Hello my friends, and welcome back to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. Well, today we have kind of a twofold episode. It’s not only a market spotlight on one of our favorite cities, which is Birmingham, Alabama. In fact, we’re in three markets in Alabama, Birmingham being one of them, Huntsville being another. But we have a very special type of financing available to you if you’re looking to invest in real estate. And you’re looking for lower mortgage rates, lower than what they’ve been for a while, because right now they’re in the seven to 8% range. It’s just kind of crazy as to how fast they’ve gone up. But what if, what if you can get mortgage financing around 5.5%? And I’m talking about 30 year fixed rate mortgages for income producing property, not for your principal residents, but I’m talking about income producing property that’s very attractive.
It’s very exciting. You won’t see this very often. In fact, I don’t even know where you can find it. So it’s kind of unique and exclusive to the team that we have here. And so today, let’s focus on the Birmingham market and why home prices are still so low, especially compared to other markets. It’s one of the most affordable cities in the US to live in. It is one of the most important business centers in the Southeast, and it’s just a wonderful market to be investing in real estate.
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So with me today, I have one of our fantastic property providers in the state of Alabama, and specifically in Birmingham. And his name is Zach. Zach, welcome to the show.
Thanks, Marco. I’m happy to be here. <Laugh>
It’s great to have you on. You know, we love our working relationship with you guys. We, you know, we love your team. You guys do great work, great product, great areas and neighborhoods. And to add to all that greatness, we have a unique loan program that we’re gonna talk about later today in conjunction with one of our top mortgage lenders, mortgage brokerages that we work with. They’re actually more than a brokerage. They’re actually a lender. They have their own financing. And so when you can get mortgage rate financing for, you know, five and a half percent ish, up or down, that’s extremely attractive. I would imagine that you agree with me on that.
<Laugh>? Yeah, I, well, I, for, for start off, I, I appreciate the praise. We work really hard to make sure we keep everyone happy. But yeah, rates like this I, I haven’t seen in a long time and I, I think it’s something that we need to talk about and people should be excited about.
Yeah, well, when I first saw it, I was pretty excited about it. ’cause I thought, wow, like, where else can you find financing like this.
Like this.
<Laugh>, you know, especially today, you know, we got so spoiled, I think, with having rates in the three to 4% range, just what seems like a year ago. And then they, you know, they shot up to seven and 8% and now, you know, we’re looking at, you know, five point something with the inventory that you guys have. So, I’m excited to talk about this. Let’s kind of start big picture and work our way down. ’cause I, I kind of like to take that top down approach so people understand why are we even talking about, you know, Alabama and Birmingham more specifically. But from a high level, let’s kind of big picture this. Why would I as a real estate investor want to look at Birmingham as a market to invest in?
Yeah, sure. So probably the biggest reason that people are gonna see when they just Google that question is Alabama is a very landlord friendly state. The courts rule in our favor all the time. They support landlords. So overall, very landlord friendly state. I think we’re ranked number two in the nation on landlord friendliness. Another one is really low property taxes. We’re one of the lowest property taxes in the country too. So those are probably the two biggest reason that investors come to Birmingham looking for investment properties.
Yeah, I love it. And you know, again, the low cost of living, it’s an affordable place to live. My understanding is that you guys have a, still a pretty robust or strong job market there. What is the economy like? What is the local economy like there and what makes up some of the major employers? ’cause A lot of people are not familiar with Birmingham.
Yeah. So overall as a state, Alabama only has a 2.1% unemployment rate. So it’s fantastic compared to some other states. The big one in Birmingham, that is probably healthcare services. We have UAB medical center downtown and they employ a good majority of people in the community. There’s also a lot of banking services here. Regions is, has a building here. Also. The other big thing is education services. Like I said, we have the colleges here in Birmingham. We have Sanford, UAB, Tuscaloosa has the University of Alabama, which everyone is aware of. Other plants like other jobs that people can have if we have all kinds of automotive industries. And Mercedes builds all their cars here, and it’s located in between Tuscaloosa and Birmingham. That employs a large number of our tenants that we see in our houses. So we love when we see someone who has a pay stub with Mercedes-Benz.
<Laugh>. Yeah, I’m sure. You know, they probably have a good income. So Birmingham is also known as a healthcare hub of sorts. I don’t know how much you know about that, but how big of an employer is healthcare in Birmingham?
<Laugh>. So if you just go out any night and you’re talking to new people, probably one outta every three people you talk to will say they are in a healthcare related field. It is very popular here.
Yeah. So I mean, I, I don’t want to think that’s a bad thing. I would think that’s a good thing. Mm-Hmm. <Affirmative> especially healthcare never seems to be going backwards. It’s always like a an expanding sector of the economy because we all need healthcare and it’s just a, you know, a, a critically important part in no matter where you live in any city or town. So that probably adds to job stability and job growth in the area, which means that there’s just more people who wanna live there or people moving in for jobs because of healthcare. Yeah.
So I think that that’s gonna be a pretty solid thing. Right. Alright, well let’s kind of break this down a little further. So, you know, it seems like Birmingham is a great market to be investing in. I think we’ve made that pretty clear. What type of neighborhoods do you guys focus on with your investment properties, like your rental properties? And also maybe share a little bit about how much of it is new construction versus how much of it is newly refurbished, you know, like new turnkey type property. Because I’ve kind of lost track of, with all the providers we work with around the country who’s actually shifting their focus to new construction or build to rent type product. So maybe you know, kind of share a little bit of that.
Yeah, so on new construction, we actually have our own independent new construction line that Spartan has. We are currently doing a subdivision in Tuscaloosa, and when it’s all said and done, there be about 70 houses that are built to rent. We’re trying to keep the good mix, 60 to 40% between owner occupied and rental houses that way. Property values stay high for our investors. Our average property rental wise is probably in your B class. Neighborhood prices are 120, $180,000. So very easy for a new investor or someone who doesn’t have a bunch of capital to get into the game here.
So 120 to $880,000 now is making the assumption that you’re coming in with the minimum down payment, which is 20%. 120 would be what, 24,000 ish plus closing costs on up to maybe 30, 32,000 for some of the higher end, as in like higher, more expensive in the air quotes pricing.
That’s in your market. You know, it’s hilarious to compare the prices in Birmingham, 120 to $180,000 versus so many other markets today, which, you know, can start in the 250, $300,000 ranging and literally go up to 800,000 plus. Which obviously won’t make sense from an investment perspective. Sometimes not at all. Even if you’re a speculator, it doesn’t even make sense, you know, to be in some of those markets. But still, you know, incredibly affordable, relatively speaking in the Alabama markets. So the 120 to $180,000 range, that includes everything? Or is that all just new construction?
So that’s mostly our Reno houses. Our new construction houses are probably around two 30 to two 50 just depending on what floor plan you get. We have a couple different floor plans for our buyers to choose from, but those are all brand new. So they’re completely different game than our reno houses, our Reno houses, our, our bread and butter. It’s what we do best and we’ve been doing it for the longest.
So the neighborhoods that these are in, how would you describe the neighborhoods? You know, sometimes they’re referred to as a class B class, maybe even C class. You can describe them qualitatively or quantitatively, however you want. But what type of neighborhoods are you guys focused on right now?
Yeah, so probably our average is gonna be your B class neighborhood. We do get a class neighborhoods every now and then. But we have a certain set of people they’re just waiting and watching our inventory. So one of those comes up that usually go off the shelf pretty quick. <Laugh>, but majority of our properties are your B class, single family homes, three bedrooms, two bathrooms, 1200 square feet, very average single family home.
Yeah. And these are, I would assume like desirable neighborhoods where families wanna live because they’re either close to work proximity or maybe schools or family.
Yeah.
That type of stuff.
Yeah. Everything around the Birmingham metro area where most of our properties are is only about 20 to 30 minutes max of a drive to get to downtown for those healthcare jobs, those banking jobs, those manufacturing jobs. So they’re all close proximity to where work is. And a lot of families just love our houses.
Let’s take a minute to talk about the new construction and a minute to talk about the refurbishment on the resale inventory that you guys have. Because, you know, now investors are maybe thinking, okay, great market lots going on, there’s growth, stability, there’s jobs, I get it. You know, Birmingham’s a good pick. It should be on my shortlist. And you know, obviously the neighborhoods are typically you’re gonna focus on BB plus A minus type neighborhoods. ’cause That’s where you get the best balance between the investment, the cost of the investment versus the returns because the rents are gonna be high enough in those areas. So, you know, that’s kind of the sweet spot. But now take a minute to talk about or describe the new construction you guys are building. And then after that we will take a minute and talk about the types of renovations on your resale product, the turnkey product. Yeah.
So this neighborhood we’re doing out in Tuscaloosa, we actually started the site development on it little over a year ago. So we had to clear out the land, put in all new sewer systems, new roads, and we’re doing sets of five houses at a time. Once those get bought up, we start another five. So I think now we’re starting on our fourth round of houses. So they’re moving quick and they’re also renting really quickly a lot faster than we are anticipating. Even as leasing starts to slow down. Since schools started and we’re getting into the winter months, it’s typically the slower season for leasing. But people are still, as soon as those hit the rental market, wanting to move into them because interest rates are so high they can’t afford a monthly payment on a brand new house, but they could rent it and that’s what they want.
That’s always a good sign when properties that are under construction have tenant interest before you guys even have the certificate of occupancy
<Laugh>. Yeah. You know.
That’s a great sign. ’cause You know, once that property’s done, it’s gonna be leased pretty quick. And not only that, but it’ll stay leased and you’ll have that strong demand ongoing. So your, your downtime, your turn time will be minimized. And that’s great from a cashflow perspective. You’ll have a tenant in there, you know, paying their rent and paying off your mortgage, you know, consistently month after month, which is ideal. It’s exactly what you want. Mm-Hmm.
So shift over to the resale side of things. You know, what are your renovations like on the turnkey rentals? What are you guys renovating? Maybe what kind of criteria do you use to determine what should be replaced versus what not? Yeah.
To be replaced? Yeah.
So on our staff, we have two licensed home builders and they’ve been in construction their entire career. They haven’t skewed away from it at all. So when we get an, our acquisitions team gets a new property, the construction team will go out and walk these properties. They’re all in various shapes or forms. Some of ’em are in better condition than others, but most of the time the houses are gonna get new roofs, granite countertops, new HVAC system, new water heater, LVT flooring, tile in the kitchen and bathrooms, and then all the pretty stuff. So paint new fixtures some basic landscaping. But we do a pretty s sizable rental on a lot of these houses. So a lot of investors love that even though the house may have been built in the forties, fifties, or sixties, all your big CapEx items are practically brand new.
Yeah. And that’s critically important because it’s really the what I’ll call the mechanicals of the property that are the big ticket items and those are the things you don’t want failing well ever. But, you know, they have a lifespan of 10 to 20 years, sometimes longer. So, you know, you have to budget for those capital expenditures like the roof. I’m having to do, you know, two roofs on two of my properties right now in the Midwest. And it just happened to happen at the same time. It’s a bummer. But I, you know, I knew it was coming. I’ve had the properties for a while.
And so, you know, fortunately I’ve anticipated it and budgeted for it. So it’s not that big of a deal ’cause you know, I just had the cash and reserves for it. But yeah, when you’re investing in real estate, you wanna make sure that you’re not gonna have these either deferred maintenance items or capital expenditures, these big ticket items coming up in the foreseeable future. So the fact that you guys are actually replacing those things is fantastic because it eliminates the big cost items for investors who are getting into these, knowing that the short term and the medium term, they shouldn’t have any problems. But of course, every property is consumable and so over time things wear down and, you know, whether it be 10 years, 20 years, or 30 years from now, something has to be replaced. Mm-Hmm. <Affirmative> and that’s what we like to call turnkey, meaning it’s safe, clean, functional properties that are stabilized cashflow positive, operating under professional management in a good neighborhood, in a good market. I mean, that’s how we define turnkey. And it’s kind of funny ’cause I started marketing the bejesus outta that term 20 years ago,
21 years ago when I started this company. And then everybody started using that term everywhere all the time. Everybody’s got turnkey this and turnkey that. The problem is, is that most people don’t define turnkey real estate the same way we do, which is unfortunate because it’s kind of like the whole old saying, you know, you put lipstick on a pig and call it turnkey <laugh>
<Laugh>. Yeah. It’s not turnkey if you gotta replace a roof within five years of owning it, you know, but a lot of our houses will put metal roofs on ’em that should last you 30 to 40 years. So,
Yeah. Yeah, yeah. What kinda roof is it, do you guys have out there? Is it, is it asphalt or is it tile or what is it made of?
So depending on the property, most of them will just get a metal, like tin roof. But if the neighborhood is mostly shingle roofs and it’s a little bit higher and a neighborhood, we’ll, we’ll stick with shingles just because it keeps the appearance in the neighborhood really good. So, but most of ’em are gonna be those metal tin roofs. So
I got my investing hat on now, you know, I’m a numbers guy, I love spreadsheets. So from when we look at the price ranges of these properties and compare that to the monthly rents, just to get, you know, like a price to rent ratio for myself. And for those listening right now, how would you compare the prices to the rents of those same properties? Mm-Hmm, <affirmative>, just so we can have an idea of what that rent ratio is.
Yeah, so the rents between our properties are usually between a thousand dollars to $1,500. Of course, it depends on the location in the school that it’s zoned for, but our ratio is probably around 8%. So I think that’s pretty solid in today’s market, especially. I don’t think the 1% rule is something you’re gonna see too often anymore these days. So I think 8% is a very solid figure for that. Yeah.
So you’re saying like 0.8, so meaning like hypothetically speaking, a hundred thousand dollars properties running for 800 a month?
Yeah.
Yeah. That’s not bad. Like I see that being pretty common today. Like a 0.8% rent to price ratio is actually the new norm. And even with new construction, it actually tends to be lower than that. It can be 0.7, sometimes even a little less. But yeah, if you’re in the 0.7 0.8, ideally 0.9 rent to price ratio, that’s the new normal. And, and you’ll do fine. And especially in a state like Alabama where your property taxes are relatively speaking low mm-Hmm.
You know, the expenses there are relatively speaking low, the numbers just pan out. Other states, you know, have very high property taxes and so you have to have higher rents in order to make up for the higher property taxes. Like Texas is a good example of that.
Yeah. Our average property taxes on our, on the properties that I’m seeing lately is probably between 850 to $1,100. So it’s really not that much compared to a lot of other markets.
You know, what you guys pay in one year for property taxes. A lot of properties here in my backyard pay that every month.
<Laugh>. It’s just, yeah. So I’m originally from Southern California too, so I, it, it took me a good bit of time. I was like, you’re only paying how much for that <laugh>.
Yeah. Is that per year or per month? I didn’t catch that.
I mean, you almost have to ask that question. It’s just laughable. So before we talk about this amazing financing, which will be in the 5% range, let’s talk about that in in two minutes. Touch upon the property management side of things real quick. ’cause Property management is very important. It’s especially important for long distance investors, which most of our clients here at Nora Real Estate are out of state investing from hundreds and sometimes thousands of miles away all over the country and sometimes internationally. So property management’s very important. And you know, for us, you know, part of that whole turnkey formula or equation is to have full service professional property management. Now, some investors, you know, I, I’d say 5% of them want to self-manage. And that’s all well and fine. The tools are out there to do it and you can do it. It’s not to say you can’t, but most people opt to go with property management. So take a minute and just describe the property management services. Mm-Hmm. <Affirmative>, you know, with district company, just what are those services? And if you have any stats about occupancy or turnovers Yeah. You know, talk about that too.
<Laugh>. Yeah. So I think one thing that sets us apart is our property management team. Exactly. So no matter if you have one house or 20 houses down the road, you’ll have one representative who is in charge of your entire portfolio. So that way, if you have any questions about your property, any maintenance, any vacancy, turnovers, you know who to go to for everything that could deal with your property under management. So right now, most of our leases are one and two year leases. We try to get the two year if we can, but the one year’s come in every now and then. ’cause Some people might have job changes every now and then, but most of ’em are gonna be those two year leases, which investors love to see ’cause they don’t have to worry about turnover after just one year. Our occupancy, we’re about 95% occupied, and we have a little over 1800 properties now, and we’re adding to that every week. So I think that’s pretty, pretty good. And it’s easy number to run your figures off of just 5% for your vacancy rates. And our renewal rate is about 60% as well. So after that two years is up, we’re getting a little bit more than half of our tenants to resign the lease, which keeps your turnover costs down.
That’s awesome. Those are great numbers. And you know, 95% occupancy is, I think to be expected today just, you know, given the shortage in housing. But that’s spectacular because 95%, you’re always gonna have a small margin in there. So it’s effectively zero mm-Hmm. <Affirmative>, you know, 0% vacancy. So that’s fantastic and congratulations on that by the way.
<Laugh>. Thank you <laugh>.
So let’s talk about this financing. What is it and how does it work? Because when I first saw, you know, the ability to get, you know, five point something percent fixed rate on a 30 year conventional mortgage, I thought that’s gotta be a typo. <Laugh> <laugh>. But clearly it’s not. And we know it’s not. Unfortunately, all of our investors and clientele and you know, the people in our database don’t know about it yet, but they will when this episode gets released. So let’s talk about it, talk about the financing, how does it work, what are the rates and that kind of stuff. And you know, then I’ll ask you any questions that come to mind.
Yeah. So this is something that for the longest time has only been available for new construction properties, but it’s finally been opened up to people like us who are in the turnkey world or just normal resales like that. So we’re partnering with Aaron at Security National Mortgage Company. We love Aaron. We’ve worked with him for years and years and I’m sure you guys have too. <Laugh>, he’s a great guy. He is a good resource. His team is fantastic to work with. And Aaron came to us with this proposition and we went with it. We gave it a try on a couple properties, a much smaller scale to make sure everything worked. And it worked out perfectly. Our investors love it. When we lock this rate, we should be able to get our investors a rate of between 5.5 and 6% with 20% down on a 30 year fixed mortgage, which is about unheard of right now. Right now you’re probably seeing 7.68% and that’s what, 25 or 30% down. So if you can do 20% down and get sub six interest rates, your cashflow is gonna be much better off.
That’s incredibly attractive and very impressive. Yeah. Aaron is a great friend of mine. We’ve known each other for a very, very long time. I wanna say we’ve probably known each other for about 15 years.
<Laugh>. Oh wow. It’s been that long. <Laugh>.
Yeah. We’ve been rock climbing and Jeeps together. We’ve done all kinds of crazy stuff. So yeah.
I’m always seeing what he’s up to. <Laugh>. Yeah,
Yeah. Stories for another day. But yeah, we’ve been all over the place. But yeah, I mean, he’s a sharp guy. He is been on the show many times and you know, he’s, he’s always got his thinking cap on and he looks at mortgages and mortgage rates a little differently. It’s not just about financing, you know, it’s not about the interest rates, it’s not about the numbers. It’s about so much more. It’s how do use it as a tool to invest and, you know, build wealth. Mm-Hmm.
Just cashflow, but create wealth with it. So it’s, it’s a tool and he has a long-term vision about it. It’s not short-term, what can I get today, but what is it gonna do for me over the years? And so you know, I love it when he puts his, you know, thinking cap on. ’cause He can come up with stuff like this. So, you know, this is great. I mean, yeah, the fact that you can get mortgage rates that are 2% or more, but 2% lower than the going rate and still be able to do it with a minimum down payment, meaning, you know, you have 80% loan to value is you’re right. Unheard of. It’s pretty rare if, I don’t even know if it’s, it exists anywhere right now. So this is pretty unique and, you know, I’m definitely gonna market this <laugh> pretty strongly. So you guys might get inundated with you know, property requests.
And that’s, I’m perfectly okay with it. I’ll work all night if I have to. <Laugh>, we’re super excited to have it too, so.
Yeah. Yeah. So the real question though is how long is this gonna last? Because this is probably not something that will last indefinitely. Mm-Hmm. <affirmative> there’ll be a time when, you know, we, they, you know, the lender won’t be able to do this anymore, they’ll just not want to do it anymore. So my advice is anybody listening to this should take advantage of it while they can.
A hundred percent.
So the process with the financing is gonna be the same. They’re gonna fill out an application, they’re gonna get qualified, approved or pre-approved and then just continue with the transaction. Just like any other standard or traditional transaction, there’s nothing new that they have to do or something special that they have to do. There’s no extra qualification for it. Correct.
Yep. All you need is just go meet with your investment counselor, get them to help you out with a pre-approval letter from Aaron. Have them introduce you to me and we will talk about my current inventory and I can apply it to any house. I have it in my inventory as long as construction will be completed by that lock date deadline.
Okay. Perfect. Cool. Zach, is there anything I didn’t ask you about Birmingham, the market? Why invest there? Or even, you know, the, the neighborhoods or projects that are going on that I should have asked you and then and just Yeah, forgot to.
Well, I would just like to touch on you know, Birmingham and Alabama as a whole is not gonna be one of those markets where you see explosive appreciation out the door in three years and you made $50,000 on your house already. But what you will see for the people who are wanting a long-term hold for their property is steady appreciation throughout the lifetime that you own that property. And that’s what makes Birmingham so special is we don’t have the ups and downs. We have slow but steady upward trending appreciation.
Yeah, very, very good point. You know, I like to refer to markets like Birmingham, Huntsville. In fact, most of the Alabama markets as slow and steady or what I refer to as linear markets, if you actually plot price growth Mm-hmm.
<Affirmative>
And changes in appreciation rates because appreciation rates go up and down. But if you plot it on a graph over time, it’s, it’s fairly smooth and steady. So it’s a, it’s what I refer to as a linear market versus markets that have appreciation rates that gyrate can, you know, considerably up and down over the course of years. And those are more cyclical in nature. So you’re definitely not in a cyclical market. It’s, you know, it’s a slow and steady, fairly predictable market. So in terms of cash flow and price appreciation, you pretty much know what you’re gonna get today. And you can make the prediction that you’re gonna know what you’re gonna get, you know, in five years from now, or 10 years from now, short of, you know, something very significant happening in your market. So I, I like that. And for many investors, it’s exactly what they’re looking for. It’s, it’s a very predictable investment decision. Zach, I appreciate you coming on any final words. ’cause Outside of that, I’m, we’re just gonna, you know, put this out there and let people contact their investment counselors, but do you have any final thoughts or words?
Yeah, like, like you just said, contact your investment counselor. They’ll put you in touch with me. We can get on the phone, we can talk about everything I have to offer for you. We’ll work through it and get you closed at a really low interest rate that you probably won’t see again for a really long time. <Laugh>.
Yeah, well said. Probably worth saying again and again, right.
I appreciate you coming on Zach. Thank you. And for everybody listening here today, appreciate you taking the time to listen. You know, this was kind of a combination episode with a market spotlight on Birmingham, as well as talking about this really unique financing, which I think is worth taking a serious look at, maybe taking advantage of it. But contact your investment counselor and if you’re new to us, you know, just contact my team here for a free strategy session. We offer a high value, high touch service that is no fee or cost attached to it. So if you’re wondering, can I forward NORAD or Real Estate Investments? The answer is yes, because we don’t charge you a fee ever. Our services are essentially free to you. But if you have a question about real estate investing or anything else, let me know.
You can contact me through the passiverealestateinvesting.com website. It’s the home of our show. You can submit and Ask Marco question. And if you’re listening to this for the first time and you haven’t subscribed, remember to do so. It takes you three seconds to do it, but that makes it part of your weekly routine. With the episodes we come out with every week, help us spread the word. Listen to us on iTunes or wherever else, and leave us a rating review. I read every single one of them. Thank you for listening, and we will see you all on our next episode.
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