Birmingham Market for SFH Buy & Hold

[Eric Baum]

Hi All,

Hope everyone is having a great weekend.  I am an active real estate investor that has portfolios in a few different markets.  I am starting to evaluate a new market and have been intrigued a bit with Birmingham ( I invested strongly in Memphis back in 2010 and 2011 where you could get in strong / premium owner occupied areas and still generate good cash flow) and on very basic due diligence so far it seems like Birmingham has many characteristis / metrics that memphis had a few years ago before the hedge funds and hype change the risk / reward ratio there a bit.

My focus / target for Birmingham would be less the working class neighborhood / formats and more SFHs focused on higher quality (higher owner occupied type neighborhoods, near better schools, rents comfortably over the median rent levels, low crime, etc).  I wanted to see if I could leverage local expertise / investors to better educate myself with where there is a balance of high relative tenant quality / neighborhoods with good cash flow as well.  Want to avoid C areas, but realize A+ areas won't be godo cash flow.  Looking for the elusive sweet spot witha bias to higher quality. I always look for that invvisible rent threshold that seems to divide some of the tenant quality. Seemed to me that rent level in the $900-$1000+ range could be the range that starts to tier tenant quality as I see $700-$800 level to be most common.

I have noticed that there are a bunch of turn-key players that do extensive rehabs such as Birmingham Income Propertues and Spartan.  In some markets, I have built my own ground operations over time and do my own extensive rehabs and in other markets I have partnered with local players like turn-keys if they are truly high quality and offer value that i can't get on my own (e.g if they have so much rehab scale that their rehab costs are far below what I can do on my own, etc).  I couldn't yet get a feel for whether their inventory was in more desrable areas - much of it seemed still in very C type areas.   Any insight is appreicated.  This could be a market that i look to develop a sizable portfolio in, but am still at the beginning of my education and due diligence and always find Bigger Pockets to be such a wealth of knowledge.  And am always looking for local advisors.   I currently have portfolios in Memphis, Chicago, Florida, NY,  Charlotte, and Philly so if I can be of any help to others please let me know as well.

Thank you so much!

Eric

[Eric Baum]

Hi @Leo Qu ,

Welcome to Bigger Pockets and congratulations on become a real estate investor.

Great question and every investor will probably have a different answer but here is what I look at (both macro and micro factors).  Keep in mind it doesn't mean I only like markets that meet all of these - just in a perfect world these are things I like:

• I like areas that have more mild winters (as snow and harsh winters do contribute to some wear and tear on roofs and exteriors)
• I look for areas that have taxes and insurance that have low / very reasonable rates as a % to market value (something you don't see often in the northeast).   You could find areas with strong rent to purchase price ratios, but that can be misleading if you have tax or insurance rates (think Texas or Rochester)
• I want cities where population trend is increasing (that means over time there should be continued demand for properties / rentals).  Also you want to see above average job growth if possible and relatively good unemployment rates.  Overall, you want to invest in a market moving in the right direction versus stagnation or decline
• I like the market to have a diversified set of industries / employees - that way if one industry declines in the future or a company goes out of business or moves it doesn't depress the city (think of upstate NY when Kodak when out of business)
• I like purchase prices to be more reasonable and closer to $100,000 for the median property price.
• I like a city that has a relative high percentage of the population that rents so I know there is a large and vibrant rental pool.  Like to see 40%+
• I look at historical and present vacancies rates and time to tenant to get a sense of the strength of the market.  I like to see vacancy rates below 10% and time to tenant no longer than 3-4 weeks
• I look at crime maps and want to know that the neighborhoods with median income and rental levels are failry safe and near good school districts
• I look for favorable rent to price ratios - as everything else can be good, but if the market can't cash flow well in the neighborhoods I am comfortable with then it won't work.  I like to be well above the 1% rule and closer to 1.5%+
• I prefer areas that from the onset do not have increased risk for natural disassters.  For example, Oklahoma has great markets but I just don't like that their is consistent tornado risk or areas that have high consistent flooding risk.  You can protect against random events and it can happen anywhere, but I rather not invest in a market where I know going is there is consistent risk.
• I don't buy for appreciation (I don't speculate) but I like investing in areas where there is a good possibility of appreciation because areas that appreciate are usually growing, have strong demand, etc so a good indication that long term micro-economics are strong
• I look for areas that have shown more consistent historical price performance.  Doing the boom years did they go up streaky or slow and steady and when the market crashed did they get crushed or hold  their own a bit relatively.  I rather invest in markets with less extreme swings than more extreme swings
• All things being equal I prefer the south east versus the mid-west - I  think there are good demographics shifts there over time happening there.
• How is the state policies towards landlords - I prefer landlord friendly states / markets versus tenant friendly.  What is avg cost of eviction, etc

There are more, but wanted to give you a flavor.  What I meant in comparion to Memphis, is when I was evaluating markets a few years ago, Memphis scored pretty high and at that time thay also had extremely high foreclosure in the pipe which at that point was another metric.  Overall, you could purchase in 2010-2012 in what I would consider A areas (new homes, mostly owner occupied areas, strong schools, etc) which normally would be tough at cap rates (returns) that were closer to C type properties (the more risk you take on a property, the more return you should expect for that risk).  Normally,  you couldn't get great cash flow on A+ properties, but back then you could.  But since then Memphis has appreciated a bunch, hedge fund and tons of investors have flooded the market constraining inventory and now returns are compressed or you have to lower qualiity standards / neighborhoods to maintain return levels (which I don't like).  It seems to me that perhaps B'ham offers a chance to get into solid owner occupant neighborhoods but still at opportunistic cash flow (so kind of where Memphis was a few years ago).  So interested to see if there is the right balance of good quality tenants / homes with solid returns.

Does that make sense?  Feel free to PM with other questions or I can help point you into a few markets to consider.

Cheers,

Eric