Spencer Sutton - Wednesday, May 27, 2015
We were on the phone the other day with an investor from California who asked for our advice in analyzing a few wholesale deals he had been offered here in Birmingham, Alabama.
It seems like we have this conversation with out of state investors on a daily basis. Unfortunately, for every conversation we have, there are probably 30 we don’t have which means 30 deals where investors could be making serious mistakes here in Birmingham.
This post is meant to help some of these investors avoid major issues down the road. If you find it helpful, share it with your friends.
On a side note – based on our experience, what a lot of out of state investors are told is ‘B’ property is more like C/D…and some F.
5 Mistakes Out of State Investors Make When Buying Birmingham, Alabama Rental Property
They believe that big lots make the property more valuable. This couldn’t be further from the truth. In these areas big lots become a lawn maintenance nightmare and a tax liability. If a turnkey provider insists that the lot size is important, please don’t believe them. This typically applies to A/B property in particular areas and from our experience they are not the areas offered to out of state investors. From a tenant’s perspective, large lots mean just more yard to cut and maintain. And when the tenant moves out the burden will be on you to take care of the yard and in the open market that lot is worth $0.
Not understanding the different municipalities. The person we spoke with the other day from California had actually visited Birmingham and been inside one of the houses he was considering buying. Things were lining up for him and it seemed like an ‘ok’ deal on the surface. What he didn’t understand is that the municipality where this house is located is notoriously difficult to work with. They are not landlord friendly and do their best to make it a difficult experience. Things like $50 landlord fee, $300 power deposit, electrical inspections that almost always result in more work, pulled permits, garbage fee, etc. In order to receive a Certificate of Occupancy, this municipality must inspect the home which usually results in more work for the homeowner. Understand where you’re buying and build possible difficulties into your dea.
Believing that all houses appreciate. It’s extremely doubtful you will see appreciation in these areas. We’ve all heard our entire lives that real estate appreciates and it’s one of the best investments you can buy. There is a lot of truth to this…but not if you’re buying in the areas of Birmingham we see so many out of state investors. Take our word for it…at least three of us here in the office own rental properties in these areas and we’ve not seen any appreciation. Furthermore, at the prices we have seen out of state investors pay, they should not hope to ever get their money out back out of these houses. Your best hope is that it might stabilize and not drop any further. And if anything will drive appreciation, it will be an increase of rents for the area over time along with a solid neighborhood.
Trusting a contractor you don’t know. This investor we spoke to was quoted $9,800 for the rehab work on this house he could buy for $10,000. Sounds good…but how in the world do you know? His justification to us was that this contractor used to work on million dollar houses in Birmingham and Atlanta. That left me scratching my head asking, ‘What in the world is he doing working on these low income houses now?’ It’s also important to note that if the rehab quote is below $10,000, he does not have to be a certified home builder and won’t have to pull permits in certain municipalities. This contractor is likely not licensed or insured which exposes an owner to unnecessary liability. Early in our Birmingham real estate days we worked with a lot of these kinds of contractors and it was always a gamble. Sometimes we saved money on the front end, sometimes we didn’t…but almost always we ended up paying for it down the road. I remember paying 50% up front on a small project and never seeing the contractor again! Do your homework, talk to other landlords he/she has worked with, talk to property managers they may have worked with and find out if they are state certified…also take a look at some of their work if you can.
Not understanding how ‘white elephants’ will deter good tenants from renting. What’s a ‘white elephant’? Anything that takes away from the generic appeal of the rental house. A major part of your goal as an investor is buying a cookie cutter house that most tenants would find appealing. A good tenant with the ability to pay rent every month is going to have many options…to increase your opportunity to attract the best tenants, you need to avoid the following white elephants:
Busy streets get a lot of rental traffic but most tenants don’t want to live on a busy street
Burned out houses in the neighborhood
Abandoned houses in the neighborhood
A house near the railroad tracks
Industrial areas don’t rent near as fast
Steep hill and or driveway
A house near the interstate
Any house next to a graveyard
A funky layout is bad news
High ceilings most often found in older homes here in Birmingham is a sign of high heating and air bills
Again, you want to buy cookie cutter houses for your rentals. There’s a reason national homebuilders have certain floor plans that they sell over and over and over….
There are great opportunities in Birmingham for rental property. At the same time, there are a lot of risks and groups out there who won’t hesitate to sell you a house that no local investor would touch.
Please do your homework, find people you trust and you’ll do well.
For a more comprehensive piece on what it takes to succeed as a rental investor in the Birmingham market, you might be interested in this eBook.