CW 395: Little Rock Arkansas Income Property Investment Market Profile with Local Market Expert Alex

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Welcome to the Grading wealth show. This is your host, Jason Hartman, and this is episode number 395. Thank you so much for joining me today and thank you for your feedback on prior episodes, too. One of the things I wanted to discuss because I didn't have much time is discuss the audio I played on the last episode regarding Little Rock and kind of dive into that in a little more depth. I kind of did that just really quickly on the last episode because I didn't want to forget to include it. But to do that, I've got one of our Little Rock team members here with us, and that is Alex. How you doing?

Doing very good, Jason.

Good. Good to have you. First of all, this is a smaller city. It's definitely not a city that makes the headlines by any means, but it's really got some fantastic metrics. There are some fantastic things to consider when you look at the fact sheet and I'm looking at some of your PowerPoint slides here that you presented at our last Creating wealth event back in June. 14% growth in population since 2000. Cost of living is 10.9% lower than the U.S. average. The median home cost $114,000. The national average is 153,832% of the city rents. This is like a landlord's dream. You know, the property taxes are incredibly low. Unemployment rate is incredibly low, consistently below the national average. Let's dive in and talk about some of this. I mean, why haven't people really paid attention to this market? You know, what are your thoughts?

We have that same question ourselves. And it's really kind of perplexing maybe because Little Rock just is not on the national radar like some of the other markets like Atlanta and Memphis and Dallas. It's really flown under the radar, which obviously, you know, we like lot you refer to it being a Small city and it's really not that small. And I guess you would think it's small. You don't hear Little Rock again on the national news that much. But the Metro area is 850,000 people. So it is a fairly large metro area. But what we've liked about it the most is the fact that it has stayed off the radar, which has kept prices low. The hedge funds, it's been off the hedge fund radar. So we're calling Little Rock the best kept secret. We want to keep it that way. We don't want hedge funds coming in. We haven't approached hedge funds to introduce what we're doing there. So with the lack of institutional investors, it's been a really good, good kept secret.

You know, the first market that we saw them all come into, the first market that actually made any sense, I'll put it that way. You know, I'm not even considering California stuff in this equation when I say that is Phoenix where I live. This market was coming back. The institutions just came in here with wild abandon and they just kind of ruined it in a way because they just, they made it impossible to compete for anybody who wants to do anything that makes sense. And they really haven't been in Little Rock much. So it stayed below the radar, as you like to say. What would you say, Alex, when we talk about that, that video, that probably goes too far. The idea of using law enforcement to enforce a private contract is very unusual. But you know what I didn't like about it? They just seem to point out all these poor areas and every city has poor areas. Look, I grew up in overpriced Los Angeles and there's a lot of very poor and very bad areas in Los Angeles. Heck, that's where the LA riots started. Some of these areas you just, they're so dangerous, it's not even funny. What do you think about that video? It seems like it pointed out, really made it seem as though this was some poverty stricken city.

The media has a fantastic history of portraying things a little bit probably over the top and not putting things in the best light and really going towards one side of the, I guess the population. But we like the video and the fact that it laid out that Arkansas is a very landlord friendly state. You know, when we saw the video we were very selective though how we wanted the market because it did portray the state of Arkansas as being just very country backwoods, lagging behind the rest of the country with up to date landlord laws. And it really portrayed some of the most deplorable places in Arkansas. And really none of that video took place in Little Rock. We didn't like the way it made landlords out to be. It made landlords. It really was kind of a slumlord type video. But the bottom line that we made public to our investors was just the fact that it is a very landlord friendly state. And if you needed to get your tenant out quickly, you can, in all reality, if you wanted to get your tenant out in two weeks, that wouldn't be a problem.

Yeah, very interesting. Two weeks. And that is a good thing. When you've got a deadbeat tenant, you got to get them out of there. You got to have landlord friendly laws so you can move on and do that. Here they were talking about slums and certainly in Los Angeles, my hometown, you've got lots and lots of slums. Especially oddly, the government housing seems to be some of the worst. Let's go through this presentation a little bit and just look at some of the Little Rock metrics that make it interesting. I mean, 40% of the nation's population buy power within 550 miles.

Yeah. I mean it's centrally located, so logistics, jobs, it makes sense for it's a very centrally located city.

And tell us about your experience with Memphis vs. Little Rock, if you would. You were born in Little Rock, is that correct?

Yeah, I was born in Little Rock. We moved over to Memphis very quickly. So I don't have a. I didn't live in Little Rock very long, but it's always been a second home to me because I've got family over there, which is how we got started in the Little Rock market in the first place. But I've always really compared both of the markets as being very similar. Now, the drivers of both markets considerably different. Where Memphis is a very logistic distribution town, Little Rock is more of a diverse economy. And that's why Moody's Investor Services rated as the second most diverse economy. Because there is a lot of different things that are going on Little Rock that drive the economy. So when the recession happened six, seven years ago, when a lot of markets suffered, even Memphis, that was kind of the start of how the investment boom happened there. A lot of individuals lost their jobs. The distribution, obviously if you have a bad economy, distribution is going to be one of those sectors that's going to hurt. But in Little Rock there's a, a lot of different sectors that even in a bad economy, there's others. There's not one single sector that could drag it down. So that's why There wasn't a huge housing crisis in Little Rock like a lot of other cities because the economy stayed strong. But comparing to both cities, the cash flow is really good in both markets. So I've always been very similar. Little Rock just a tad bit smaller, but both markets. If you're a cash flow investor, Little Rock is definitely a market you would want to look at.

It's interesting because they look at the job growth predictions. The 10 year prediction based on economic factors, migration pattern patterns, etc is 33.7% versus the national average prediction of 32.1%. That's a pretty decent margin over the nation. America is really discovering that they don't need to be in these overpriced, overcrowded, over regulated cities. I'll use the LA comparison again. I mean, it's just amazing how this has changed versus when I get into the business so many years ago it used to be, oh, you got to be in the centers in the big cities. And it's, it's just not that way. What about some of these rankings? You know, number one place to live in the United States. Kiplinger magazine in July of 2013. Really? I think that would amaze some people listening.

I mean, Little Rock's a very clean town. Actually, I think it was named the second cleanest city in the United States. This is a lot to do in Little Rock. It's a great place to live. Like I said, it's always been a second home to me. And no matter what your hobby is, there's something to do there. Whether you're in the outdoors, you're in the sports, you're into music, you're into dining out and having a good time, being entertained. There's just a lot to do in Little Rock. And part of that Kiplinger study has to do. It just brings it all together. Is there things to do? Is the housing cheap, Is the crime low? All of those things is how they develop that rating. And you know, Little Rock's a great place to live. I mean, the development they're doing downtown is amazing. And when you all come to Little Rock for the bus tour, you'll just be overwhelmed with what they've done. I mean, I know y' all hadn't seen what it looked like beforehand, but they continue to put in and I don't know what the number is. It's somewhere in the billions of what they're putting in. Capital, infrastructure to the town.

Look at these highly reputable sources. Kiplinger's Businessweek. Okay, so BusinessWeek as fourth strongest economy in the country. I mean, who would think that that's amazing.

It's just another one of those markets that stays off the radar. But because the economy's strong, it continues to be a good housing market for investors. It's very friendly. You know, when unemployment stays low and the economy is strong, then there's just going to be good things going on in the town.

Southern Business Development says top 10 smaller markets in the south for foreign investment. Forbes says no real estate boom or bust. Thus earned recognition. 10 strongest real estate markets in 2009. Moody's like, no, that.

No boomer bus. I don't want to interrupt you right there. And that's another reason why that makes this a good market.

If you look at linear markets. We like linear markets. Yeah, yeah.

While Memphis became a great cash flow town, was obviously the result of subprime lending, lending and foreclosures. A lot of houses hitting the market. And it's not just Memphis. It was a land in Dallas and, you know, several other cities that because there was a huge housing decline, there was a, a big renter P.O. out there. I mean, you lost your home, those people turned into tenants. Well, in Little Rock, they didn't have this huge boom or bust. So with an ongoing growing demand of people wanting to rent in general, it is creating a demand for rental houses in Little Rock. And because there wasn't a huge wave of foreclosures like other markets, that creates, just like I said, in general, with individuals wanting to be more renters, a demand for rental property. So we've answered that demand with what we're doing, and Little Rock is putting nice rental homes on the market, that there's obvious demand, how quick we're renting these things out. There's an obvious demand for rental homes in Little Rock.

Okay, Forbes says 22nd out of 361 metropolitan areas as best places for business. This is Forbes magazine. That's an amazing ranking. You know, 22nd out of 361. Brookings Institution, and I've had some Brookings Institute guests on my show. 7th best metropolitan economy in the United States in 2009. Nobody listening probably thinks that Little Rock, a place that so many people hadn't even probably heard of before Bill Clinton would get these kind of rankings and garner this kind of interest. It's amazing.

Low taxes in the state. I mean, it's the complete polar opposite of a state like California, New York, where taxes just kill business. Arkansas is a very tax friendly state, very pilot friendly state, which is controversial all over the country of, you know, giving businesses property tax breaks in lieu of taxes to come. And Arkansas is very friendly with that. So it's. Yeah, it's a very friendly business state which obviously that's going to contribute to a strong economy.

Speaking of business friendliness, let's look at the major employers, state government, two major universities, 28, get this, 28 Fortune 500 companies. The Air Force base, healthcare, a large job base for hospitals, insurance manufacturing. Dassault Falcon Jet Corporation. I want one of those. Verizon, Caterpillar, IT company, Axiom, Windstream, Stevens Inc. Largest investment bank not located in New York. L', Oreal LM Wind Power, Dillard's, many others.

You know, one thing to take from that, if you notice all of those, those are all big companies, those are all huge employers and they're across a bunch of different sectors. And if you're looking at a market that you don't want to be into a market with one market driver then. And Little Rock offers that because like I said, you just named several different sectors just within that brief list of companies you named.

Yeah, a diversified employment base is always good. And a linear market versus a cyclical market is always good. And we've shown on prior episodes how over time, even though the cyclical markets have the big ups and downs and they make a lot of headlines because when they're booming, they're booming and people are making money. But over time, since no one I know has really been that good at ever predicting, appreciating or depreciation reliably over time, the linear markets amazingly beat those high flying cyclical markets. So that's what you've got here. So let's look at some properties. One of the things I really love that you guys do, you do great kitchens, very designer looking and very cool. So this property is 76,900 and tell us a little bit about it.

It's located right in what we call midtown Little Rock in the Broadmoor district. What we really like about this property is the location of it. It's near 630, which is the main, I guess interstate loop within the city. So it gets you anywhere that you need to be in little rock in 15 to 20 minutes. It's right off University Avenue, near UALR, University of Arkansas at Little Rock and near a major hospital. Now when we tell our investors it's near a major university, the first thing they ask us is, is it near, you know, are we going to get college students? Is it going to be Animal House at our rental property? And the answer is no. It's a commuter college. So most of the people going there live and they're older, they're going back to school. They live local. So it's just more we mention it because it's a driver of the local economy. So we like the area. There's a lot to do right in that vicinity. And then we like the neighborhood a lot, too. What you have is a lot of older individuals that have lived there all their life. Maybe even the original owners of the houses, they're passing away in the family. Anytime you get someone that's lived in a house, you've got several different aspects or several different siblings involved. That's where you can pick up a really good deal because they just want to get rid of it. So we've gone in there and got some of these houses and done our updates and brought it up to today's look. And it's been a really easy rent for us in the area.

Looking at the performance, specifically on this one, a debt coverage ratio, which is interesting because we recently talked about that on our members only conference call. And this property, and we were talking about investor financing options on that call last week, this property has a debt coverage ratio of 1.76%. Phenomenal. I mean, that is totally phenomenal. So. And we've talked about that in prior episodes of the podcast, but I just want to point that out, that one out first, because I rarely do. Now, the projected rent here is 895. And Alex, it's already rented.

Yes. Tenants already in place. We put it on the market and I'd say we got a couple applications on it. Third app came in. We approved it all within 21 days.

Fantastic. So this is not exactly a performa. This property is already, you know, performa means prediction or projection. This is actually already doing this. Okay, so here you've got 8.95 per month. That brings your positive cash flow down based on 20% down on this Performa to 251,000 doll per month, over $3,000 per year on just an $18,300 investment. So $3,000 per year, 18,300 invested means your overall cash on cash return as long as you maintain the same income and expense ratio. And you've already got the income it's already rented of 16% annually. 16%. I mean, where else can you do that? 16% annually. That's phenomenal. The cap rate is 9.1%. Good luck trying to find that on a lot of commercial deals out there. And what's interesting here is that on your pro forma, and this is probably a mistake. I'm pretty sure it is. You put the real estate appreciation rate at zero. So the overall return on investment here is only 21% if you perform it. I know that's a mistake. If you perform in the national average appreciation there and say you put in 6%, I'm sure your return on investment here would have been somewhere in the neighborhood of 40% annually overall, with everything included.

That was a mistake. Yeah. So, yeah, you're right. I mean, you're looking at right around 40%. And I want to touch on one thing because you. You mentioned the kitchens. And we get this question a lot when individuals ask us like, well, you know, why are you putting granite in? Do you really need to put granite in?

And the backsplashes are totally designer too.

You know, it doesn't cost that much. If you look at a lot of the kitchens we do, it's. There's not a huge counter space. So we're talking maybe an additional seven or eight hundred dollars to put in granite. Maybe a couple hundred dollars extra for the talking, maybe a thousand extra dollars. But the reason we're doing it in Little Rock is because we can. There's other markets where prices have gone up so much that there's not much room for acquisition. And then fixing the property up and still having that room in there to turn around and sell it to another investor. And then them still cash flow. So there's room to do these things. And if you could get those types of returns with that type of kitchen, in the long run, you're reducing the investor owner's maintenance anyways.

Yeah, right.

And obviously it makes it easier to rent. One of the things we're doing in Little Rock, we're. We're creating a brand of homes, and that'll take some time, but. But we're answering a demand that they have in Little Rock, where what we found out before we got into the market that most of the rental homes that look like your grandmother's house looks like the grandmother passed away, the family didn't know what to do, so let's rent it out. And the thing hadn't been updated, and that's what a lot of the rental homes look like. So there was a demand to have some really nice rentals. And that's what we're doing here.

Yeah, these are really swanky. I love what you guys do to the kitchens. They're awesome. And you know, as they always say, kitchens and bathrooms, that's what sells. So that's important. This has got your vacancy rate included in the pro forma. Even though it's already pre rented. It's got a maintenance percentage built into the Performa and overall that's just pretty awesome. Anything else you'd like to say about this one?

I agree. It's awesome cash flow. I'd say the maintenance on a property like this, it's about 1,100 square feet. So your maintenance and turn cost is going to be a little bit less as opposed to a larger house, 1800 square feet. So yeah, your maintenance should be pretty low on this one compared just because it's a little smaller house.

Talk to us about the military presence in Little Rock and the tenant base there and the expenditures and so forth. I mean a 6,000 acre military base base, $830 million a year impact in the economy, that's almost a billion dollars. Again, I'd say a fairly small economy.

There's an air force base, Camp Robinson in Little Rock and you know, once again it's another driver of the economy. Out of the homes we manage. We do have some individuals that work on the base. We've got some houses for sale in that military base area. Coincidentally, we don't have a military tenant in those. But if you've got a house near the military base, it's just one other added feature of, you know, well, we could get a military tenant or we could just get a normal tenant. So you just, it just increases the.

The renter pool, more than 5,000 active duty military and civilian members with 5,500 family members living and working on and around the base. So let's look at one more property before we wrap up and just talk about a couple more Little Rock highlights before we go. Okay.

We've got another one within that same neighborhood. So once again we really like the area, the central location. And this one is 102,900 tenant is already in place for 1100 dollars a month. Normally we don't like to talk about the tenant profiles, but I just kind of found this one interesting. So he makes 95,000 a year and works at Dillards. So I didn't know that a local department store manager can make that much money, but we've got a tenant with really good income in the property. Like I said, already rented property has new countertops, new light fixtures. I mean you walk in our house and you know, even though the house was built in 1955, everything in it is new. From everything you could see lights, electrical countertops flooring, all of that is new. Actually on this one we've done a lot of work under the house. So every once in a while we get an investor that don't like they look at us and like well, 1955, that's kind of old. But when you do your property inspection, you come to find out that some of these homes are probably in better shape than a house built in 2000.

I was talking with Harry Denton, you know, he was talking about how real estate, it just lasts for, you know, it's amazing.

Like I said, we've got some investors, they only want stuff built after 2000. And my sort of, kind of counter to that is if you have a house built in 2000, you've got a 14 year old AC, a 14 year old furnace and a 14 year old roof. Whereas our house built maybe in the 1950s, 60s or 70s, could have a new air conditioner, could have a new furnace and could have a new roof. And those are three huge capital expenses that you don't have to worry about for 15 to 25 years.

Looking at the numbers here, this performa is with 20% down, 80% financing. So you need about $24,500 to buy the property. And cash flow is projected at 2,981 annually. So almost 3,000 a year. Cash on cash return 12% annually and overall return on investment 42% annually. And again all of your costs are built in there, your insurance, your property manager. So you know you're not managing your own propert maintenance cost of 8% of the income. You know, I would argue that that's probably going to be quite a bit less considering that this is a brand new rehab here and you know you've got great management in place. So, so phenomenal, phenomenal stuff here. I mean this is just a surprising great little market. I mean I, last time I was in Little Rock I was just totally struck at how clean and pretty this city was. I really did not expect that. In terms of economic development, steady increase in activity, manufacturing, transportation, service sector growing at a steady rate. One of the top 15 aggressive development markets in the nation, which doubled in the past 30 years. Projections indicating that it will double again in the next 20 years. The downtown corridor, you want to highlight just anything there in terms of that. I mean the new jobs coming there, phenomenal.

I think you just nailed it. The market, the things that you're all reading off, you know, they speak for themselves and it's a great weekend if you, you know, if you got a couple of days off and you want to go to a new market and spend two days in a city you've never been to. This is a great weekend town, A lot of stuff to do.

Our tour is coming up at the end of September, so we hope you'll join us there and you can register for that@jasonhartman.com we will have a Saturday Creating wealth boot camp. And so I will be speaking all day Saturday and teaching you all about real estate investing. And that applies to any market, of course. But then on, on Sunday, we will be very specific to the Little Rock market as we go around and we actually look at these properties and we'll see them in different stages, whether they be rent ready or in the rehab stage. We'll probably have a couple in the rehab stage. We'll enjoy several meals together. So you'll get to network with other investors and talk with our team. Meet the property management team there, meet the construction team there and just get a great idea as to the market. And the last thing I want to point out, Alex, is 1.3 billion in new capital investment, over $440 million in new payroll since 2005, and 12,000 new jobs. So really good stuff. Get here, beat our tour, be at our Creating wealth seminar, and you'll get to do them both in one weekend at the end of September. Thank you so much for joining us and telling us about Little Rock. Any closing thought?

I appreciate the interview and I look forward to meeting some new investors in Little Rock in a couple more.

Oh, we'll look forward to seeing you there. There's still some early bird pricing, so go to Jason hartman.com, click on events and register and we'll see you at the end of September.

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