Spencer Sutton - Wednesday, July 11, 2018
I want to give you three things to consider before you buy in, what some people call, high return areas of Birmingham.
And typically what that means is people are looking to buy in areas where they get cap rates of, you know, 10% to, some people say, 20% cap rates. But typically this means they’re in areas that are cheaper houses, low to moderate income areas, where they can push the rents a little bit, and so, they can achieve that higher return.
Before you buy in these areas, I want you to think about three things.
Number ONE – You need to think about the area of the home you’re gonna buy.
This may sound like common sense and I get it. But I hear a lot of people talking about the street scene or “Hey, this area of Birmingham may be rough, a high crime area.”
However, there are still good streets in this neighborhood or whatever. And yes, that is true. I mean, really, Birmingham is a street-to-street area.
You can be in a place called East Lake or Ensley and you can find pockets that are really nice. But this is what I want you to really think about. And that is that 99% of the time these areas are not going to improve, right?
There’s more than likely not going to be some major turnaround in these areas. I’ve lived in Birmingham my entire life. And I’ve invested in these areas for the past 15 years. So, I know a thing or two about what’s going on and have seen a steady decline in most of these areas that are considered a high return. I see a lot of investors buying houses in these areas.
Think about that. If you’re a long-term rental investor and you’re buying houses for the long term, you need to understand that things on the street that you buy on will more than likely go bad than they will improve.
If you’re a wholesaler or a flipper, you know, you’re selling houses to people in different ways that may work because they’re short term, and right now the market is good, you can sell a house to people. And especially if you can buy deep enough, you can make some money on that.
But if you’re a long-term investor and trying to build a rental portfolio, just have that in your mind, that some of these areas will never get better and it’s gonna decline.
You won’t get appreciation either. You may get rental appreciation.
The rental price may go up a little bit over time, but I’ve looked at the performance that people put out there, what they’re saying, “Hey, you’ll get a return and appreciation return on these houses.” And that’s just simply not fact, not gonna happen.
That’s point number one.
Number TWO – You need to think about the age of the home.
The age of the home matters because, with these older houses, so areas like East Lake, Ensley, Tarrant, West End. Some of these areas…the houses were built in the ’20s, and ’30s, and ’40s, and with that comes more repair.
If you’re doing your…you know, put together your spreadsheet, and looking at your, you know, analyzing the returns, you should get, think about higher maintenance and repair costs. Not only when somebody’s living in the home, but also when somebody moves out. You’re gonna have to do more work.
Also with the age of the home, you’ve got to think about the insulation of these homes is not very good, in the walls, in the attics, and the windows.
And so, the higher utility bills means that tenants can only afford to pay so much rent.
Something else to be thinking about is just the Alabama weather on these houses is pretty harsh.
All these things factor into your buying decision. You can think about you’re gonna get higher returns, but if you’re thinking long-term, areas decreasing, and if you’re thinking about higher, you know, repair numbers, then just add that into your calculations because all is going to play a part of that.
Something else with these lower-income areas is this (a little bonus material here) – is if you wanna buy a house and have it rented out Section 8, which we manage a lot of Section 8 houses, you need to understand that a Section 8 tenant is gonna live in the house more than a tenant that has a job and goes out and works every day. Be prepared to spend more money in repairs for a Section 8 tenant. They’re going to live in that house more than a tenant that has a job and goes out every day to work.
Number THREE – Maintain a long-term mindset.
You wanna think about buying a house and owning it. If you’re trying to build a rental portfolio, you want to do this with a mindset, you’re thinking, “10, 15, 20 years down the road, what is this investment gonna look like?”
This will look a lot different than if you buy a house in a B-class neighborhood. Say a Hoover, or a Calera, Alabaster, Helena, where you will still have some appreciation, like price appreciation for the home. You’re also going to have good solid rents. And you’re repairs will be less.
Now, the home will cost more. Your net cash flow may not be as much as you want it to be, but 15, 20 years down the road is going to look a lot different than if you bought in the West End. The reason I know this is because I have bought in probably some of the worst places in Birmingham or some of the places I would say I bought in areas that I would tell you, as an investor, don’t buy in that area.
I, you know, suffered consequences of that. I lost money, made money. But I always want to try to give investors solid advice.
So, these are three things you need to think about. Number one, think about the area of the home when it’s probably not going to increase in value.
Number two, the age of the home. These homes are typically older. You’re gonna have more repairs.
And then three, what kind of mindset do you have? Most people, when they’re thinking about real estate, think very short-term, But it’s a long-term game. Buying rental portfolio is a long-term game because especially in a hot market like we’re in today, you probably gonna pay a little more than you would have five years ago.
And so, if you need to sell…if you’re thinking short-term and you need to sell in four or five years, don’t be surprised if you don’t get even what you paid for the house out of it. We see that a lot with investors. Just think about those three things, make good decisions, do your homework and be very patient.
So, that’s all I have for you today.
P.S. Be sure to check out another article where I try to TALK YOU OUT OF BUYING BIRMINGHAM RENTALS!