Don't make these 5 mistakes buying your rentals....

18 Replies

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.

@Spencer Sutton

Great read!

I'm originally from Bham but live in Atlanta now. Atlanta is a tough place to find deals. I'm looking for neighborhoods that are popular with young professionals near and in the city. Any insight on areas becoming more popular other than Avondale Southside and lake view? Ive read a couple things about Norwood. 

That's some very good information! Thanks for sharing. You really have to know Birmingham there are some not so good areas even if they seem close to schools like UAB. 

Hey Heath...yes, I've heard ATL has gotten tougher!  

A couple of years ago there was talk about Norwood becoming the next hot area but it just hasn't materialized.  The homes are massive and built around the turn of the century...which means they're money pits.

It would be purely speculative to invest in that area...but if you have time and money anything is possible!

Great advice. Thanks for sharing.

This will help as I continue my search for deals in my area.

Great advice, Spencer!  Thanks for posting.

Thanks for the kind words everyone...it's important and healthy for the this community to inform each other of common pitfalls that can derail our goals!  

Please be sure to name any other common mistakes you see investors making in your markets....would love to know.

I wrote a little more about this on this blog http://www.gkhouses.com/blog/dont-miss-these-5-tur...

No kidding on the lot sizes. Heck, even the small lots in my area do not get maintained and city has a heyday with code violations.

Excellent article with great advice. It can by applied to any city in the US. 

When you say the larger lots have no extra value. Are you saying that a house with 1/4 acre lot will appraise out for the same like-kind house thats on a 1/2 acre lot? They don't do any adjustments for lot size on the appraisals down there? That seems odd........

Here there is typically an extra 5k to 10k for the difference.  And sometimes, that can make the difference to being out pocket an additional 3k to 4k.....

Those are very good points. Thanks for sharing.

Hey @Mike H.

You're right...doesn't seem to make too much sense!  The houses that we're talking about that most investors buy down here in Birmingham are low to moderate income properties. These properties will most likely never appreciate with the rest of the market.

The lot is seen as more of a hassle for tenants and if there is any added value to a large lot, it's only seen in the tax appraised value which is just a cost to the owner...not realized gain.

Hey @Spencer, thanks for this post. As a out-of-state or even international investor like myself, it's quite traumatic to do due diligence and still find out that .... it's insufficient in the end. That's the reason why some out-of-state investors may choose turnkey route..but still, everything needs to be vetted...Nothing is rosy. 

Good point about lot values. My personal home has two acres with riverfront access and a small boat ramp; the comps they used were similar houses that were next to walmart with lots half the size of my front yard alone. Adjustments for lot size were minimal.

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