Lessons Learned

I have spent a lot of time thinking of what we did right and wrong in our accidental business. I have been doing this because, right now, I have a lot of time to think. There are many mistakes, that if I could take back, probably would still lead me to this moment in time. I am finally at peace that I have done all I could. Of course, if we hadn't invested in Alabama in the first place... No. If I had continued to invest in Arizona real estate, I believe I would have had the same outcome--but maybe with twice the work because I never would have been able to hire a property management company to run things.

That said, this post is not about what I did, or did not do, right or wrong. But what happened outside of my scope of influence. I realize I bought the houses, picked the tenants and managed everything. That's on me. And if I ever take on something like this again, I promise I have a better understanding of what to do. But before I invest again, perhaps I will get a time machine and see what the world looks like 10+ years from now.

We invested in homes in Alabama starting in 2003 for two reasons. First, there was a significant shortage of rental homes in the Birmingham area and an overflow of eligible renters. When I realized this, it blew me away. In fact, one time I advertised for renters in the Birmingham Sunday paper--before buying the house--and the Rajun Cajun called me at 8 a.m. on a Sunday morning and told me her voice mail box was full of expectant tenants and exactly what was my plan here? Because I had a Phoenix mentality, I figured I would get one or two potential renters by advertising in the paper, let them find the house I could buy and be on my merry way. I ended up buying eight homes within a six month period. All based on one Sunday ad.

The other reason we invested in Alabama was that we could buy a rental home in the Phoenix metro area at the time for $200,000 and rent it out for $800 a month. We bought our first home (the one in Leeds) for $75,000 and rented it out for $950. So, it made sense in 2004 to 2006 to sell my Arizona homes and invest in Birmingham. Because money was cheap to come by, we didn't pay cash for our homes, but financed them. That gave us the buying power to pick up a gazillion properties all at once. After all, the market was booming. Prices would go up, right?

It wasn't just that we had illusions of grandeur. The banks believed in us. The tenants believed in us. Investors--I mean big money investors with millions to spend--believed in us. Even the SEC attorneys I visited in early 2008 thought our business model was spot on. By then we had four years of success. Our financial statements rocked. Our bank accounts looked great.

However, there were a couple of items that changed the landscape in Birmingham. The first one was the wave of hurricanes that blew through the South (that's for you, Alec). There was Charlie. Wilma. Irving. Katrina. All of these brought in the displaced to Birmingham, a land-locked city. At the time, there was work in Birmingham. Savvy investors, realizing these folks were desperate for a place to live, were buying up homes everywhere, even in the questionable parts of town.

Also, around this time the economy was on a spiral into the abyss. People who had less capital than I started loosing their homes. And what did the investors do? They bought smart. The same home I may have paid $130,000 for was for sale on each side of my rental for $30,000. When the investors purchased these properties, they were asking $600/month for rent. I was asking--and needing--$1,000.

Then when the economy tanked, Birmingham was hit hard. One of the main employers in the area, the iron industry, closed down. This affected the Honda and Mercedes plant, which also drew in a lot of workers into the area. Government programs, such as Section 8 housing, came to the rescue. Most people who rent in Jefferson County right now are on Section 8 vouchers. It is the culture in Birmingham. Last I looked, Birmingham had more than double-digit unemployment, with a good portion of its citizens just living off the dole.

And because a good chunk of the population cannot find jobs (or want to find jobs), what happened to the tax base in Jefferson County? I am so glad you asked. Regular resources such as fire, schools, police and the like have been seriously hurt. Those who can are moving to the suburbs. I have homes in the suburbs too. Those who live in the suburbs weren't immune to the failing quality of life. They just cared more and want better schools for their kids. I had a long-time renter who had worked in management for the same grocery chain for 20+ years. He, his wife and two kids lived in one of our priciest homes. When the grocery chain closed down, he was out of work. They left to live with family, giving me an empty home that cost more than most of my other properties. The house is nice, but it was still hit by the down market.

And remember how all those investors were scooping up homes for the displaced in the questionable parts of town? They lost those properties too. And then those neighborhoods became ghettos. Here is a home currently for sale. It is priced high for this neighborhood. Last time I was in Birmingham, I saw multiple homes with plywood across where the windows used to be with spray painted "For Sale: $,2000 OBO As-Is"). No, that price is not missing a zero or two. Essentially, Birmingham is becoming the next Detroit. There are currently more than 2,000 homes slated for destruction because the city has condemned them. However, the city only levels about 10 houses a year. They don't have the resources.

Knowing what I know now, I would like to think I could have predicted better. But probably not.