The Birmingham Real Estate Investor Episode 19
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HIGHLIGHTS FROM THE PODCAST:
0:39 - The introduction to Jeff Shadrick 1:10 - Jeff's real estate background 6:07 - Tips to a successful partnership 8:25 - Learn more about turnkey properties 9:44 - Jeff hung up his suit & tie in 2010, learn major differences between then vs now in real estate 15:28 - Is there a strong cashflow capacity in the real estate market today? 18:20 - With the pandemic and having residents home more often, will this drive maintenance repairs? 20:39 - Best practices for renovation budgets & common mistakes you can avoid 26:41 - Tips for out-of-state investors when assessing potential investment properties 29:23 - Can the time on a rehab be determined to the exact day? FULL TRANSCRIPT OF THE PODCAST AUDIO:Jeff Shadrick: You don't know what you don't know. And so you can go into a house and you can look at the pictures all day long, but you guys know as well as I do that pictures only show you 50% of what's really there. They never fully represent the condition of the property. So, if you can't get boots on the ground, you're really just shooting in the dark. Spencer Sutton: Hi, everybody. Welcome back to another episode of the Birmingham Real Estate Investor podcast. I'm one of your hosts, Spencer Sutton. And as always, I have Matthew here with me. Welcome, Matthew. Matthew Whitaker: Hey, what's going on? Spencer Sutton: And we are really excited to have a guest with us, Jeff Shadrick. And he's been in the Birmingham market for quite some time. And he is the CEO of Build Pro, and he has extensive experience with rehabbing, remodeling and getting houses flipped and rented. And so, listen, Jeff, we're excited to have you here. Jeff Shadrick: Thanks, Spencer. I'm excited to be on as well. Looking forward to a great conversation. Matthew Whitaker: Jeff, I would love to know ... Tell us about your real estate career, just for the background of our audience. Give us an idea of when you got in, how it's morphed over the years and what y'all are doing today with Build Pro. Jeff Shadrick: Sure. In one shape or the other, I've always been in the construction and investment arena. After I left college, I went into the finance arena and spent about 18 years in the trust and wealth management area with some of the local and regional banks here in town. And so, as a side business while doing that, I was developing and building new construction and doing spec housing and then also just personally buying investment property to raise cashflow. Jeff Shadrick: So, in about 2010, late 2010, I decided to go full time into that. Hung up my suit and tie and left the corporate world and went full-time into investment. And a lot of that really was driven by the fact that during that time, post 2008 crash, there was really no new construction going on at the time. Banks had shut down most of their lending facilities for both the staff and the new construction. I started looking at different avenues to hit that entrepreneurial itch as well as develop what I thought was going to be a growing platform here in the Birmingham area, given the market that we have here. Jeff Shadrick: I started looking and really developed that there were some great opportunities in the buy and hold and the turnkey model for individuals because we were just buying stuff at such a deep discount during that timeframe, and we were getting really good rent to purchase ratios for our market. Birmingham, I think at the time was averaging somewhere around 60% of rent to own ratio. And so it just made a lot of sense, given the inventory that was available, and the market dynamics just made it really work well for us. Jeff Shadrick: And we started getting a lot of phone calls from people that were looking for cashflow opportunities as well. So, I put that model together to take advantage of what was available here in Birmingham. And it just took off. The demand was great. Our supply was great, and we were really getting some really good numbers for that. So, like I said, I hung up the banking hat and went into the investment world full speed, and that's where we've been ever since. Matthew Whitaker: It's kind of funny, if you're listening to this, Jeff said he hung up his suit and tie. He's wearing a t-shirt right now, a Build Pro t-shirt. A lot of people, they wear a suit and tie every day, I would imagine, and would love to hang all that up and wear a t-shirt every day. So, kudos to you for doing that. You keep saying "we", and just for transparency, you're actually a partner with Jonathan Mednick, which is one of our most listened to shows we've had. Matthew Whitaker: When you keep saying we do you mean you and Jonathan, and then describe your relationship with Jonathan and how all that worked? Jeff Shadrick: Yeah, absolutely. When we first went into the turnkey business, I had a few other partners, business strategic partnerships, with to get the business up and running. That relationship ended a few years back, and then Jonathan and I partnered. I approached him in 2015 with the current model that we have now. And it was really a good fit for us to build out REI Trader, given Jonathan's background with the brokerage and the real estate side, acquisitions and disposition, as well as my side on the finance and the construction side. Jeff Shadrick: It was really just a really good opportunity for us to join forces in the market. And I think Jonathan, at the time, was looking for some change as well. He was packing up. I think he was planning on moving to Nashville probably the week before we met. And after I laid the model out to him and he bought in on it- Matthew Whitaker: He had to unpack all his boxes, huh? Jeff Shadrick: That's right. He actually had already signed a lease in Nashville and everything and was like, "Hey, can I do this remotely?" And I was like, "Absolutely not. You have to be here doing this with me, so." Matthew Whitaker: That's great. Jeff Shadrick: I'd like to say that he thinks that that was a good decision for him to stay here in Birmingham and set some roots. And so when I say "we", what I reference to is Jonathan and I were working as partners on the investment company side through REI Trader. Matthew Whitaker: Talk about partnerships because I think a lot of times people get into business and some of the most successful businesses are good partnerships. And some of the biggest train wrecks are partnerships. Talk about what a successful partnership looks like, because we're trying to get advice to people that are getting into real estate investing. And what can you glean from your years of a partnership experience that would help them? Jeff Shadrick: Yeah. That's a great question. Partnerships can be fantastic just like you said, and they can also be a complete disaster. I think the most important factor in forming a good partnership is that your interests have to be aligned. The individual or individuals that you're going to work with, have to compliment and elevate each other's strong points. I think the dynamic between Jonathan and I, that has worked really well is from a co-founder perspective is that we learned really early on in the partnership that it would work best if we split the dynamic of the business up and to focus on what each others strengths were. Jeff Shadrick: And so Jonathan had a very good an extensive background in the brokerages and acquisitions and the real estate acquisition side. I had done that necessarily by default, when I was working on my own, it was not necessarily a side of the business that really got me out of bed each morning. It was just more of a necessity. The construction side was my forte. That was the side that really drove me and really inspired me. And so really when we sat down was we just laid out the dynamics and the parts of the business, and then we assigned those roles to each other. And then we decided from an early stage, too, to let each other really run those sides of the business. And, obviously we make decisions combined that drive the vision of the, and the future of the business, but the day-to-day aspects, we really let each other run their own pieces. Matthew Whitaker: And describe what your business is today. Describe kind of what turnkey is in your world and what exactly you all are doing today? Jeff Shadrick: Yeah. So turnkey for us today is really what most people consider or understand to be turnkey. We go in and we, we bought properties that, that have ... we like to stick with properties that have at least two exit strategies. We're big diversification proponents. When it comes to our investments, we look at them from a standpoint of, do they make sense for a buy and hold perspective? Do they hit our targets internally? And then also if we chose to sell that property out to our client base, we also make sure that it hits their targets as well. Jeff Shadrick: We always want to try to limit our risk exposure on each property that we buy. So having said that, we just really like to try to make sure we've got multiple exit strategies, whether that be, we can turn around and rent that and cashflow it, or we can sell it out to one of our other clients, or at the end stage, if we choose to liquidate that asset, there is a market for that asset to be able to sold on the open market. Spencer Sutton: Hey, Jeff, I know that you said you hung up your banking hat in 2010, and I would imagine it was quite a time to be buying properties in Birmingham back in 2010. I mean, it was incredible, we're 10, 11 years removed from that now. So what has changed in the Birmingham market and what are you seeing in the market today, as far as being able to buy houses, inventory demand, all of that? Jeff Shadrick: Yeah. So if you remember back to 2010, it was predominantly the wild, wild West of, of real estate investing. You know, you just had all of the factors aligned, the good, bad or ugly. The market was in the tank and it created some, some excellent opportunities to pick up basically as much inventory as you wanted to pick up. Everyday you could open up the internet, pick as many houses as you want and go out and buy. It was just really easy to acquire houses. Jeff Shadrick: The flip side of that was that you could acquire them very easily, but the market prices were depressed. So you had to really kind of work around that dynamic. So you had to be a little strategic on how you purchased and how you made that asset perform. But back then, you didn't have as much competition either. I'll use this term loosely, there weren't a lot of gurus out teaching the real estate business. There were probably a handful of guys that were doing it in the market, that they were well-known across the industry. Jeff Shadrick: And so what you had was you had a lot of folks that were kind of the mom and pop investor that were buying ones and twos, and things of that nature on an annual basis. And you didn't have the wall street funds that were in here buying 40 to a hundred properties a month. So that really didn't develop on until maybe 2013 is really when we all kind of started getting involved in the hey, we think we can make this a viable business and take it to main street with, through reeds or just in regular investment funds. Jeff Shadrick: And so during that time, it really was a lot easier to acquire properties. You didn't have to do any kind of marketing. It was just turn your computer on in the morning and pick how many houses you want to buy and go get it. So, the glory days of investing. And I would say that really over the progression of 2014, we started to see more and more people. The investor investment funds wall street money started to come in to the really high cashflow markets, such as Birmingham, some of the other markets around the country that made sense for buy and hold, and largely their play was to come in and initially buy for, typically, a six to seven year hold and then exit those properties for an appreciation game for markets. Jeff Shadrick: But what they realized was when they got into it, they were like, Hey, this is making cashflow, and we can turn around, and there's just a huge demand for this. So they turned around and decided that, okay, well, maybe we don't need to exit out of these. We'll just keep them and put them into long-term portfolios. Jeff Shadrick: So you started to see groups come in and start to kind of draw down inventory. And what that really caused was ... On the positive side, it caused the market prices to increase because the demand was increasing at such a high rate. You saw prices go up, which helped the individual investor. But it also hurt us because we were now competing against the 8,000 pound gorilla in the room that just had more buying power, could afford to pay higher premiums on properties. And we're okay with settling with, a four to 6% return ROI on their money versus what traditionally the individual wants to try to get in that 10 to 15% range at the time. Jeff Shadrick: So it was kind of an interesting dynamic until wall street kind of figured out that model. And so, as we've progressed, I think through 2014, through current day, we've seen increased demand for the cash flow. It's really become more mainstream fixing and flipping and buying for cash flow has been really escalated through the media, through the market channels, through the investment and mastermind groups around the country. Jeff Shadrick: And so I think where we're at now, inventory is really at an all time low, networking and marketing is just become a really key factor for developing leads and trying to find those hidden gems to meet your investment criteria right now. Matthew Whitaker: Talk a little bit about What you've seen in home prices from let's call it the bottom of 2010 to 2020. Do you have an idea as a percentage, how much home prices are up, how much appreciations happened now, over that time? Jeff Shadrick: I don't have the exact for our market. I would tell you that it's probably in the 25 to 30% increase range over the last four years we've seen. I would say the most of that increase has come 2016 to 2020 has really been the driving factor of the increase in pricing. Matthew Whitaker: And then, what about rents? Have rents stayed in your mind up with that appreciation so that you can still cashflow? Jeff Shadrick: Rents have stayed consistently ... in the Birmingham market, rents have just kind of stayed consistent. We haven't seen a downturn in rents. We've seen progressive movement up in the rent amounts. I will say that post pandemic, one positive that I think we've seen out of the pandemic is the rents have increased considerably over the last 12 months. We're averaging anywhere from 150 to upwards of $200 a month, more on the single family rents right now, per property, just as a basis on a standard three one, 18 months ago we were top of the market somewhere around 825 to 850 on a three bedroom, one bath. It's not unheard of right now for us to get 900 to 950 on a three bedroom, one bath now. Jeff Shadrick: So, we've definitely seen the increase from there. I think more people are choosing to rent than purchase right now. I think what's driving the retail market right now, high demand and low inventory. And so you've got bidding Wars that are happening. I think that's really been the driving factor. It's not economic expansion that's driving that, unfortunately. I think it's just more of the factor that you've got people who are choosing to become renters now. And they're also moving out of the cities. Jeff Shadrick: I think people are choosing to get out of the congested city areas and they're moving into the rural areas. And so that creates opportunity for the single family buyers. And it also is driving some appreciation in the rents as well. Matthew Whitaker: Yeah, we're seeing that, too. Occupancy has never been higher. I mean, it's just crazy how fast homes are renting and agree that people are also kind of getting out of the cities. One of the, I think is driving it in addition to kind of pandemic don't want to be on top of each other, is the idea that a lot of people are working from home now, so they need more space. You can no longer be in an apartment and have an extra bedroom. That's your office. You want more space and single family has benefited. It is pandemic related, but just not fear of getting sick, but just need more space because you're home a lot more. Jeff Shadrick: Yeah, I agree. A hundred percent. Matthew Whitaker: It's kind of interesting. I just thought of this question. So I'm curious how you would answer it. If people are at home a lot more, I wonder if that's going to increase the repairs and maintenance on these houses that we're managing. What are your thoughts on that? Jeff Shadrick: We just had this conversation the other day, Jonathan and I. We have definitely seen an increase in the number of maintenance calls over the last 12 months. And it's purely related to what you just said. People are home a lot more, they're utilizing the facilities more. So your plumbing clogs, your HVAC calls, those things, you know, we've had, we've had a cold winter here relative to what we are normally used to. So we're getting more and more of those types of calls. I think those would probably be our top two would just be the plumbing and the HVAC stuff. But yeah, a hundred percent agree that maintenance costs have definitely been an increase over the last 12 months for us. Jeff Shadrick: So it's definitely something you have to take into consideration as we continue in this pattern where people ... and I don't see it going away anytime soon, people are choosing to work home or companies that are choosing to work more remotely as opposed to the traditional office environment. So I think that that's definitely something that you've got to factor in. I know a lot of investors that we dealt with used to never factor in an adequate amount of maintenance coverage when they were running their numbers on properties. Jeff Shadrick: They just, hey, on paper this thing is showing me a 20% return, and all I'm taking into consideration is mortgage and taxes and insurance. We'll worry about the maintenance stuff later. Well, what we've seen is our vacancy rates have gone down, but the maintenance has picked up. So, I recommend anybody that's reviewing properties now, you might want to step that, that maintenance allowance up just a few points just to make sure you're covered. Matthew Whitaker: Yeah. Good. That's great advice. So I want to get into your sweet spot. I want to talk about renovation budgets on rehabs I'd love to know, you've probably done this enough that you can walk in on a napkin and get it pretty darn close, but I'd love to just know some best practices when figuring a renovation budget. And then I'd also love to know what are some commonly missed items that people need to think about when they're putting together a renovation budget? Jeff Shadrick: Yeah, well, you're exactly right. I think I've probably been in just about three quarters of every home in the Birmingham market at this point. So I do have it down to where I can probably walk in to a property, I can tell you by looking at photos of the property that our acquisitions folks send over to us, I can probably tell within probably a three to $4,000 range of what that rehab is going to be. And that just purely comes from, being out in it every day for the last 10 years, and really seeing all the aspects, understanding the normal problems, given your local market, what you see related to plumbing and electrical, and HVAC, and the home styles, things of that nature. Jeff Shadrick: So you can kind of come up with some generalities after you see enough of them, but I would just say that it is very important to document and do thorough inspections on your properties. Every house is different. You can look at a thousand houses and you're going to get a thousand of them. They're going to have, you know, one or two things that are going to be different from every house. There's just no two ways around it. They're each individual monsters, and you have to kind of look at them that way. Jeff Shadrick: So you really create a documented process. We have a scope of work that is A to Z. I know a lot of folks like to go in and just go, Oh, well, it needs paint, it needs some flooring, and we'll just pretty up the cabinets and things of that nature. We made a decision, and I'm way too OCD to let a house go. If I see a piece of chipping paint it'll bug me, I'll lose sleep at night because I'll know that it's there. So we go in and just really do every house from the perspective of, if we had to sell this house on the open market, we want to have the best product that we possibly can to get the highest evaluation that we can. Jeff Shadrick: We hate call backs. We hate maintenance requests. So when we go in and start doing a renovation on a property, our goal is to make that house as maintenance free as we possibly can. A lot of folks want to ... they'll kind of look at it and say, "Well, I don't have any plumbing problems right now. I can kind of get away with not changing out those drain pipes from cast iron to PVC, or the water lines from galvanize to TOPEX, or fixing those copper lines, or I don't necessarily need to change out those faucets right now. Jeff Shadrick: Unfortunately what you're doing is, you're setting yourself for down the road issues, and you're going to have constant problems out of that. And it's so much harder to fix those things. And it's more costly to fix those things once you've got a live body living in that property. And so you're better off going ahead at the front end and doing those things thoroughly on the front to save yourself a lot of headache down the road. Being a turnkey provider, which we know we sell some of those properties to investors across the US. Jeff Shadrick: The last thing I want to do, is to get phone calls after we've sold a house to an owner, we've told them this property has been fully rehabbed. And the next thing we know within the first couple of weeks, they're getting phone calls saying that, you know, the plumbing's backed up or, you know, having problems with the electrical or something of that nature. That's just reputation-ally and just running business the right way is the mindset that you've got to have. And that's really a key focus for us on our side. Matthew Whitaker: And the second part of that is, what do you think people missed when they're renovating a house? What does, what do you think is the most commonly easily missed thing that people need to watch out for? Jeff Shadrick: Plumbing and electrical are probably the number one and number two. Most folks don't realize that new property, I mean, you're living in a newer environment. So houses that were built in the fifties and sixties from an electrical standpoint, aren't set up to carry a lot of the newer appliances and the newer systems that people want to install, the new microwave's and the refrigerators and things of that nature. They pull more energy, or require more wattage. So if you've got a house that is, under 125 amp service, you're just setting yourself up for problems potentially down the road, if you don't go in there and address those. Jeff Shadrick: Non grounded systems are a lot of things where people will go in and say, well, I can, I can shave a few thousand dollars off my budget on the front end, by not going and doing what's necessary to put grounded systems in on the electrical. But what then you're going to do is your residents are going to keep calling you, telling you that, "I can't use these two prong plugs. I got to do adapters, my appliances and my fixtures won't work in these plugs." Things of that nature. And there's the safety factor as well, just from a non grounded standpoint. Jeff Shadrick: So we see that a lot. It's something that we focus on for our rentals. And we suggest that folks that hire us to do their rent ready stuff, to at least focus on those things. If you have galvanized plumbing in the house, odds are that those plumbing pipes are probably, if not already, corroded and are clogged up. The first thing that's going to happen when you move a resident in there is they're going to call you and tell you that their plumbing lines are backing up. Jeff Shadrick: We have a lot of clay pipe, terracotta pipe in our area, and so, those things corrode. Roots get into those, and if you don't address those things on the front end, they're going to come back and cause you problems on the backside. Spencer Sutton: They actually end up costing more money because you get a disgruntled resident, who may not stay. They may not stay another year. We have a lot of listeners who are out of state investors. We have a lot of clients that are out of state investors. And so I'm just thinking, your advice was to make sure they do a thorough inspection of the property. For these people who are living out of state and maybe they are on a wholesaler's list or something, and they're getting these deals that are wholesale deals, they come through. What would your advice be to them? They don't have boots on the ground. They're not here. To make sure that they're making the best decision, what kind of advice would you give them? When they're looking at properties? Jeff Shadrick: If you're out of state or you're not able to be here and physically walk that property, find somebody in that local market. This is not a plug for us. We offer that service to out-of-state investors. So we have an inspection service that they can use us for to go out and actually do a thorough ... it can be as just going out and doing an onsite inspection for them, and it can be as in-depth as actually fully pulling through and actually creating a scope of work for them. Jeff Shadrick: So I would suggest finding somebody that can go through, that has the knowledge to be able to go through, and actually look at and uncover the unseens. You don't know what you don't know. And so you can go into a house and you can look at the pictures all day long, but you guys know as well as I do that pictures only show you 50% of what's really there. They never fully represent the condition of the property. So if you can't get boots on the ground you're really just kind of shooting in the dark. Jeff Shadrick: Because what you're not going to see, is you're not going to see those plumbing issues. You're not going to see those electrical issues. You're not going to see those foundation issues that are hidden that need to be addressed. You're not going to be able to see any of those attic, or things that are just behind the walls. Those are the things that you really need to make sure you're going to see. Because I can tell you, if you're ever going to sell that property, the inspector that comes through there is going to find those items and it's going to hurt you more. Matthew Whitaker: When you budget for a time on a rehab, what's your kind of rule of thumb, how long our rehab should take? Jeff Shadrick: We typically look at it from a standpoint of the, the value of the rehab. So, anything that we do, if it's 20,000 or less than we should be lock stock and barrel, in and out of there within 30 to 45 days. That's kind of a loaded question, and I'm glad you asked that because, what people don't ... if you're working on one property, then that timeframe can be totally different than if you're working on 10 properties. We get that question from folks all the time and it really has to do with what's your available capacity, and what are your availability of resources? Jeff Shadrick: And so there's different models. There's the model of I'm going to GC that project myself, and I'm going to hire my own subcontractors and manage the plumbers, and electricians, and the labor guys, and the HVAC guys. And that's going to take a totally different timeframe than if you hire somebody that has all of those people on staff, and offers that product for you as a turnkey service. So you have to kind of look at it from a standpoint of what are your resources, what is your skillset and how involved in the process do you want to be? Jeff Shadrick: So to answer your question, I guess, in a high level fashion, it's really driven, you can, from a 50,000 standpoint view, if you're doing less than $20,000 worth of work, you should be in and out of there within 30 days or less. If you're spending more than that, say you're doing a higher end rehab for a decent flip, you're going to budget somewhere between 45 to 60 days. Matthew Whitaker: Awesome. Well, Jeff, this has been great. I sure appreciate your time. And I learned a bunch. I've got even some follow-up questions that I want to ask you some time. So at some point we might have to do this again, but thank you so much for, for connecting with us. And I know everybody learned a bunch Jeff Shadrick: Well, I hope so. This is it's been fun and I certainly appreciate the time and looking forward to continue the conversations. Spencer Sutton: All right, everybody. We just want to remind you if you haven't already done, so subscribe to this podcast and share it with your friends. And if you hadn't left us a review, go ahead and leave us a review. As long as you found some value in this podcast. All right, we will catch you on the next episode.
