Birmingham cash-flow screen: 325 of 1,650 passed. What do you pay for insurance?

Question

I ran the same buy-and-hold screen I did for Cleveland and Toledo on every active Birmingham-area listing from $60k to $600k, pulled Oct 23. That's 1,650 listings. The assumption I trust least is insurance, and local owners know it better than any dataset.

Assumptions: 25% down at 7% on a 30-year, 3% closing, 8% vacancy plus 2% bad debt, 7% repairs, 8% capex and 10% management. Rents come from HUD's fair market rents, discounted and capped at Zillow's rent index. Taxes are at the rental rate inside city limits. I ran insurance two ways: the Alabama average scaled to the house plus 20% for a landlord policy, and a flat $1,500 a year.

What came out:

• 325 of 1,650 cash flow with scaled insurance, and 59 clear $200 a month at 8% cash-on-cash. At a flat $1,500, it's 303, with 39 clearing that bar.
• Nearly everything that worked is under $150k. Nothing over $200k passed.
• The 1% rule fooled me again. A good share of houses that hit it still lost money.
• The typical passer clears about $90–115 a month. Thin.

325 of 1,650 cash flow with scaled insurance, and 59 clear $200 a month at 8% cash-on-cash. At a flat $1,500, it's 303, with 39 clearing that bar.

Nearly everything that worked is under $150k. Nothing over $200k passed.

The 1% rule fooled me again. A good share of houses that hit it still lost money.

The typical passer clears about $90–115 a month. Thin.

Stress test: 5% bad debt, 10% lower rent and 25% higher insurance all at once. 141 still cash flow (87 at $1,500). Lower rent hurts the most on its own.

This is buy-and-hold at list price with no rehab, so it's a different question from @Idan Deutsch's BRRRR screen here a few months back, where none of 350 passed. Both point the same way: cheap houses can cash flow, but the margin is thin and depends on numbers you have to check locally, starting with a real insurance quote.

Two things I'd like from people who own here:

• What does a landlord policy run you on a $70–100k house? Under $1,500 or over?
• What do rehabbed 3-beds actually rent for in 35211 and 35208?

What does a landlord policy run you on a $70–100k house? Under $1,500 or over?

What do rehabbed 3-beds actually rent for in 35211 and 35208?

I built this screen through my business, Row Home Solutions. Throw me better insurance numbers and I'll rerun it.

Thomas

Jill F. · Answer

Since Hud small area fair market rents are set to the 40th percentile, it might be overly conservative screening for some (60%) of the properties in a given area if you aren't planning on accepting housing vouchers.

Thomas Fragoza · Answer

@Jill F., that's a fair point, and I hadn't spelled it out. The screen starts with HUD Small Area FMRs, which are set at the 40th percentile, then I take 15% off because those figures include utilities, and I cap at the Zillow rent index when that's lower. So for a market-rate house that can rent above the 40th percentile, the screen is conservative, and some of those could look better than the results show. I kept the rent cautious on purpose so a passer still has to work, but it's a good reason not to treat a thin miss as dead. That's also why I asked what rehabbed 3-beds actually rent for in 35211 and 35208. If locals have those comps, I'll compare them to the HUD numbers.

Thomas

Thomas Fragoza · Answer

@Noah Wright, good catch, and it's one I hadn't built in. The screen prices insurance as a cash-flow cost, but you're right that on a DSCR loan the lender's coverage rules set the floor: rent loss, a capped deductible, and replacement cost or the loan amount. On older $70k–$100k Birmingham houses, rebuild cost can run well above the purchase price, so a cheap ACV quote could make a deal look better than it will once the lender-required policy is in. And since the premium sits in the payment the lender uses for the ratio, it can cut the loan size too. I'll ask for quotes at lender-required coverage rather than the cheapest policy. Thanks for adding it. Thomas

Noah Wright · Answer

I can't give you a Birmingham premium I'd stand behind, but a screen built this carefully deserves one more input on that line. If any of these get financed with a DSCR loan, the quote needs to match the coverage the lender will require, not the cheapest policy an agent can write. The programs I see commonly want rent loss coverage, a capped deductible and dwelling coverage at replacement cost or the loan amount. On an older $70k to $100k house, rebuild cost can run well above the price, so a cheap actual cash value quote can understate the real premium. That premium also sits in the payment the lender uses for the DSCR ratio, so a high one can shrink the loan as well as the cash flow.

Hossein Sharifi · Answer

Great screen. What jumps out to me is how thin the passers are next to the insurance swing. Every $500 a year of premium is about $42 a month. On a house clearing $90-115, going from $1,500 to $2,000 eats close to 40% of the cash flow. So I'd treat anything under $100 a month as a coin flip until there's a real quote in hand.

When you get quotes, give the agent the roof age and year built. On older housing stock those two often move the price more than the dwelling value does. It also helps explain your 1% rule result. On a $90K house, insurance and taxes are a much bigger share of the rent than on a $200K one.

Thomas Fragoza · Answer

@Hossein Sharifi, that math is the part that worries me too. At $90–115 a month, one high insurance quote turns a passer into a break-even, so I'll treat anything under $100 as unproven until there's a real quote. Good tip on roof age and year built. I'll include both when I ask.

If anyone here owns older houses in 35211 or 35208, I'd still like to know what your landlord policy runs.

Thomas

Birmingham cash-flow screen: 325 of 1,650 passed. What do you pay for insurance?

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