Every market has a story. Today, we focus on Birmingham, Alabama. In this episode, Marco Santarelli talks to two of his trusted local property partners to reveal how the state of Alabama has become successful in attracting foreign automotive companies and other big employers that draw a lot of current tenants. They discuss property values and why Birmingham can be called ‘a linear market.’ They also touch on clientele demographics and how to grow your rental property business. If you’re a Millennial, opportunity awaits you in Birmingham.
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Market Spotlight: Birmingham, Alabama
Birmingham has been one of those perennial markets where property values have been low relative to all the other markets that we’re in. It’s been a consistent perennial cashflow market for us. Property prices are still at historic low levels there and relative to the rents you can get, it makes it a very attractive market. It’s an affordable city. It’s in the South, there’s a lot of people move into the South as many of our audience know. It is also one of those great important business centers that reside in the Southeast US. We have been in Birmingham for many years and we move a lot of product there. We have very happy clients because of the cashflow and the opportunities that it provides us. I wanted to do a market spotlight. We’re long overdue for market spotlight on Birmingham, Alabama. With me are two of my trusted local property partners out there, Merv and Stephanie. Welcome to the show.
Thank you, Marco. It’s good to be here.
It’s great to have you on. I’m excited about this interview because Birmingham is one of those markets that I’ve been putting off for a long time and it’s a long overdue to have a fresh market spotlight on it. Let’s jump right into this thing. Every market has a story and there’s a reason why I should be considering a particular market. Why do you like Birmingham? Sell me on it at that 40,000-foot level.
We like Birmingham because it’s one of those markets where the property values don’t change up a whole lot. When we look at what’s going on here and there are a few other cities around the country like this, we get an appreciation of let’s say 2% to 2.5% a year, even when times are rocking like they are now when other markets are going up 10% to 12%, we’re 2% to 2.5%. It makes it what we call a linear market, which doesn’t change much, but it also makes it very predictable. When we get a house that’s let’s say $85,000, it’s probably going to rent for somewhere around $850 a month. We’ve been able to do that time and time again. That’s why we like the market and there’s been a good inventory here. It’s a little tighter now than it has been.
The other thing about the market is that there are a lot of good, solid employers here. Our automotive industry here is pretty strong. We’ve got a Mercedes plant down the road. We’ve got a Honda plant down the road. We’ve got a Toyota engine factory here. Obviously, I never mentioned any American brands. They’re all foreign brands, which is interesting because Alabama has worked hard over the years to attract those kinds of industries, which gives us a solid underpinning. You might expect that inflation might set in after all that happened, but it hasn’t all that much. Our wages are going up probably more than the house prices percentage-wise, but still there are plenty of people to work and it’s a good solid market.
What’s the draw for these large corporations? Has there been tax incentives or is it because there’s a low cost of living and abundant skilled workers? What is it?
First of all, our state income taxes are low. Our property taxes are even lower and they have put incentives out and build roads and infrastructure and all kinds of things for all these people that have moved factories here. There’s a Hyundai factory down by Montgomery for example. They put a whole new road system down there. They’ve done it the same for the other two. The state has stepped up, in my opinion, at trying to attract them and make Alabama attractive for them. In-kind, it’s paid off for the state in the long run because we’re not like some of those other States that are bankrupt or almost bankrupt. Our coffers seem to be fairly full.
You mentioned Birmingham as a linear market, which is something I talk about a lot and I tend to agree with you. It is for the most part linear market. However, when I’m looking at some of the charts and data that I look at for various markets, I’ve noticed that Birmingham has been in what I call a wealth phase, a momentum phase where you’re having above your historic norm appreciation rates, which can be 4% to 6%. Maybe that’s very localized or regional? As a metropolitan area, the Birmingham market ranked at the top of my list of 504 markets that I track. I want to see if there’s disconnect between what I’m seeing and what you’re seeing being the boots on the ground. Are you seeing above normal appreciation rates in certain areas?
Here’s where I think it is. It’s not in the investment-grade properties. It’s in the owner-occupant properties. People that are moving in, that are owner-occupants and are buying houses are driving prices up because there are not that many houses available. If you look at let’s say a $200,000 to $250,000 house, there’s a lot of pressure on that house because there’s not a lot of them available. I believe that’s where you’re going to see the appreciation. I’ll give you an example, the house we were selling a few years ago for $79,000 is now $84,000. That’s what I call an investment-grade B-class solid neighborhood property.
We’re going off a little bit on a tangent here, but since it’s fresh in the conversation, what would a rental grade property be like in an A-class neighborhood? What would the price and rent be in that area? How does that compare appreciation wise so our audience know?
The A-class market, you’re going to get more appreciation like you are the owner occupant. At $149,000 house, you’re going to rent for $1,325 to $1,350 a month, somewhere in that range.
You have a stronger appreciation potential. Those are the neighborhoods that you see that 4%, 5% maybe 6% year over year annual growth. That makes more sense.
Those owner-occupant areas are more school system-driven. They’re at a very highly desirable location.
That $150,000 property that you’re talking about, that’s barely enough to get a garage here in Southern California. Everything is relative. The good news is that overall, speaking in broad terms, Birmingham is still in what I call a wealth phase. There’s still measurable positive inflation-adjusted appreciation in your market, which is great for investors that are looking for something that will at a minimum keep pace with inflation and still have a very good cash-on-cash return and cashflow right from the get-go. That makes a very appealing investment. I like the Birmingham market. I like all the Alabama markets for that matter. You are very landlord-friendly. You’ve got good rent growth, good population growth, you’ve got a lot of things going on. That transitions to the whole concept or the topic of the economy. You got a local economy that is diversified across manufacturing. You’ve got higher education. You have a broad medical community there with a lot of medical professionals. You’ve got banking there. At least those make up some of your top employers. Describe what the local economy is like. Tell me about who the major employers are? Investors are always interested in what makes up the economy because that’s the engine that drives the market.
Our number one employer is medical. We have a huge medical community. The University of Alabama, Birmingham is our number one employer and it takes up a large chunk of our downtown. It’s a university, a medical research facility and a hospital. It has its own medical and dental school. It is a very large employer for us. We also have a lot of other hospitals and research facilities that are located here in Birmingham. It’s very well known as a medical community. You also mentioned that we’re a banking hub. We’re one of the banking hubs of the Southeast. We have a pretty big telecommunications presence. Automotive is also growing. We have a lot of distribution centers. That’s one of our big employers that draws a lot of our current tenants. It’s very stable work. We’re pretty well-diversified, which is one of the reasons I love our market and that we’re not dependent on one industry.
Here’s a side question. I always like to consider what that is doing to the overall population. I don’t know this data point. I haven’t looked at it for a while, but do you know if the population of Birmingham is growing, shrinking or is it relatively flat? I don’t mind flat markets. Growing markets are obviously attractive. Where I get concerned is long-term trends that are declining, like what happened for decades in Detroit to use it as that poster child.
I don’t think we’re declining at all. I know we’re not. We’re growing some. Part of the growth of the industries that Stephanie mentioned is that they’re moving a lot of people. We see a lot of people from other countries that are moving here. It’s has become more of a melting pot. I’ve been here since 2001 and I’ve seen a significant change in the last few years. Even these industries like the foreign car companies, there are a lot of people from those countries that move in here. They’re driving some of that. There are also a lot of jobs here. Alabama has been quite rural for many years, but a lot of people are coming to the city for jobs and things like that. That’s what’s putting the pressure on the housing.
The city of Birmingham itself is relatively small. It’s about one million people, but the Metro is what’s growing. The Metro is all of the suburbs that surround Birmingham. That’s where we invest and that’s what’s continuing to grow and a lot of people moved to the suburbs and that market grows as well.
Is there any one thing in particular driving that population growth or is it organic to a large degree, maybe being driven by jobs?
We have very low unemployment right now. We had another drop. We were one of the lowest unemployment markets in the country. I think job opportunities are bringing a lot of people here.
It always seems to be the number one driver. It’s all about where I can get a favorable employment that pays me well and allows me to live. It’s jobs. It seems like lifestyle always takes a back seat to employment.
We’ve been ranked very high as far as Millennial job growth. We’re one of the top places for Millennials to move because of the opportunities here as far as jobs. We also do have a very low standard of living and there are lots of cool new things to do here. It’s actually a lot more exciting than people realize. The downtown is booming. It is attracting more young people as well.
What did you say the population was?
Birmingham proper is about 300,000. The Metro area is about 1,000,001. If you add all the cities together, for example, our address is Vestavia, that’s one of the cities around Birmingham. When you drive around, you don’t know when you’re going from one to the other.
Let’s talk about the opportunities there. Let’s begin with the neighborhoods. Describe generally the types of neighborhoods that your product is located in. I have a fairly good idea of what that is, but let’s talk about the types of neighborhoods and the types of tenants that you’re going to find there. We’ll talk about more specifically the property types that you have available.
We typically only invest in AMV markets. Our rule of thumb is we don’t like to go below $800 a month in rent. That keeps us in better areas. We’ve been doing this for quite a while now and I’ve lived here my entire life. We know the market. We know which areas to invest in and which areas to avoid. We stay in those higher price point, but also higher tenant-based communities. By AMV market, for us that typically starts around $80,000 and goes up to about $160,000 and then the rent. We are still one of the only areas in the country that we can consistently get right around that 1%.
Those are very attractive. Prices range from $80,000 to $160,000. You’re getting roughly 1% per month in terms of rent. How are you finding the rental market? Are you finding that properties turnover and rent up fairly quickly? Do you have a tight rental market? Is it slow to lease it up? What’s going on?
There are plenty of properties available, but there are a couple of things that we do to try to make sure the investor gets the best deal. We try to fix the house better than our competitors. We also try to press the rent to the top of the range because that will make sure that you’re getting a better return. We’ve tried to position ourselves that we’re the premier company to rent from if you want a better house and you want good service and that word gets around. We’re getting up in the 500-house range under our management. It’s not like we’re sitting here with a few houses. We’ve got a presence here in Birmingham.
I know you do. It’s no surprise to me. If you don’t mind very briefly, I know we have to be careful what we say here. Some of our clients always ask about the demographics of the clientele. In other words, their customer is their tenant. Are we looking at blue-collar, white-collar, medium, low-income, good credit, moderate credit? How would you describe the demographics of our customers?
The lower in rent range you get, the more you’re going to get into the medium to low-income families. We do take Section 8. That means that the government’s going to subsidize some of that rent. They’re not going to subsidize rent when it gets over $1,000. When you get up in those eight neighborhoods, there’s no Section 8 going on there. Those are going to be more white-collar people, white-collar jobs. Those are what I call bedroom communities, where people commute to downtown or somewhere around Birmingham to go to work. There’s an area like Center Point, which is a large area on the Northside of Birmingham. There’s some Section 8 in there, but there’s a tremendous amount of working-class people in those neighborhoods. Honestly, not going under $800 a month in rent keeps you from being in those neighborhoods where people are sitting on the front porch all day.
Let’s talk about management services. Can you describe how that works? What’s available? Investors know that’s a critical piece. Your property manager is an absolutely key player on your entire investment team. Make us feel good about that.
We started our property management business and I do have a business partner, Jennifer Brown. We own those two businesses together, Alliance Wealth Builders and also the 1st Choice Properties. We started from scratch. We had twenty properties after our first year and now we’re getting North of 500. You can see that we’ve built that up over time and probably 95% of those properties that we manage are ones that we bought, fixed, rented and continued to manage. One of the reasons I believe that if you’re in this business doing what we do, you have to have your own property management. You’ve got to feel good that the people you’re buying from are going to take care of you after you buy.
My point here is it’s the same people. It’s Jennifer, I and our team. The other thing that happens is that there are property managers in town and there’s a number of them, but they’re not all investor-focused because of what we do, we have to focus on the investor and makes sure that our client, our investor is the first one we take care of. It’s always investor-first. We love our tenants, we love all that but the investors got to come first. That’s our focus and that’s why I believe we’ve been able to grow our business to that level.
I want to jump back for a moment because I don’t feel like we drilled into the one thing I wanted to ask you about, and that’s a description of the types of properties that we’re putting out. Maybe talk about bedroom, bath size, you can tie that into location if necessary. What’s the typical product type look like?
Our bread and butter property or our most common property is going to most likely be a Center Point property. That’s our largest and most popular rental market because it’s geographically very large. We have a lot of inventory there. Those properties are typically three-one because they were built in the ’50s, that’s what they built. Most of those properties are three-bedroom, one-bath, but we do get larger properties as well. Our most common size is about 1,000 to 1,200 square feet. They are usually ranch-style, three-beds, one-bath, den and kitchen. That’s pretty much it. Once you get up into a little bit higher price points, we do have a higher bed-bath ratio. You have properties in that market that were maybe built in the ’70s that are going to have three-bedroom, two-bath or we have a bit of three one-and-a-half.
Once you get into the more A properties, the more A neighborhoods, those are going to be newer, typically 1980s-plus. We have had a fair amount of post-2000 construction and this year we’ve sold new construction for the first time. We do have some newer very nice three-twos. Sometimes with the garage, but most of our properties do not have garage parking. It’s hot down here so we don’t have to worry about snow or anything like that. It’s not a big deal. Most of our properties have driveway parking or carport. We do get properties with a two-car garage at that higher price point. Those neighborhoods are typically not going to be that much bigger. The square footage is usually 1,000, maybe 1,500. We’ve had larger houses. We do get four bedrooms, multiple baths, but our most common property is going to be that three-one and then going up from there when you get reflective of price point.
Stephanie, is that new construction standing inventory or is it reservation? You have the lots and then you’re building it essentially pre-construction.
As of right now, we are working with a local builder. We are not doing it ourselves yet. We have been working with them on their inventory. We’re limited by what they have.
Is it still pre-construction with a reservation? Are they building essentially spec homes?
Essentially, it’s a spec home. It’s like they’re building a community and they choose to sell some of them as rental properties. It’s what it boils down to. Like a lot of communities, they don’t want it all to be rental. They want a mix of rental.
I haven’t seen a lot of that yet myself. That’s why I was asking the question. What’s exciting you the most right now about Birmingham as a city or market? As far as opportunities go there, what excites you about Birmingham? I know you’ve lived there your whole life, but what would you say?
The city has gone through this incredible revitalization in the last few years. I was doing some browsing and saw that we got plans approved for a new gigantic stadium. We are going to continue to grow. They’re doing everything they can to bring more industry and bring more exciting opportunities to the downtown area. We’re hosting the World Games in 2021, so that’s going to be cool. There’s a lot going on that’s bringing a lot of excitement to Birmingham. Every time I turn around, there’s some new restaurant or new bar or something cool opening up. It’s a very fun city that most people don’t realize. We’re a huge booming city. We have a lot going for us that is under known, people don’t know about how exciting it is and it continues to grow. I love it here. I’d love to live here my whole life more now than ever.
My perspective is a little bit different than that because I’ve lived in Columbus, Ohio. I’ve lived in Nashville, Tennessee and now here. My perspective coming here, in fact, was I dragged my wife here kicking and screaming because she did not want to move to Alabama because of the perception. I can tell you after being here since 2001 that in reality, what Stephanie said is very true. I could not move my wife out of here with dynamite now. She loves it here. There’s so much to do. We have all kinds of concerts. We have plays, we have an orchestra. All of the things that you would expect out of a much larger city, quite honestly. We used to think we were going to go to Atlanta to do those things, but we’ve now got it all here.
When we have our investor clients come down and tour the city and kick the dirt, meet with you guys, go and see the property, regardless of what their experience is, it’s always a positive experience and they come back pretty excited. the confidence level is high or higher than it was going in. The funny thing is a lot of times their intention is to maybe invest in one rental property and they come away with two or three contracts. That’s a great experience and a large part of it has to do with the team. The team of people that are there such as yourselves, but it’s definitely the market. It’s definitely the neighborhoods. It’s definitely the quality of the product and it’s most definitely the management. All those things come together synergistically to make a great investing experience and also a great investment. I love my relationship with you guys and we have happy investor clients and it’s helping us fulfill our mission of helping one million people create wealth and passive income with real estate. It all works together. Do you have anything else you’d like to share with our audience?
I’m going to say that in addition to the city growing, we still have that small-town feel. Birmingham was much unknown for the longest time. It feels like only in the last few years we’ve gotten any national attention. We’re still a hidden gem. We definitely have a smaller town feel. We have a lot of wonderful people down here and we would love to host your investors and show them for themselves.
That’s exactly what I was going to say. We love that the clients come down because we believe that relationship is one of the most important things. If you buy a house in Alabama and you live in California, Washington, Florida or wherever, you’ve got to trust the people that are going to take care of you day after day. The only way to do that is to get to know them. We love having people come to visit us. What I would say to your audience is don’t ever be afraid to ask to come down to visit because it’s the best thing for all of us, for you and for us when that happens.
I agree 100%, we encourage it. We can’t force it, but we know what happens when people do visit the local market and the team. It’s all great. Merv and Stephanie, thanks for joining me here. This has been great, good information. From a market perspective, it’s inspiring. For those reading, if you haven’t subscribed, please do so. Remember to download a free copy of our Ultimate Guide to Passive Real Estate Investing. Go to PassiveRealEstateInvesting.com. You can download that report. If you’re not working with one of our counselors, you should maybe connect with them for a free strategy session. Learn more about the Birmingham market and the opportunities that are there. The opportunities are great and we have a constant stream of inventory there. It’s not a market where you’re going to struggle to find inventory. That’s it for now. Thanks for reading. We will see you on our next episode.
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Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Identify great tenants using SmartMove. Visit www.TenantScreening.com and Save 25% using podcast code NORADA25.
Try LandGlide FREE for a week by visiting www.LandGlide.com/PassiveInvesting
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)