Hello my friends, and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santorelli. So I’ve been doing this stream of market spotlights lately and it’s great. The feedback has been wonderful. We’ve done, I think three different markets just in the last month and a half or two months. This might be the fourth, maybe the fifth, but fourth market spotlight that we’re doing. One of the perennial markets that we’ve been in for a very long time is Birmingham, Alabama. It is a great market. There’s a lot going on there. It’s kinda like a hidden jewel in a way because a lot of people don’t even think about it or talk about it much because it’s not like a major metropolitan area. But we’ve had investors investing there for a long, long time with great success, very strong cap rates and cash on cash returns. It’s still an affordable market. There’s just a lot of great things to say about Birmingham. So I wanted to bring on one of our fantastic property providers to talk about the Birmingham Metro and what we have going on there and all the good stuff that they’re doing.
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So with that, Stephanie, welcome to the show.
Thank you for having me.
Well, it’s great to have you on. It’s been a while. In fact, we were just talking about this before we started recording. I, you were saying it was like four years or something like that bef since we had you on. Is that really true
<Laugh>? We’ll have to go back and check, but I know it’s been a while.
Yeah, it’s, it’s long overdue is basically what you’re saying.
Yes, exactly.
<Laugh>. So I’m excited to share, I guess, this market with people because number one, we haven’t talked about it for a while, so it, it’s overdue. Second, it’s just a market that has inventory on a regular basis, good inventory. The numbers really make sense and it’s easy for even beginning investors or investors that don’t have a lot of down payment capital or investment capital to get started with. So it’s really a great market and friendly for everybody. Let’s begin. I guess talking about the question I always ask first, and that is from a high level, why should I as an investor invest in Birmingham, Alabama?
reat question. So I’m a little partial. I’m a native. I was born and raised in Birmingham and I find it to be just an incredible place to raise a family. I have so many friends and family members here, so it’s just overall it’s a wonderful place to live, a wonderful place to raise my children. But at a high level, our GDP is nearly 30, I’m sorry, 63 billion and it’s increased 29% over the last 10 years. We ranked 24th out of 288 cities with the lowest cost of living in the us. Our unemployment is only 2.5% when the national is around 4.6. Then we have an average household income of around 58,000 where the US average is 35. And finally we are 49% tenant occupied. So we always have a really steady pool of renters that are looking to occupy our properties. And we, I’ll get into this more with you later, but we have a wonderful diversification when it comes to employment. So we’re not dependent on one industry.
That’s actually a, an interesting question about the economy. I’m not overly familiar with the Birmingham market. What are some of the major employers or what’s driving the economy? I mean, you know, every, every market is broken down into different industries and some of them are very heavily focused on finance. Some of them are heavily focused on oil and gas, which, you know, that you could argue I guess Houston is to some degree, although it’s gotten better over the years. What is making up the Birmingham economy, if you will? What makes up industry there?
Our number one employer is actually medical. So you know, that’s not going anywhere. We also have a big presence of manufacturing, higher education banking, telecommunications. And we have, in the last 10 years or so, Alabama has become the number four auto exporting state. So we have several auto manufacturers and they’re other companies that build like parts and things like that, that have moved into our state that the exports have exceeded 8.5 billion in 2021. So we’re quickly becoming a huge auto manufacturer and that’s providing a lot of great jobs for our tenants.
I’m trying to remember, I if it was Toyota or who moved out of California, I know they moved towards Texas. Maybe it’s to Alabama. Who are the automotive employers out there?
We do have Toyota that’s in Alabama. We have Honda, we have Hyundai. Mercedes is the biggest one that’s close to us. They just did a huge expansion that’s employing a ton of people. And that’s what then about a 30, 45 minute drive from our market. We also have Autocar, which is in one of the markets that we heavily invest in. There’s several more, but they’re just continuing to grow.
Interesting. I don’t know if you know this, I don’t necessarily expect you to know this, but do you know if the population is growing? Like, if, if you have positive net migration in Birmingham, I would assume you do because of the employers and the major employers that are there. But you never know. I mean, it could be flat.
I haven’t checked it lately. I would assume it’s pretty flat. We, we just consider ourselves like a very boring market. So it’s not like that exciting to move to Alabama. But I would say we do have a lot of people that are moving in for job opportunities. So I wouldn’t say the last time I checked it wasn’t a huge increase, but I don’t think we have negative either.
Yeah, like I said, I didn’t expect you to know that. I mean, that’s not really a statistic that most people care about or even track. I find it interesting. I’d like it because, you know, I compare something like a market in Florida versus an ex other extreme market being Detroit, Michigan. And you know, one, you’ve got decades worth of, you know, negative net migration and you look at Florida markets and you’ve got like massive positive net migration cuz people are moving to Florida, moving south to the warmer, warmer climate, you know, for the tax-free state, all that kind of stuff. But you know, having positive net migration leads to housing demand. It puts pressure on the housing market cuz those people need to live somewhere. So they either have to buy something and live there or they have to rent something and live there. But in both situations it creates a transaction.
It’s a sale where it’s pulling inventory off the market so the demand is sucking up, you know, whatever supply there is. And that’s good if you own in that market or if you’re planning to buy that market. And that’s a sustained trend. I would imagine that the three main markets in Alabama, which would be Birmingham, Montgomery, and what’s the other one? Huntsville. Huntsville, yes. I’ve just seen, you know, constant growth and interest in those markets even though they are what you’re calling quote unquote boring markets. And I like boring markets because they’re just consistent. It’s kinda like the, you know, the hair, you know, the turtle. Okay. So is there anything else you want to comment on or add in terms of why invest in Birmingham, what’s going on in the local economy or you know, other major employers or industry that’s there?
Yeah, we just continue to grow. Like I mentioned, auto is the biggest growth factor for us right now. They continue to bring in more parts manufacturers and then the existing employers continue to add on bring in more jobs. So that’s huge for us right now. Like I mentioned, medical is our number one employer. We continue to grow in that as well. Building new hospitals. The University of Alabama Birmingham is actually our number one employer and it’s a medical school, a dental hospital, a medical hospital, a university. So we continue to grow with that as well and they’re making huge advancements and doing all kinds of really cool breakthroughs there. We also have a really big banking presence. B B V A Compass is located here. Regions, we have a really big Wells Fargo presence. We also have other health systems and it’s just very diversified to the point that we’re not, like I said, dependent on one industry. In years past we were the number one steel manufacturer and that was pretty much our only claim to fame. But that’s not really the case anymore. Now we are more diversified and have these more well-rounded opportunities.
Yeah, well that’s great. So a question about like pricing. You know, in, in your market we’ve seen pretty much most markets around the country appreciate very, very rapidly in an unsustainable way in 2020 and 2021. And there are reasons for that. What have you seen happen over the last, let’s say two to three years in Birmingham, but with more of a focus on like what’s going on now? Cuz I, I know a lot of markets have kind of cooled off, which was to be expected.
Right? So I’ve been in this business for 12 years now, and when I first started we sold very low priced properties very low priced, very high cash flow, but they were not in fantastic areas. And so as we have learned and grown and gotten deeper into our property management business, we’ve learned that that is is not the key to long-term success. And so we have moved into more a and b markets. So overall Birmingham has appreciated at a faster rate than we’re used to. Our normal appreciation is 3%. So like I mentioned, just slow and steady, but in the last two years we have had higher than normal appreciation due to obviously the crazy market. It’s hit us as well. So I would say in the higher end properties there has been some significant increases those being the more unoccupied, the very nice areas, that kind of thing.
We got into that situation too where there were bidding wars and multiple offers and all of that kind of stuff. But in what we invest in, which is more of the B market, more of the just kind of a, a standard B it’s a safe neighborhood, it’s a good neighborhood, but it’s not gonna be the highest end. And where we are located, those haven’t been as crazy. So the last two years our prices have increased a little bit, but that was more to keep up with the lack of supply. So we were having to pay a little bit more to acquire these properties than we did in the past. And so we had to charge a little bit more for them. But overall, we have not increased dramatically. Like so many areas have, I would say, I mean a property that I sold five years ago is probably five or $10,000 more than it was. It’s not 50 or a hundred thousand like it is in a lot of areas. So we have been hit by the times, but not in a way that’s made our properties not cash flow anymore.
But you’re seeing strong, relatively speaking, strong cap rates and strong cash on cash returns because of the price points and the rent ratio to that price point. Right. Yeah. So kind of a similar question then. What has been going on with rents and rent growth? Has, has that been tracking more or less in lockstep with price growth or has rent been kind of like what it’s been doing in other markets where we’ve seen like very strong rent growth in the last couple years?
We have had growth in the last couple of years. I wouldn’t say it’s dramatic. So it has not been ne like I said, our pricing isn’t really dramatic. Our rent growth isn’t really dramatic. I wouldn’t say either one of them have just skyrocketed. They are keeping up incrementally. Our average, we try to increase a on renewal a lease by $50 a month. So it’s not going to be anything crazy. We don’t go in and do, you know, huge increases. An A property may have a slightly more than that, but again, it’s just, it’s very boring market. We try to do incremental increases every single year instead of huge one time increases, keeping up with inflation and that kind of thing because most of the markets that we invest in are, they’re very heavily tenant occupied <laugh>. And so we also have to keep up with other properties in the market. So because we have our own property management company, we are very aware of what the rent rates are and what we can increase too to not outprice ourselves out of the market and that kind of thing. So to answer your question, yes, the prices for the rent have gone up, but not dramatically.
Okay. So we’ll talk about the types of properties that you guys are renovating and and providing for us here in a minute. But before I get to that kind of a segue question, if you will give us an idea of the price range low to high of what is available in the pipeline today and coming down the road. And similar question, what is the equivalent rent low and high for those same properties?
Absolutely. So general range that we’re in right now is about 115,000 to 150,000. So of course we’ve had a few that are less than that. We’ve had several that are more than that, but that’s very typical for us. For the rent, that’s about 9 75 to 1250.
Okay. So your rent a value or rent a price ratio is right around 0.8%, maybe even 0.9%, which is good. I mean, I’ve said a few times, generally speaking, that 1% rule is kind of out the window at this point in time.
I wish I could still abide by the 1% rule, I really do. Yeah, it just feels like the market has shifted so much, so that’s unattainable. But someday we may get back there.
Yeah, I mean history repeats itself, or at least if it doesn’t it rhymes so <laugh>. But you know, real estate is all about cycles. You know, we have global economic cycles, we have economic cycles within our own economy within this country. We have local market cycles, we have real estate cycles, we have cycles with interest rates. Everything is a cycle. On a cycle. We have, you know, micro cycles within macro cycles. So things, things come and go. You know, there were times when we had interest rates in the 17, 18% range, you know, in the 1980s and now, you know, we’ve got 5% rates, right? I mean, we’ve even seen sub 3% rates, which is whoever thought we would’ve seen that. So things always ebb and flow. So to say that we are not gonna say, see 1% rent to price ratios is, I mean, nobody knows.
Nobody has a crystal ball, but to say that it won’t happen again is not necessarily true. So we’ll see what happens, but still, you know, a, a price, a rent to price ratio of 0.8%, still good. I mean, it gives you a good, good rate of return. It gives you you know, solid cash flow. There’s nothing wrong with it. So do you have any comments about the neighborhoods that you’re focused on? I, I you made some comments about it. You know, you’re focused primarily it sounds like on B class neighborhoods, maybe B plus, A minus depending on what you’re finding. Is there anything you wanna talk about as it relates to the neighborhoods you’re focused on?
Sure. So yes, you’re exactly right. We focus on mainly b We do purchase and sell a properties. They’re just harder to come by, as you can imagine. We sold a lot more three years ago before the market shifted. So we absolutely still have them. We try to get as many as we can in that, that situation. I really try to focus more on an investor telling me I want this specific type of property so we can go out and find it because the a’s are a little bit more difficult to acquire, but we can do that. But what we consider, we call it our bread and butter, our typical properties are B markets. They’re working class tenants or we do work with Section eight. We have a mix of different neighborhoods. We focus on the Birmingham suburbs. So the Birmingham population, if you consider just like the downtown population, that’s about 200,000 people.
The metro is 1.1 million. So we focus on the metropolitan area that makes up a lot of suburbs that surround the kind of downtown hub. We also go to Tuscaloosa, which is about an hour from us, which has the University of Alabama and is a great rental market. And then we will have some other areas in between. But we typically, because we have in-house property management, we try to not go further than about an hour and a half. So we can really effectively manage from Birmingham. So in those neighborhoods, like I said, they’re good, safe neighborhoods. Like I said, the price points usually one 15 to one 50. They are a mix of working class tenants. We also have nurses. Again medical is a big factor for us. And then we do have a mix of Section eight tenants as well. I’d say about 30% of our rental portfolio is section eight.
So when we rehab all of our houses, we renovate two section eight standards. So all of our properties can go section eight. And our policy on that is we have a very strict criteria as far as our applications and leasing. And so any tenant has to qualify per our standards and then whichever tenant that meets the lease qualifications and is approved and then has a deposit gets to move forward with the property. So we work with, again, a section eight and private pay. We have probably six or seven primary markets that we invest in. Those markets are a mix of very heavily tenant occupied and more owner-occupied. I ran a few just outta curiosity earlier. Our primary neighborhood that we invest in, just because it’s geographically very large, is called Center Point. That’s a market we’ve been in for years and years. It’s our primary market that we invest in.
They’re the median house held income is about 45 K. The median age is 33 and it’s about 44% tenant occupied. But then when you go up just slightly to another neighborhood that’s very close to center point that’s a little bit smaller. So Center Point is about 16,000 people. This neighborhood Pinson, which is very close, but a little bit of a higher, let’s say center points, a B minus penson’s A, solid B it only has 7,000 people and it has a median income of 70,000. And that one has an owner occupancy of se sorry, it’s closer to 14% tenant occupied. So we have a different mix. Another area that we invest heavily in is Hueytown. That one is almost as big as Center point. It also has a little bit higher average income of 58,000. And that one is 28% tenant occupied. So Center CenterPoint is definitely our largest market.
It’s very heavy on the tenant occupancy, but that also means that we always have a steady pool of tenants that we’re pooling. And there’s always a lot of people, I tell people that one of the reasons that we invest heavily in CenterPoint is a very family-friendly area. We get calls all the time that says, I wanna rent property A because my cousin lives on property B Street and they wanna be close by right <laugh>. It’s very generational. There’s a lot of people that live in that neighborhood and that’s how we get a lot is referrals. And people just wanna be close to family members.
That’s a great sign. Mm-Hmm. <affirmative>, you have strong tenant demand and you know, when people are referring other people, it’s solid. That’s great. Mm-Hmm. <affirmative>, that was a really good description. You kind of covered some of the questions I wanted to ask you about neighborhoods, and I was gonna ask you what your favorite was, but I think I, I could probably guess just, you know, it’s in that list of three that you had there. Mm-Hmm. <affirmative>. So let’s talk about properties for a minute. Maybe talk about the types of properties that you guys are focused on. You know, are the single family or are there other like duplexes, fourplex in that mix? What’s kind of the makeup are, you know, are they typically three bed, two bath? And then I’d like to hear a little bit about the typical renovation. What does that look like in terms of, you know, a scope of work on a typical renovation?
Absolutely. So we only invest in single family at the moment. We, well, I shouldn’t say only, we very rarely invest outside. We have had a handful of duplexes, triplexes, they’re very not common in our market. I know a lot of other markets they’re in abundance and that’s a really good investment tool, but we just don’t really have them. So we have invested in them in the past. They do okay for us, but most of our tenants prefer their own home. So if they’re not looking to live in an apartment, then the option of a duplex versus a single family home, they’re almost always gonna go for a single family home. So we invest in single family. Mm-Hmm. <Affirmative>, we have three bedroom or greater. We very, very rarely do a two bedroom. We’re pretty much three bedroom or greater. A lot of our properties are one bath that’s very common for those areas, like center point, but they’ll also be higher as well.
Most of our properties were built in the fifties to the seventies, but we do get newer properties as well. Typically, they’re a thousand to 1200 square feet, but again, we get larger as well. So it, that’s kind of the, the standard that we adhere to. But we also have things outside of that as far as our scope of work. We focus on what we call the big four, the roof, the H V A C, the plumbing and the electrical. Our rule on the roof, the H V A C and the water heater is that they have to have at least five years life remaining or we replace them, we update the plumbing and the electrical as needed in every property. And then we do a cosmetic rehab. So we go in and we do, you know, if there’s hardwoods where you refinish them, if there’s carpet, we replace it, we paint the cabinets, we change out the hardware, we give it a facelift, but we don’t do high-end finishes.
We don’t add granite, we don’t add new hardwoods, that kind of thing because we look at these as a rental property and we want our investors to have as little upkeep and as little deferred maintenance as possible. So we do everything we can to make it as tenant friendly and investor friendly as possible. Typically don’t include dishwashers, we do in the A properties, but in the B properties we, if they have a slot for dishwasher, we actually close it in. We found that to be one of the biggest maintenance items. So we just remove it. We close in the fireplaces, we try to do everything we can to make it as, you know, tenant proof as possible.
I’m just curious, when you remove the dishwasher, I’m assuming there was one there, does that lower the rent that you can ask for that property? No, it doesn’t change it.
No, because again, in these areas, we’re setting so much of the rent and most of the time where this is located, so CenterPoint is a specific area that we do this. They’re built in the fifties. Most of these houses don’t even have a slot for it. And so it’s not common really to have a dishwasher in that neighborhood. So it’s really not a big deal.
Yeah, very interesting. I never stopped to think about the dishwasher. I mean, sometimes you have amenities like, you know, granite countertops and dishwashers and a disposal and all that kind of stuff. And you know, it, it, you can, you can charge more 25, $50 more a month or maybe more, but I guess it’s market specific and neighborhood specific. It’s actually a, you know, a term that I, I used years ago, I stopped talking about it actually, which is pretty strange. But I keep referring to it as what is neighborhood normal? Like what is normal for that neighborhood? And a great example of that is what you just said. You know, you, you’ve got three bedroom, one bath homes. Now you, you know, you wouldn’t think that is normal. You’d think like a three bedroom, one and a half or maybe a three bed, three bed, two bath home is, is normal.
But it, it may be normal where you live, but it may not be normal for the neighborhoods that you’re looking at in Birmingham or maybe Birmingham in general. Absolutely. So you have to keep that in mind, you know, ask the question what is considered neighborhood normal in the areas that you’re looking in and you know, it shouldn’t be a surprise that it’s a three bedroom, one bath with no dishwasher, <laugh>, you know. So anyway, let’s wrap up with, you know, a little bit about property management, if I’m not mistaken. Your company has a sister company that does the property management, if I remember right? Yes. Okay, so just high level, just talk really briefly about the property management services there and anything you want to talk about as it relates to, you know, occupancy rates or whatever you’re seeing.
Sure. So we do have in-house property management. We find that to be crucial for our turnkey process. We make it as easy as possible for our investors. I am your point of contact from the point of, you know, know determining which property is the right fit through closing. So I will work with you through the inspection, the appraisal getting it closed, and then we have a dedicated owner relations contact person that I will introduce you to once the property closes and she will take care of you from there. Again, it’s in-house management, so any questions, they’re always coming back to me. Anything that I can do to help, I’m always there. But we have two owners that own both companies, so it makes everything very efficient. We charge 10% for management and we lower it to 9% when you own three properties.
We also offer two warranties with our turnkey properties. The first is a mortgage guarantee. So if the property is not leased by the time your first mortgage payment is due, we will pay the amount of your coupon until the property is rented. That just gives us a little bit of time to make sure we have the right tenant in place. Since we’re gonna be working with you for the long term, we wanna make sure that it’s the right tenant, not just a warm body that’s going into that property. As I mentioned before, we have a really stringent application process and qualification criteria. So we wanna make sure that we’re getting a good quality tenant. So in that case, we do that mortgage guarantee so we can make sure that everybody’s covered for the first little while until we get that right tenant in place. We also offer a contractor’s warranty. So for the first year, our contractor will cover anything that was done during the rehab, which is on the scope of work. So they will make any kinda repairs that were done during the initial rehab.
That’s awesome. Yeah, those are two great guarantees.
Yeah, I would say as far as vacancy we are around 4% vacant right now. So was that 96% occupied? And when a property goes vacant, we have a policy that we have a 72 hour turnaround from the property going vacant to getting a estimate for the rent ready.
That’s fantastic. I don’t know if I knew those guarantees. I knew you had something in place, I just didn’t know the, the specifics of it and that’s great. I wish everybody did that <laugh> actually, but that’s fantastic.
Right. Well we find it really important to working with our investors. We want our investors to come back and buy more properties. So we want you to be very comfortable and we wanna make sure again, that we can take the time to place the right tenant so that they’re not a problem for us or for you
<Laugh>. Absolutely. Well that’s great. No, I really appreciate you guys doing that. Well, in wrapping up, is there anything else about the market or the investment opportunities there that you’d like to share before we bring this episode to a close?
I’ll just say we have inventory right now. We were really struggling for the last couple of years as everyone was to get good inventory. But we have had a few changes lately that we do have properties available for sale. We have some wonderful opportunities in that, like I said, one 15 to one 50 range, great start potential for a new investor to get in get multiple properties if you want to, to, again, if you get three properties, you get a discount on the property management. So it’s a great market to invest in. I like to say that because we work in so many different neighborhoods, different suburbs of Birmingham, that it’s really easy to diversify even within our market. So I can get you three different properties in three different neighborhoods and it gives you a little bit of a hedge because you’re diversified even within our portfolio. Right.
Yeah. Makes sense. Well, Stephanie, I appreciate you coming on, so thank you for your time.
Thank you for having me.
Absolutely. So if you’re listening to this, Birmingham is a great market. Like I said, it’s a perennial market. It’s, it might be a quote unquote boring market, but it’s definitely a market worth looking into. And now that we have more inventory there, you know, Stephanie and her team can certainly help you. So just contact the investment counselor that you have here on my team. If you don’t have an investment counselor already assigned to you, no problem. Just contact us or fill out the form on our website and usually within 12 hours we’ve got you connected with our team, but they can certainly answer more questions, give you a deeper dive into the opportunities there, and then, you know, circle Stephanie and her team in for you. But that is it for today. Thank you for listening. If you have any questions, contact me and my team. Remember to subscribe. Takes you three seconds to click that button, spread the word about the show with your friends and family, cuz I’m sure they would like to learn more about financial freedom and real estate investing and all that good stuff. And thank you for listening. We will see you all on our next episode.
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