Target Metrics for MFH - New Investor in Indianapolis

Multi-Family and Apartment Investing
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Target Metrics for MFH - New Investor in Indianapolis

Anderson Smith
Member since 2021 · 4 posts · 1 vote

I'm just beginning to get involved in real estate investing in the Indianapolis, IN area and am struggling to evaluate properties that come onto the market. Through my research, I've pulled together a few rough target metrics but am struggling to find duplexes in decent neighborhoods (A- to C+) that meet these criteria and am unsure if I should:

  • a) make the targets less stringent
  • b) stick to these targets and just be more patient when looking with properties
  • c) look for cheaper properties in lower quality neighborhoods
  • d) wait it out and hope for a downturn in prices over the next year or so

The rough targets I've established are as follow (note: assuming a mortgage with 25% down)

  • Rent to price ratio: 1% target
  • Cap Rate: 8% target
  • Cash on Cash ROI: 10% target
  • Cash flow per door: $100 minimum

I would appreciate any feedback that anyone has on how realistic my target metrics are, especially for the area (Indianapolis) or any advice in general.

Additional details: I'm 26 and am just starting to look into real estate investing as something to do on the side; I currently have a steady career and plan to keep working as my primary means of employment for the foreseeable future. I purchased my first property in March 2020 and have a highly leveraged position on this property (I used a low downpayment loan options for an owner-occupied duplex as a first home). 

I currently have ~$80k for downpayment(s) on another rental property/properties and am looking for multi-family homes that require little to no work to get them rent-ready so that I can maximize the leverage of the cash I have.

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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
5y

@Anderson Smith A number of things come to mind from your post. First of all, you're not going to find MF properties in A class neighborhoods otherwise, they wouldn't be A class neighborhoods. Indianapolis is a good market for SFR but most of the duplexes are in old, rough neighborhoods that do not perform well. Other than lowering your A class criteria, I would not start lowering your criteria to make something fit. That's what leads to bad decisions and mistakes. You can always find something if you lower your criteria enough. You'll regret it though. Personally, I would re think whether you really want to invest in MF in Indy. I would also rethink your financial criteria. You can easily get 10% COC on a SFR with much less risk and $100/door is also too low.

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  • Justin Polston
    Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes
    5y

    @Anderson Smith if you go into the suburbs of Indianapolis, you'll find duplexes for $110k to 120k that rent for 1300+. We have a few turnkey as we speak that meet that criteria which seems to beat your criteria. These are B- C+ areas specifically in Shelbyville, so I can speak directly to that.

    Triplexes, you'll pay a little bit more but the rent revs increase, my experiences have been near $130-140k for $1800 in rent.

    Quads and multiplexes are all over the charts depending on how rough the conversion was. Last quad we got into was rougher, $2200 in rents and $165k sale. However, you get into an area with the appraiser/financing where the return on money is worth it but is the physical structure going to comp out? Probably not. So many of MFR deals are off market and appraisers aren't always educated/slick enough to figure it out if it is outside their vanilla consumer cookie cutter neighborhood appraisals.

    Again, most of these are Greenwood, Shelbyville, Franklin, Greenfield, Rushville.

    Good luck!

    1Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    5y

    @Anderson Smith A number of things come to mind from your post. First of all, you're not going to find MF properties in A class neighborhoods otherwise, they wouldn't be A class neighborhoods. Indianapolis is a good market for SFR but most of the duplexes are in old, rough neighborhoods that do not perform well. Other than lowering your A class criteria, I would not start lowering your criteria to make something fit. That's what leads to bad decisions and mistakes. You can always find something if you lower your criteria enough. You'll regret it though. Personally, I would re think whether you really want to invest in MF in Indy. I would also rethink your financial criteria. You can easily get 10% COC on a SFR with much less risk and $100/door is also too low.

    2Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @Anderson Smith, I view this two ways: if you start wavering on your criteria and then pick up a dog, you will be very upset that you ever wavered. If you hold to your criteria, you realistically may never find anything.  

    I do not know Indy, but am not far away in Cincinnati.  I sold a duplex in a class A neighborhood, but it was at a 0.72% rent to purchase price, and had some deferred maintenance.  The buyers are converting to single family to flip.

    Regarding the areas: cheaper property does not mean you will make more money.  It means you are taking on more risk.  That risk might pay off.  That risk might cost you a ton of money.  In the lower quality neighborhoods, you will likely see more vacancy, more damage to the Property with each turn, and in general a lower quality tenant.  That might not happen right off the bat, but it is a risk you are taking.  Technically, any tenant can do $20k of damage to your property and disappear, but I would venture to guess that lower quality tenants are more likely to do this than tenants that can afford the B+ and A areas.

    Regarding the financial metrics, I think you will have trouble finding any property that hits a 8% cap rate, 10% cash on cash, and $100/door if you are truly budgeting properly. If you self manage and self lease, these numbers are not that hard to hit, but then you are simply paying for your time. When you pull 10% management fee and anywhere from 3-8% leasing commissions off, reserve for all future Capex (remember even new construction will have Capex costs eventually if you hold long enough), as well as repairs and maintenance, insurance, taxes, interest and amortization on a loan, etc you end up with a very thin deal. You can reserve less, and maybe your bet will pay off, or you can account for appreciation in your numbers, but there's no guarantee that things won't come up or that the property will appreciate over time, especially given the 10 years of astronomical appreciation we have seen.

    0Reply
  • Jeffrey Donis
    Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
    5y
    Originally posted by @Evan Polaski:

    @Anderson Smith, I view this two ways: if you start wavering on your criteria and then pick up a dog, you will be very upset that you ever wavered. If you hold to your criteria, you realistically may never find anything.  

    I do not know Indy, but am not far away in Cincinnati.  I sold a duplex in a class A neighborhood, but it was at a 0.72% rent to purchase price, and had some deferred maintenance.  The buyers are converting to single family to flip.

    Regarding the areas: cheaper property does not mean you will make more money.  It means you are taking on more risk.  That risk might pay off.  That risk might cost you a ton of money.  In the lower quality neighborhoods, you will likely see more vacancy, more damage to the Property with each turn, and in general a lower quality tenant.  That might not happen right off the bat, but it is a risk you are taking.  Technically, any tenant can do $20k of damage to your property and disappear, but I would venture to guess that lower quality tenants are more likely to do this than tenants that can afford the B+ and A areas.

    Regarding the financial metrics, I think you will have trouble finding any property that hits a 8% cap rate, 10% cash on cash, and $100/door if you are truly budgeting properly. If you self manage and self lease, these numbers are not that hard to hit, but then you are simply paying for your time. When you pull 10% management fee and anywhere from 3-8% leasing commissions off, reserve for all future Capex (remember even new construction will have Capex costs eventually if you hold long enough), as well as repairs and maintenance, insurance, taxes, interest and amortization on a loan, etc you end up with a very thin deal. You can reserve less, and maybe your bet will pay off, or you can account for appreciation in your numbers, but there's no guarantee that things won't come up or that the property will appreciate over time, especially given the 10 years of astronomical appreciation we have seen.


    Great points!

    0Reply
  • Anderson Smith
    OP
    Member since 2021 · 4 posts · 1 vote
    5y
    Originally posted by @Justin Polston:

    @Anderson Smith if you go into the suburbs of Indianapolis, you'll find duplexes for $110k to 120k that rent for 1300+. We have a few turnkey as we speak that meet that criteria which seems to beat your criteria. These are B- C+ areas specifically in Shelbyville, so I can speak directly to that.

    Triplexes, you'll pay a little bit more but the rent revs increase, my experiences have been near $130-140k for $1800 in rent.

    Quads and multiplexes are all over the charts depending on how rough the conversion was. Last quad we got into was rougher, $2200 in rents and $165k sale. However, you get into an area with the appraiser/financing where the return on money is worth it but is the physical structure going to comp out? Probably not. So many of MFR deals are off market and appraisers aren't always educated/slick enough to figure it out if it is outside their vanilla consumer cookie cutter neighborhood appraisals.

    Again, most of these are Greenwood, Shelbyville, Franklin, Greenfield, Rushville.

    Good luck!

    Justin - thanks for the detailed response. I really hadn't considered many properties outside of the 465 loop since I'm much more familiar with the city itself than the surrounding suburbs. Have you found it difficult to place tenants in these areas, and how long do your tenants typically stay in a property?

    0Reply
  • Anderson Smith
    OP
    Member since 2021 · 4 posts · 1 vote
    5y
    Originally posted by @Mike D'Arrigo:

    @Anderson Smith A number of things come to mind from your post. First of all, you're not going to find MF properties in A class neighborhoods otherwise, they wouldn't be A class neighborhoods. Indianapolis is a good market for SFR but most of the duplexes are in old, rough neighborhoods that do not perform well. Other than lowering your A class criteria, I would not start lowering your criteria to make something fit. That's what leads to bad decisions and mistakes. You can always find something if you lower your criteria enough. You'll regret it though. Personally, I would re think whether you really want to invest in MF in Indy. I would also rethink your financial criteria. You can easily get 10% COC on a SFR with much less risk and $100/door is also too low.

     Thanks for the input Mike; I appreciate it. 

    I looked lightly into SFRs instead of duplexes, but (from a numbers perspective) the duplexes that I've evaluated always seem to outperform the SFRs in the areas that I'm looking at. Based on the feedback that I've gathered, it sounds like I should really be looking in B/C areas. When you've been able to find SFRs with 10%+ COC and over $100/door return have these been in B/C neighborhood and have they been on market or off market deals?

    Thanks again - Anderson

    0Reply
  • Anderson Smith
    OP
    Member since 2021 · 4 posts · 1 vote
    5y
    Originally posted by @Evan Polaski:

    @Anderson Smith, I view this two ways: if you start wavering on your criteria and then pick up a dog, you will be very upset that you ever wavered. If you hold to your criteria, you realistically may never find anything.  

    I do not know Indy, but am not far away in Cincinnati.  I sold a duplex in a class A neighborhood, but it was at a 0.72% rent to purchase price, and had some deferred maintenance.  The buyers are converting to single family to flip.

    Regarding the areas: cheaper property does not mean you will make more money.  It means you are taking on more risk.  That risk might pay off.  That risk might cost you a ton of money.  In the lower quality neighborhoods, you will likely see more vacancy, more damage to the Property with each turn, and in general a lower quality tenant.  That might not happen right off the bat, but it is a risk you are taking.  Technically, any tenant can do $20k of damage to your property and disappear, but I would venture to guess that lower quality tenants are more likely to do this than tenants that can afford the B+ and A areas.

    Regarding the financial metrics, I think you will have trouble finding any property that hits a 8% cap rate, 10% cash on cash, and $100/door if you are truly budgeting properly. If you self manage and self lease, these numbers are not that hard to hit, but then you are simply paying for your time. When you pull 10% management fee and anywhere from 3-8% leasing commissions off, reserve for all future Capex (remember even new construction will have Capex costs eventually if you hold long enough), as well as repairs and maintenance, insurance, taxes, interest and amortization on a loan, etc you end up with a very thin deal. You can reserve less, and maybe your bet will pay off, or you can account for appreciation in your numbers, but there's no guarantee that things won't come up or that the property will appreciate over time, especially given the 10 years of astronomical appreciation we have seen.

     Evan - your perspective on risk makes a lot of sense. I'm certainly not in the position to take on a high-risk investment since this property will make up half of my portfolio (I only have one property currently). I think I'll stick to B/C+ neighborhoods and plan to self-manage for now to try to increase cash flow a bit more (while still ensuring that numbers work well when accounting for property management).

    Regarding general metrics, I've tried to take a fairly conservative approach by accounting for mortgage, insurance, property management, leasing commission, vacancy, repairs/maintenance, and capex.

    0Reply
  • Justin Polston
    Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes
    5y

    @Anderson Smith hello! I'm not sure where the popular notion comes from that there is a lack of demand in the suburbs. The suburbs wind up being "bedroom communities".

    Really no less demand, and tenant quality can be higher than within the city.

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    5y

    @Anderson Smith be careful of numbers on paper. We've been doing this for 10 years in Indianapolis and I've yet to see a duplex out perform a SFR. As I said, the majority are in old, rough neighborhoods that don't attract quality tenants. The vacancy rates plus the turn over costs can be astronomical on this class of property. Go on Zillow and see where the listings for multi family properties are located. At least 50% are located in the Brookside, Grace Tuxedo Park, Tuxedo Park, Englewood and Arsenal Heights neighborhoods. These are all rough, high crime areas that I wouldn't recommend. There are no multi families currently listed in what I consider a B class neighborhood. You don't find many MF's in better class neighborhoods which is why they are better class neighborhoods. You don't find deals on the MLS. Everything we do is off market.

    1Reply
  • Spencer Gray
    Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
    5y

    For Indy I would either go SFR or invest in a large (100+ unit) MF as a passive investor (LP) in a syndication.

    You'll probably get a slightly better return the SFR route, but it may consume more time.

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