In this article, we will share our Birmingham, Alabama real estate investing mistakes with you so that you don’t make the same mistakes.
Or heard the horror stories that circulate on the web.
I’ve made several of those mistakes myself.
One, in particular, was when I bought a 12 unit apartment complex in an area of Birmingham that we believed was going to revitalize.
A large local church had opened up a center in the area along with a clinic. And just on the other side of the train tracks was a great part of town where young professionals were moving in and changing the credibility of the area.
All positive signs.
However, we underestimated the criminal element in the area as well as the time and attention that these low-income apartments required. We ended up selling the complex at a large loss.
I drove the block where the apartments stood several months ago and they’re no longer there. They were bulldozed and I believe that a nonprofit organization is going to come back with something better for the community.
In this post, we’re going to talk about the importance of doing your homework before you take a substantial risk in owning rental real estate…especially in low to moderate income areas of town.
Some time ago, I asked one of our former property managers, Morgan Smith, to describe a mistake he’s made in his investing career. We’ll also look at how this could have been avoided if he would have done his homework.
Morgan’s been investing for almost 10 years now and he recounted one of his biggest (and earliest) mistakes below:
“I purchased my first rental house for $81,000 in Tuscaloosa in 2006 with 80/20 financing after educating myself about leverage and housing.
The house was a really nice foreclosure and was ready to rent soon after it was purchased. It was a 3/2 and we started to try to lease it in the winter months.
As a rookie, you can imagine how excited I was to start getting calls on my first rental house. Because I was so excited and anxious to start making some money, I took the first applicant that had enough income to qualify and who could come up with the deposit and first month’s rent.”
This was a BIG rookie mistake by Morgan and one that we see new investors/homeowners make all the time when they’re trying to rent out their house.
Renting a house takes patience and discipline.
It can take as many as 20 showings and 10 applications before we find one solid and approved tenant for a gk house. Morgan wasn’t being especially disciplined and he allowed his emotions to get in the way of solid underwriting practices.
“Some unfortunate highlights of my deal:
Thankfully the tenant stayed for 3 years. Unfortunately, I had to evict her in order to get her out of the house. It was tough to think that this was my first property and first tenant ….and ultimately, my first eviction.
Although we were in the middle of the eviction process, she ended up vacating before the Sheriff had to set out all of her things on the street. An interesting side note…in 2015 she ended up paying us her past due balance via collections (so I collected 50% on the $3,500 balance she owed us).
By the time the tenant vacated my property, I had moved to Birmingham. When she left I hired a contractor from Birmingham, who moved into the house in Tuscaloosa and lived so he could fix the property and get it back on the market. That didn’t end up working out like it was supposed to…this contractor ended up stealing all my tools.
In hindsight, I should have never purchased this house because I knew I was eventually leaving the city. Real estate is long term investment and like all hard assets, selling is very costly and time-consuming.
I was able to sell this house for $80,000 in 2012. A rough calculation of the numbers (rehab costs, ongoing maintenance, financing, selling costs and commissions, etc.), I would say I lost around $15,000 on my very first rental property.
While it’s hard to stomach a $15,000 loss (especially for a college kid!), it was a valuable experience. All of the education I received at Alabama was not as practical as this one lesson. I gained so much knowledge and wisdom about managing property and handling tenants.”
Use discipline in your underwriting process. It takes patience but will pay off with a solid tenant. This is huge…do your homework and stay disciplined to your criteria and process.
Understand the difference in managing a property in and out of state. There’s a big difference and Morgan said he should probably never have bought that house knowing that he was going to be moving to a different city.
But if you do buy a rental property or decide to rent your own property and move out of town, make sure you either have a lot of experience…or hire a professional property manager.
Birmingham, Alabama real estate investing mistakes become costly without thinking through both of these issues.
A few years ago I was with Wayne McGinnis (one of our former property managers) walking a house.
I noticed a house for rent across the street.
It looked like an investor may have recently purchased it, rehabbed it and was now marketing it with some street signs.
But I started looking at the street scene and trying to figure out if I would have bought that house as a rental.
The answer: NO
Directly next door was a burned out house and next to that burned out house was another burned out house!
Out of state investors who buy rental property in Birmingham should be careful about the house and street they’re buying on. Many investors don’t take the time to come to the city and walk through po…
What do you think is going to happen to those houses?
I’ve met many investors who might believe the owner will have those lots cleared and rebuild a house. I’ve met others who believe that the lot is worth something.
Both of these assumptions are incorrect.
In certain areas, the houses and the lots are worthless and become a liability for the owner.
And this situation becomes a disaster for the investor who owns the house next door. It’s going to be much more difficult to rent that house with a burnout next door. Good tenants who will pay you every month don’t want to live next to a long-term vacant house or a burnout. Would you?
Understand the street scene. Before you buy in a particular neighborhood, call some property managers who manage in the area and ask them about the street. And most likely they’ll let you in on the challenges of owning property on that street and in that area.
Remember that Google Earth images may be a couple of years old. I would ask for recent pictures of the house and the street…and by ‘recent’ I mean a week or two old at the most.
It’s worth noting that these two houses next door may have burned down after the investor bought the good house.
This is all a part of the volatility and the risks of buying in low to moderate income areas. Birmingham, Alabama real estate investing mistakes can wipe out any previous profits you gained previously.
I hope this has been helpful to you.
Remember, you can call us at anytime if you’re looking for advice on certain area of Birmingham. We would love to help you make wise decisions.
Matthew is the CEO of Evernest. He is a student of the book Good to Great and is passionate about building the best property management company on the planet (and maybe even the universe if Elon Musk will hurry up). You can usually find Matthew at the baseball field with his son, at a dance recital with his daughter, or at his favorite restaurant with his wife, when he’s not in the office. And if you can’t find him in any of those places, it probably means he’s traveling.