Spencer Sutton - Friday, October 23, 2015
Birmingham is one of the nation’s top spots for cash flow investors. In Birmingham you can buy a solid rental house for $50,000 and rent it out for $700 to $800 per month.
Our economy is strong thanks to thriving medical and financial industries. And our rental market has remained strong for several decades. The solid Section 8 program here in Birmingham also interests a lot of out of state investors…even though it’s seemingly a lot different than Section 8 in other parts of the country.
We love investors. We started gkhouses.com as a result of accumulating our own rental portfolio along with investors we knew who wanted us to manage their property.
Initially for us it wasn’t our goal to hold rental property….but as we started buying and selling houses here in Birmingham under the Homevestor franchise, it just kinda’ happened.
We would get up to 120 calls every month from people wanting to sell their houses. After a little exploration, we usually ended up making 20 to 30 offers and buying 4 or 5 houses per month. Most of those we sold to local investors.
Eventually, we held some for rentals.
The first rental I bought happened to be a 10 house package. There were some ok houses and then some really bad ones.
I remember going to collect rent the very first time. The couple was behind and as I pulled up to the front and got out of my car…two very large pit bulls lifted their heads from the porch as if to say, ‘Can we help you?’…or they were saying, ‘There’s nothing to see here…slowly get back in your car and drive away’.
Whatever they were saying, I listened and quickly drove away!!
I ended up selling that house. And the one next door.
Here’s a picture of that house now….
The one next door doesn’t exist anymore…I sold it to a local non profit working in town and they eventually tore it down.
By the end of 2008 I had around 30 rentals in three different entities.
Now while I don’t buy/sell properties here in Birmingham anymore, I spend a good amount of time talking to people who have either bought rental property here or are interested in investing in Birmingham.
Recently we had two investors from the west coast come to town. This post is what we can all learn from their visit…maybe a couple of take aways.
They’ve bought 12 houses here in town and while it’s been a great long-distance relationship, we always enjoy meeting people face to face, shaking hands, and visiting rental houses together. You can get a much better understanding of mindset and goals when you drive from house to house and have time to talk.
To see areas in Birmingham where they bought their rental houses, take a look at the map below:
That day we visited all of their houses. There were two rented and the rest in some state of turn (getting ready to rent). There wasn’t anything particularly bad about the houses or area but they were in parts of the city that are known for a few things:
Older homes – A lot of the homes they bought were built in what we call ‘West End’. A lot of West End homes were built between 1900 and 1940.
High Police presence – The Police in these areas are not sitting around at the coffee shop…they’re BUSY.
Low to moderate rents – In these areas it’s tough to get over $700 per month. Most of the houses are between $500 – $650 for a 3/1….private pay or Section 8.
These investors are good guys and they’re smart. They own rental property on the west coast and one of them has been in the business for over 20 years…so they know their stuff.
However, Birmingham rental property is different. I believe there were a couple of steps they could have taken that would have drastically improved their experience.
1. Come to Birmingham for a week and drive the streets – This can’t be overstated. If you’re considering buying houses in Birmingham, it’s imperative. And if you don’t have the time to take off or the money to spend a week here, then you probably don’t need to be buying a rental property.
To give our client’s credit, they did this…they spent some solid time here in Birmingham. But if you think you can shortchange this step, you’re wrong.
When I drive through a particular area of Birmingham, I’m going to be looking for a few things:
Abandoned and vandalized houses – You can see a picture of a house someone sends you and it looks great…but how do you know it doesn’t have a burn-out next to it? How do you know it’s not sandwiched between two apartment buildings? These things will impact your ability to rent that house to a solid tenant. Most good tenants don’t want to live on a street with a bunch of vacant houses…they won’t feel safe because there will be things going on in those houses that aren’t ‘safe’.
Pride of ownership – Here I’m simply looking for several houses that people are taking care of in the most basic ways. I like to see cut grass during the summer, raked leaves during the winter, and I especially like if they have taken the time and effort to plant shrubs, plants and flowers. You know the houses that people care about and if you’re driving a street and see 75% of the houses with strong pride of ownership – that’s likely going to be good area to own a rental.
Unnecessary Loitering – How many people can you find walking on the sidewalks or sitting on their porch. The more people I count, the less likely I am to buy in that area. I prefer neighborhoods where people are at work or busy with their lives…not sitting on the porch…all. day. long. Seeing retirees in these areas are great…but not working age groups of people. I once owned an apartment complex where the tenants drank beer and played cards all day. Not the best complex in the world.
2. Visit several property managers in the area and ask a lot of questions – Our friends who visited with us that day had been to Birmingham and driven the streets. But what they failed to do is to visit with several different property managers during their time here.
There are enough honest managers in this city that would have warned them about who they were dealing with and given solid advice about where they were buying. Again, there’s nothing wrong with where they bought as long as they have realistic expectations.
If they had visited with several reputable property managers in Birmingham they would have learned important information about who they were about to buy houses from. This company has operated under several different entity names over the past 10 years. The reason they do this is because they’ve lied so much that they need to change their identity and story every three years so that out of state people can’t look too much into their past deals.
Once they’ve sold enough houses, made enough money, and ripped enough people off they shut it down and start all over again.
How they get away with it year after year is beyond me. We only know this because we’ve taken over about 50 houses from previous clients of theirs over the past six months.
The solution to this problem is simple. Visit different property managers in the area and ask questions like:
Have you ever heard of XYZ Company?
What has been your experience with XYZ?
How long have they been in town?
Would you recommend buying these houses they’re selling?
What’s the real story on this rental area?
They told me the house can rent for $XXX per month…what’s your experience with similar houses in that area?
What are some common issues with these types of houses?
Ask these questions to enough property managers and you’ll see some consistency in the answers. And as a result you’ll probably end up doing one of a few things – buying the house(s), asking more questions from the seller, or running the other way.
Do your homework. Don’t be lazy.
Know who you’re buying houses from and believe in their credentials and history.
If you do these two things before you buy in a strange market, you’ll have more success than your counterparts who are buying houses sight unseen based on a piece of paper with unrealistic CAP rates.
We’re going to put together a tour of Birmingham so you can see first hand how some of these things can impact your rental success. So check our resources page soon.
– Spencer Sutton