I build, I don't shortcut anything."
Nicholas Smith: "As far as adding different fixtures, adding the whole appliance packages in there, 30-year roofs, putting porcelain tile in the bathroom, I add that in there to make the tenant feel appreciated. And when they walk in, they say, wow. Memphis, I didn't know they did houses like this. And they appreciate it and they want to stay there long term, because they haven't seen many houses like that around."
Nicholas Smith: "After a one-year lease there's a turnover, so you have to put a whole other tenant in there. In my mindset, I'm thinking, how can I prevent this for the investor? Let's try to sign a two-year, three-year lease, and that's what we've done on some of our new builds. How can I add some of the amenities of $200,000 and $300,000 houses to this $180,000 product? That way it feels appreciated, and they take care of it. When they see all the amenities in the house, they really take a pride in taking care of it. And you don't have any issues from maintenance issues, CapEx issues."
Alvin Taveras: "If you put a crappy property and a great property for the same price, same rent, same everything, you could have wildly different cash flows, depending on what your CapEx is, how many repairs you have, what your turnover is, how long it took you to get that tenant in there. If you go three months with a vacant unit, you're not making cash flow that year."
A hands-off team
Alvin Taveras: "I want to dive a little deeper into your process of putting together a team. You're packaging together the property management team, you have the insurance providers. Walk me through the entire team and how we package these deals together."
Nicholas Smith: "It's about relationships at the end of the day. I work with people who do a great job and love what they do. And from an investor standpoint, we try to give them a streamlined process where they just plug and play. The property management that we have used, they've been with us multiple years. They know our process, they know what we're building, they know exactly what's going on. So when we get that to the investor, it's pretty much a hands off experience."
Nicholas Smith: "It's new construction, so there's not that many problems. We try to make a process where everything is standard. There aren't any big things. You don't have to have the mindset of okay, I have to figure this out. Everything is streamlined. Everybody knows exactly what's going on."
Alvin Taveras: "They know the rental rates for that market. They know the warranty companies, the appliance companies. They have a direct relationship with the builder. If they need to figure out what the paint color is, they have access to that. And you can possibly have your property rented before you even close on it. Getting a tenant placed before you even own the property is one of the best ways of reducing holding costs."
Nicholas Smith: "It really is. Before we even contact you guys, we already have a tenant in place, because we're thinking about the investor at the end point. We're trying to make everything as simple a process as possible. We're building the same product over and over, and that's what investors love. As far as flooring or paint, there's pretty much a page where we have everything listed. So everybody knows exactly what's going on."
Permits and build speed
Alvin Taveras: "One thing I forgot to mention: we're talking about how we get the cost so low, and it's the speed of construction as well. Down here in Florida it's common to take three or four months just for permitting. In Tennessee, specifically Memphis, it's a whole different ballgame. How long does it take to make a build?"
Nicholas Smith: "Honestly, it takes about one and a half to two weeks for permits, but I'm building houses in around forty-five to sixty days. Sixty days if there are delays, issues with the water utility companies. But between forty and sixty days, we're getting our things shipped up."
Alvin Taveras: "This is infill development. There's already electricity, already the utility hookups. There's already a neighbor on both sides of most of these houses. We're not clearing cow fields and trying to bring water out there. And that means you're already in an area with public schools, a grocery store, close to the highway, and you can get to downtown pretty quickly."
Nicholas Smith: "We're only building where we'll stay. We're building near downtown. It's underdeveloped and we're developing it up. It's about building where the schools are, where people want to be, where parks are around. At the homes we've built, there's children everywhere. People just generally love to be where we're building our houses, and they love the product, they love the environment."
The takeaway
Alvin Taveras: "I love hearing your mindset of taking the next obvious steps and listening to the investors, listening to the renters. When I asked you specifically how you get the prices this low, you focused on value. The cost cutting is already baked into the cake. It's already part of building in that area. Then it's about how do we get everyone to have the best experience possible and ultimately make the best product that we can."
Everything above is what the speakers said on the show; none of it is a promise of returns. Confirm current prices, rents, insurance and taxes yourself before you invest.
Watch the full episode: https://youtu.be/mSmVIMLhiNo Explore Memphis opportunities: https://build2rent.com/Memphis-Metro Get weekly deals: https://build2rent.com/weekly