I was on the phone yesterday 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's such a common conversation I thought it would be helpful to post it here so others might avoid the same mistakes he almost made when looking at C/D rentals in Birmingham.
It's probably helpful to also note that what a lot of out of state investors are told is 'B' property is more like C/D...and some F.
Anyway...here are the mistakes a lot of out of state investors make.
#1 Mistake - Thinking that big lots make the property more valuable. This couldn't be further from the truth. In these areas big lots are a lawn maintenance nightmare and a tax liability. Don't listen to anyone try to sell you on the 'value' of a bigger lot. Tenants don't want a bigger yard to take care of and the lot value is worth $0 on the market.
#2 Mistake - Not understanding the different municipalities. The person I spoke with yesterday from CA had actually been to Birmingham and been inside one of the houses he was considering buying. Things were lining up for him and 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... Understand where you're buying and build possible difficulties into your deal.
#3 Mistake - Believing that all houses appreciate. It's extremely doubtful you will see appreciation in these areas. Your only hope is that it will stabilize and not drop any further. If anything will drive appreciation, it will be an increase of rents for the area over time along with a solid neighborhood.
#4 Mistake - Trusting a contractor you don't know. This investor was quoted $9,800 for the rehab work on this 10k house. Sounds good...but how in the world do you know? His justification to me 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 houses now?' It's also important to note that if the quote is below $10,000, he does not have to be a certified homebuilder and won't have to pull permits in certain municipalities. This contractor is likely not licensed or insured and we've seen many walk off without finishing the job. 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.
#5 Mistake - 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. That could be a busy street, burned out or abandoned houses in the neighborhood, railroad tracks, industrial areas, steep hill/driveway, near the interstate, next to a graveyard, funky layout, high ceilings, etc... 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. Do your homework, find people you trust and you'll do well.
That's it for now...hope it's helpful.
