Turnkey in Indianapolis through RTR case study

[Doris Jin Huang]

Wanted to share a case study of our recent purchase in Indianapolis through Rent to Retirement, hoping this is helpful for those who are looking into this company or turnkey investment in general. The property is a single family home located in a B/C neighborhood. 

Purchase price: $142,000 

Conventional loan 20% down

Rent: $1225

Property tax: $1076

Insurance: $520

Management fee: 8%

With the assumption of 6% repair and maintenance, 5% vacancy, 6% capex, it will net us $268/month, reflecting a 9.8% cash on cash ROI.

We closed it over a month ago and just received our first month rent. The process was smooth and all the parties involved (RTR, local turnkey provider, lender, PM company) are pretty responsive. The numbers provided by RTR are mostly accurate (the only thing is that their property tax number $829 was for owner-occupied which became $1076 since it's now a rental). So far there hasn't been any maintenance issues but of course too early to say. Overall it's a positive experience.

We have a few rentals in NY where we live but now shifting our focus out of state for obvious reasons. Our plan is to purchase more properties in Indianapolis, turnkey or fixer upper. Look forward to meeting more people in this market. Any comments, questions, suggestions welcomed.

[Zach Lemaster]

@Doris Jin Huang

Thanks for sharing your experience!  We enjoyed working with you on this IN property, and look forward to hopefully working with you on many future investments.  We are available whenever you would like to have a follow up strategy discussion about creative ways to scale your portfolio, diversify into more markets, llc/tax topics, etc.  We are here when you need us, and have many resources at your disposal!

To your success!

[Melissa Perez]

Hi Doris!

Wondering where you came up with your numbers for Maintenance/CapEx and Vacancy?

[Justin H.]

Great to hear you are having a great experience! Curiois to hear what property management company are you all using and what area of Indianapolis is the rental in?

[Kevin Ivey]

Glad to hear will file this away.  We are doing rehab and resell in Settle area and finding a "rental" property is almost impossible that makes sense for cashflow.  We are looking into a few company's to do an out of state turn key in the next year! thanks!

[Zach Lemaster]

@Doris Jin Huang

Thanks for sharing your experience!  We enjoyed working with you on this IN property, and look forward to hopefully working with you on many future investments.  We are available whenever you would like to have a follow up strategy discussion about creative ways to scale your portfolio, diversify into more markets, llc/tax topics, etc.  We are here when you need us, and have many resources at your disposal!

To your success!

[Doris Jin Huang]

@Melissa Perez Glad you asked. I forgot to mention RTR uses 3% vacancy, 3% r&m, and no capex in their models, under the assumption that their newly renovated properties have minimum repair needs. I used more conservative numbers based on what we learned from our NY rentals and from other investors. What numbers do you use?

[Doris Jin Huang]

@Justin H. This property is in Devington, managed by Pillario Property Management. Are you from Indy?

[Doris Jin Huang]

@Kevin Ivey We are on the same boat. Our properties in NY hardly generate any meaningful cash flow but appreciation has been good in the past years, so overall we consider them good investments. However an issue for us is the big loss on paper will affect our ability to borrow conventionally. By contrast, properties like this one in Indy will lower our DTI, theoretically allowing the banks to lend us more.

[Doris Jin Huang]

@Zach Lemaster Appreciate it Zach!

[Melissa Perez]

@Doris Jin Huang Yes, I noticed the NO Capex calculation myself. Although we are supposed to get a brand new furnace and water heater based on the inspection so im glad those are two less things to worry about we will have to account for the roof and any other items that may pop up over time. I plan on using a smaller 4% for CapEx, 4% for R%M and 3% for Vacancy for now. Our market is a huge rental area and we will also have significant reserves in place already so we will be covered. I just want to see how things go at first then adjust as needed going forward.

[Melissa Perez]

@Doris Jin Huang Whereabout in Queens are you in? Are you a live-in landlord there? I agree it is tough to decently cashflow in NYC. Our duplex cashflows a small amount but considering how high the rents are you would think it would be so much more.

[Steve K.]

Maintenance/repairs and capex only $1,764/yr? 5% vacancy= only a few weeks in lost rent without anything for make-ready costs. One turnover, plumbing leak... even a simple water heater, will set you back years. Hope for appreciation and rent increases. 

[Zach Lemaster]

Avg occupancy time 3.5 years to 4yrs, avg leasing time 18-21 days = less than a 3% vacancy.  Brand new builds that have a one year comprehensive warranty (maintenance free), 10yrs structural warranty, etc., or full renovation to ensure cap ex have at least 7 to 10 years of life remaining.  Avg holding time for typical investor 3.5 to 5 years will likely not experience cap ex in either of these scenarios.  Always good to run your own numbers, but also know why you are inputing the numbers you are.  We have a long history of rental performance across many locations to evaluate what numbers should be a starting point to evaluate.

[Doris Jin Huang]

@Zach Lemaster Avg holding time of 3.5-5 years is much shorter than I thought - what does your typical investor do after holding a property for 5 years?

[Doris Jin Huang]

Wanted to share an update on this one while doing our year end reviews. We are 9 months into the ownership of this property. The positive is the PM company is pretty good at communication (maintenance requests, late payments etc). However repair and maintenance averaged 12.9%, much higher than my projection (6%) or RTR's projection (3%).

The tenant has been paying but late most of the months, at one point they were behind by over a month but was able to catch up with government/church assistance. Their lease will be up in about two months and the PM suggests either a non-renewal or switching to a month-to-month lease. On one hand we prefer not to renew the lease as we feel the reliance on assistance programs is not sustainable, but on the other hand the cost of the turn (vacancy, new tenant placement fee, cleaning etc.) will be pretty significant, especially considering their occupancy is less than one year. What will everyone do in this situation?

[Redrev Romano]

Doris, thank you for sharing your experience. It is unfortunate to hear that this has not been an ideal tenant. We do our best to set investors up for success. The biggest variable with owning a rental property is often the tenant. We understand that the tenant has caused more than expected maintenance, and has been late on some rents. It is good to hear that the tenant has been made whole on rents that were late so far. We would like the opportunity to see if we can assist in covering some of the maintenance beyond what is expected even though you have owned this property for quite some time. We are also here to assist in discussing the best path forward with this tenant regarding lease renewal or not. Likely a higher rent would be achieved if you did not renew, and the goal would be to have a tenant that does not cause additional maintenance by taking care of the property & paying rent on time. We have reached out to you to schedule a time to discuss further.

[Doris Jin Huang]

@Redrev Romano Thanks for the message Redrev. Zach had reached out and offered to help with half of the maintenance and to discuss with the PM and see what can be done about the turnover. It seems this property significantly underperforms your average, and I appreciate your involvement in resolving issues. Hopefully the turn won't cost us too much and we can get off to a fresh start in the spring. 

[Cullen W Jones]

Hello! I love seeing statistics on peoples' ROI and hearing the story behind it! I'm a realtor here in Indianapolis. I'm here to provide service however possible based on your needs.

[Evan Polaski]

@Doris Jin Huang, given what you have since experienced, would you purchase another turnkey?

As Redrev noted, tenant risk is a very real risk, as is Capex risk. I know many investors have had success with turnkey rentals, but there are also horror stories (not with RTR, but in general). In my experience, I never had luck with tenants my managers put into properties. I self-managed when I first started buying rentals, went to management for about 18 months, then took them back.

In my experience, it is the softer items when meeting tenants that I believe have given me good tenants: do they arrive on time for appt?  Are they responsive in communications before and during application process?  Do they look me in the eye when we are talking?  What questions are they asking when touring a property?  This is in addition to the typical clean background checks, no evictions, 3x take home income vs rent.

[David Song]

@Doris Jin Huang

Capex and repair are dependent on the size of the house, and it's construction material and longevity, but not dependent on rental income. Using a percentage of rental to estimate capex and repair is wrong. A new roof will cost over 10 k easily. A new exterior paint of a SFR will cost over 5k. Roof has 30 year life, paint has shorter life.

Let's say two identical SFR, one in Tier 1 city rented for $3600, whereas another in Tier 3 city rented for $1200. Their capex and repair are similar, and their percentage of rent is much higher for Tier 3 cities.

Unless there is significant appreciation, this house will not cash flow much, if at all.

If I were you, I will stick with New York City and it’s suburbs. 

[Doris Jin Huang]

@Evan Polaski I agree meeting tenants in person is a very effective step during the screening process. Here in New York we also self-manage and know our tenants on a personal level. But with our out-of-state properties we wanted to be more hands-off. Still learning how to best work with PMs. When you had your PM, were you able to review the qualifications of the tenants they picked?

Would I purchase another turnkey? In fact we are working with RTR right now on a new construction home in Cape Coral, Florida. We just bought a piece of land, currently in the process of closing a construciton-to-perm loan. Land cost plus building price came out to be around $284K (water front lot), appraisal just came back at $350K. Closing cost and interest payments during construction will be around $12K. It'll take about a year to build the house but if everything goes well we'll have $50K+ immediate equity. There are good turnkey products out there, but definitely requires lots of research and choose the market/company carefully. 

[Doris Jin Huang]

@David Song Your point is well taken. Estimating Capex is more straightforward but how would you project repair costs?

Curious why you'd stick with NYC? Based on my calculation appreciation in some boroughs in NYC averaged about 5-6% per year, but the numbers in Indy and Cape Coral are both north of 10%. Plus the tenant-friendly legal environment, I thought ditching NY was a pretty great idea?

[David Song]

Originally posted by @Doris Jin Huang:

@David Song Your point is well taken. Estimating Capex is more straightforward but how would you project repair costs?

Curious why you'd stick with NYC? Based on my calculation appreciation in some boroughs in NYC averaged about 5-6% per year, but the numbers in Indy and Cape Coral are both north of 10%. Plus the tenant-friendly legal environment, I thought ditching NY was a pretty great idea?

New York City and it's suburbs are prime REI location, similar to Bay Area.

It is the center of east coast jobs, and economic engine.

Also, it is where you live.
investing OOS requires large capital, big investment and frequent trips. For property under 500k, it’s too small for all the trouble. 
About 8 years ago, I thought about doing OOS SFR and asked my realtor about his opinion. He said no one from Bay Area who did OOS came back happy.

I took his advice and simply just do local deals. Looking back, I made the right choice.

BTW: where did you the 10% appreciation for those location? We need to look at 10 years or longer.

[Doris Jin Huang]

@David Song@David Song This is how I get those appreciation numbers - for each market I took a relatively large sample of properties that changed hands at least twice in the past 20 years. I excluded those that were obviously a flip, and also excluded the transactions happened around the 2008 crash. Then I calculated the internal rate of return for each property and averaged them out. As this is a somewhat labor intensive process, I only focused on the areas/neighborhoods we are interested in buying, so my numbers are not accurate measurements for the entire city (say Indy or CC). However they are largely consistent with our first hand experience making offers in these places in the past year.

You are absolutely right about the challenges of OOS investing. We might still consider flipping in NYC but we are very determined to stay away from long-term rentals, having gone through a grossly unfair court process :(

[David Song]

@Doris Jin Huang 10% appreciation over 20 years will be huge appreciation, about 670%. Is that calculation correct?

New York City, being the largest city, also enjoys a geological restriction. Limited land, and difficult to access. The longer the commute, the cheaper the house.

Similarly SF Bay Area also is a peninsula surrounded by water and bridges.

Where to invest is up to each investor own judgement. I invest in Bay Area with commute time around 1 hr. That will reduce initial purchase price and a little higher rental return initially. Also, those areas are usually on the path of development.

As far as tenant eviction, you just have to learn tenant management as an investor. CA is very tenant friendly but we had no issue evicting if needed. OOS tenant issues will be more headaches, if you are relying on someone else to deal with it. Conflict of interest, the PM benefits from issues, turnovers, repairs. Unless the PM is a saint, otherwise, majority will try to take advantage of OOS investors. All you can do is pray.

[Account Closed]

@Doris Jin Huang would love to chat offline!