After living in Memphis since childhood, I have an insiders view of my city. But sometimes an insider’s perspective can be warped, creating a false understanding of what is normal and usual. One may have a wrong understanding of scale and size, for instance, thinking a city is urban and cosmopolitan rather than recognizing its actual character as a small college town dependent on a specific industry.
Just as glasses can be removed, a perspective can change with the right circumstances. In my case, various personal and work trips led to experiences in other cities, near and far. From Atlanta to Dallas, from Chicago to New York, from Toronto to Seoul.
A healthy outsider’s view of Memphis developed as I was surprised by the need to explain where Memphis was located, how short commutes were in comparison, and intriguingly, how much cheaper it was to buy a house in my hometown than the neighborhoods I visited around the world.
Starting my professional career about the time of the last major housing bust gave me a first hand look at the negative outcomes possible from real estate, as I learned how to prepare tax returns by inputting K-1s with large losses and 1099-C debt forgiveness forms on returns of foreclosed developers. Hours of data entry gave me time to reflect upon the changing fortunes of clients whose change of addresses reflected moves from exclusive neighborhoods into modest accommodations. I could only guess at the personal turmoil accompanying those caught in the downward crash of the real estate wave they rode.
Before long I began to see other returns of more interest to a young man with a financial mind. Tax returns with Schedule E entries reflecting houses with steady rental income and minimal expenses. Depreciation entries that shielded the cash flow from tax. Preferential capital gains tax rates when houses were sold. These lessons stuck with me as a moved out of tax into other pursuits.
As an accountant, I could of course run the numbers and see potential returns. But as a Memphian with an insiders view, empty structures graffitied and littered were silently screaming monuments to the truth that real estate isn’t just a matter of spreadsheet calculations. Pros and cons galore, that a conservative minded accountant can weigh and ponder, while the years (and investment opportunities) pass by.
The outsiders view of Memphis that developed through my travels, like a binoculars lens slowly bringing clarity to a distant target, finally developed my confidence in a bullish take on Memphis real estate. Visiting large cities where a home in a working class neighborhood may cost 4x-10x as much as a house in a similar class neighborhood in my hometown is a pretty startling realization. Watching California investors pour money into poorly managed Memphis rental properties only made sense through the lens of realizing these investors were getting a 10 for 1 discount on price. The 1% rule may be a fable in some cities, but was a realistic target even in solid areas here.
Memphis is dependent on a specific industry, it’s true. But when that industry is as stable as transportation, and poised for even more growth as online shopping only increases, the dependence on industry is more like a safety net limiting the downside than a helium balloon whose descent is just a matter of timing. Transportation doesn’t have the wages or profit margins of software, but it does provide a wide variety of jobs and vast scope of auxiliary roles and businesses with respectable earnings, as well as a hub of essential workers whose incomes and spending contribute to economies of scale within the local business community.
If you don’t know, Memphis has the top cargo airport in the world (most air cargo moved annually in recent rankings, second only to Hong Kong in any years not holding that title since at least 2002). The air cargo is only complementary to the pre-existing multiple rail mainlines, river ports and a geographical location that leaves 75% of the United States population within a two day drive. These are unique advantages that either have extremely high switching costs, such as airport and railroad infrastructure, or impossible to replicate advantages, such as the geographical location within the country.
With interest rates on the rise, inflation at decade long highs, and a real estate cycle long overdue for a correction, one doesn’t need a crystal ball to see that real estate investing faces significant headwinds. A disciplined focus on real estate fundamentals is necessary now more than ever. A rising tide may lift all boats, a crashing wave may flip them over, but if you line up correctly you don’t even need a boat, instead you just surf the wave all the way to shore.
And I’m lining up on Memphis.