Spencer Sutton - Thursday, June 28, 2018
I’ve thought of at least 5 reasons are you shouldn’t buy Birmingham rental houses?
And in this video, I walk through each of them one by one.
[TRANSCRIPT] Hey, Spencer Sutton here with gkhouses. And today, I wanna give you five reasons you should not buy Birmingham rental property.
Now, you may think that’s kinda strange coming from me. Especially since we manage a lot of rental property here in Birmingham. And I think rental property is great and if it’s for you then great. But I want to give you…if you’re thinking about buying rental houses, I want to give you five reasons you shouldn’t buy Birmingham rental property.
Now, when I say that I’m mainly speaking to investors that we see a lot that we’re coming into Birmingham, most of them live out of state. They’re coming into Birmingham and they’re buying low to moderate income houses because of the promises of high returns.
I’m not necessarily talking about a homeowner who needs to rent their house because they’re, you know, they’re moving away, they’re moving out-of-state or they can’t sell it for some reason. That’s not the person I’m speaking to. I’m talking to you as an investor.
So, here are the five reasons:
1) You’re undercapitalized
So, this is a big one, right? If you don’t have the money to deal with repairs and maintenance, and the term when a tenant moves out vacancy. If you don’t have the money to deal with this, then this is not the place for you to buy rental houses.
As a matter of fact, you shouldn’t be buying rental houses. You need to make sure you have plenty of cash.
I have personally seen a lot of investors go by the wayside because they were undercapitalized. They thought
“Hey, day one I’m gonna start making cash flow, and I’m gonna take this money for the first 12 months, I’m gonna set all the cash flow aside in this bank account. And that way I’m just gonna, you know, have this money.”
Unfortunately, a lot of people will teach you that you take that money and, “Hey, you know, you need to have a car like I have.”
And so you take that cash flow, and you go buy things, huge mistake. I mean, owning rental property costs money. There is a cost of doing business with rental property. And if you’re buying in these low to moderate income areas you can be guaranteed that you’re gonna have some repair and maintenance issues come up.
Because these houses are older and tenants are a little bit harder on houses. Alabama weather, the summer is very hot. It’s harder on houses. Winters can get…sometimes can get pretty sketchy around here. So, if you’re undercapitalized, you should not buy rental property here in Birmingham.
2) You don’t do your homework
I’ve bought a lot of rental houses here in Birmingham. I’ve bought and sold rental houses, but I always went to the property. I always looked at the property. I always walk the property. And I knew what I was getting into before I bought it and even then, even then, I still made some really bad decision.
Like, even as little as eight months ago, I sold a house for like, $ 3,000 that I’d bought a long time ago. It was a piece of junk. I intended to sell it, I had to hold on to it for rental property and bad decision.
So, if it’s hard for me. So much harder for somebody who’s living out-of-state, who’s just may be looking at pictures, who has never been to Birmingham, who has never driven the streets.
There is another post that I had on here where I talk about doing homework and how important it is. You can look at Google images of houses and if you look at the top left-hand corner it will tell you the date of the picture.
A lot can change in a matter of months or a matter years, on a street in some of these low to moderate income houses.
So, if you don’t like to do your homework you do not need to buy Birmingham rental property. I can promise you that.
We had a couple investors from Reno, Nevada come into town some time ago and they did it the right way. I mean, they went to these different houses, they had somebody who was trying to sell them a bundle of houses, a portfolio I think of like 10 houses and they had the money to spend.
They had like $800,000 that they were gonna invest in Birmingham. So, they were doing their homework. They called us and said, “Hey, can we come by and get your opinion on these houses.” We said, “Sure.” So, they came by, sat down at the conference table and we just looked at the list of properties.
We knew the areas very well. Our advice to them was to take their money and keep it, do something else with it. And that’s exactly what they did. They didn’t, you know…if you’re buying houses from somebody they wanna tell you one thing, but if you get an objective opinion, you can probably do a lot…make a lot better decision in those cases.
So, these two gentlemen went back to Reno, Nevada with $ 800,000 and they were better for it based on the portfolio that we looked at. So, do your homework, if you’re gonna buy houses.
3) You’re too nice
So, owning rental property and dealing with tenants means that you have to be tough sometimes.
If you cannot stomach tough conversations and can’t be very candid, very transparent with people, even telling them things that they don’t want to hear, then you don’t need to be in this business. You don’t need to buy rental property.
This is a big one because there are…unfortunately, there are many professional renters out there. And they know exactly what they need to do to take advantage of different situations. If they can get in your house and begin slow pay and no pay.
So, if you’re worried about having these conversations and eventually evicting somebody, then definitely don’t buy Birmingham rental property in some of these areas. Areas you might otherwise consider because you’re going to have to have hard conversations.
You’re going to have to get tough with some people and it’s not gonna be fun. So, that’s reason number three.
4) You’re a short-term thinker
I have mentioned this before, but buying rental property is a long-term game.
You know, I talked to a lot of younger investors who, you know, are just now buying and everything sounds great and everything sounds like, you know, it sounds like they have it all together, but this is just year one or two.
This isn’t year 10 of owning rental property. And so, it’s a long-term game. You need to have that mindset. It’s not something that you’re gonna come in and you’re gonna buy from another investor. So, if you think you’re gonna come in and buy a house from another investor, hold it for a year or two and then sell it for more money. I would say that’s probably not gonna happen.
And I’m speaking from our experience. We see plenty of real estate investors who are asking us to sell their property. Unfortunately, they’ve bought too high and there’s no market for overpriced rental properties when they’re either vacant or they have a tenant that’s not paying. There’s just no market for that.
Another point about long-term thinking is that you really need to consider the things that you’re gonna have to deal with over 15, 20 years of owning rental property.
You’re gonna have vacancy that you’re gonna have to handle. You’re going to have…in some of these areas, you might have of vandalism. So, something that we see here or we’ve seen here a lot is HVAC theft, condensing units being stolen. Copper throughout the house gone.
So, you gotta think about those things, vacancies, vandalism. You gotta think about eviction like we mentioned before. Potential eviction. Not getting paid. I mean, there’s several different things if you’re a long-term investor you have to think about. So, and then you gotta think about rental rates, right?
So, if you have a house that’s rented for $750 and the tenant moves out in a year, and then you can’t find somebody to rent it for that amount again. Then you’re gonna have to lower that rental amount. And if you lower that rental amount, think about what is that gonna do to your return model or your financial return model, and how you need to adjust that.
So, if you don’t have a long-term mindset, you don’t need to be buying Birmingham Rental Property.
5) You’re not committed to owning at least 10 or more
I mean, I think that I see plenty of people who come in here and they buy one or two houses and then after a year or two, it just becomes a pain in their neck. You know, it’s exciting at first, it’s cool to think about owning rental property. But if you don’t have a plan for buying 10 or more, 10, 20, 30 houses over time, rental property is probably not for you.
I know that from personal experience, you know, that wasn’t my plan going into it. So, I was buying and selling houses. I was wholesaling houses, that was my goal. I ended up with rental property because some of these houses I couldn’t sell just based on they weren’t great houses and so I stuck them in rental portfolio.
And then in 2007, 2008 when the bottom fell out, the market crash, ended up holding a lot of rental property. So, that’s not a plan. You need to plan better than I did to have rental property.
So, those are the five things. Five reasons you shouldn’t buy rental property in Birmingham.
Number one, you’re undercapitalized. Two, you don’t do your homework. Three, you’re too nice. Four, you have short-term thinking. And number five, you can’t commit to buying 10 or more. So, I hope that these tips help you in some way.
And if you ever have any questions, don’t hesitate to reach out to us at 205.940.6363 ext 3.