Indianapolis SFH Turnkey Analysis

36 Replies

Hello BP!

I'm currently evaluating a SFH 3/1.5 in Indianapolis. House is 1150 sqft. The home will be completely rehabbed (cabinets, bathrooms, flooring, roof, furnace, windows, etc.). Built in 1978. Zip 46221.

Any investors out there familiar with the market who can provide some feedback? This would be my first turnkey investment! I want to make sure I'm not overpaying for the risk/return that I'm going to be getting.

Price $87k
Downpayment $17,400
Closing $2000

Estimated rent $1000
Vacancy 10% $100
Maint 9% $90
PM 10% $100
Ins $50
Tax $145
Mort (30yr @5.25%) $385
CF: $130

Annual NOI: $1,568
COC: 8.1%

Are these assumptions conservative enough? I don't mind lower returns if they come with the corresponding lower risk. This would be my first turnkey and I'm just looking to take baby steps here.

Any feedback would be appreciated! Thank you!


seems like a good home as a primary residence. You need to also budget for capex which is where all your cash flow will disappear. Have a trusted home inspector inspect every aspect of the house and get his opinion on when major things may need replacement like boiler, ac, roof and if any issues with plumbing etc and make sure to get an estimate of replacement cost for each of the items if replaced with similar things. Make a 15 year projection of your capex and see if you still come out ahead. Vacancy rate is another killer. Make sure you call other property managers in that neighborhood and check what is the typical vacancy rate when someone moves out and check with your turnkey provider if they charge first month rent for replacing tenants.

@Jason Leong 46221 zip code covers a huge area and Indianapolis varies neighborhood to neighborhood and even street to street so you have to be really careful of the value. I have no way of knowing if $87K is a reasonable price. Your assumptions on operating expenses are pretty reasonable. In my opinion, $130 is too slim of a cash flow. The smallest unaccounted for expense, and there will be unaccounted for expenses and your profit is wiped out. Personally, I like to see $200 or more. I know Indianapolis very well. Feel free to reach out if you want more feedback.

Mike

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

@Jason Leong

another thing--keep in mind that when you do have a vacancy, you'll have a $1000 lease up fee from the PM to get it re rented and whatever turn over costs there are to spruce it up and get it rent ready again. One turn over in the year and you have a loss if you only have $1568 cash flow for the year.

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

Thanks for the replies!

@Raghuveer M. Thanks. What capex are you referring to that isn't already covered by the maintenance reserves? Appliances? Or are you just referring to maint expences early on when my reserves haven't been built up sufficiently yet? Also, the PM will charge 1st month's rent for tenant replacement. Is that standard in the industry?

@Mike D'Arrigo Thanks! I just listened to your podcast a few minutes ago where you had a guest discuss his turnkey experience. An excellent listen!

I was mainly talking about big ticket items that need replacement as home is built in 1975 and turnkey provider may not bother replacing something that could last 3-4 years more. I am also new to investing but on reading lot of threads it is always prudent to budget for some big ticket items within first 2-3 years while reserves are still being built.

A very thorough home inspection should reveal if any thing may be anticipated

I do think I'd have an independent home inspection done for precisely the reasons you suggest. And yes, any big ticket item (whether it be a maintenance issue or extended vacancy) could be damaging if they pop up early on before sufficient reserves are in place. I'd imagine it would be prudent to have additional personal back up reserves in place for worst-case scenario big-ticket items early on.

I've received confirmation from the seller that the roof will be replaced and that the home will be getting a "complete rehab", but since the work hasn't begun yet, I haven't gotten anything in writing.

@Jason Leong mentioned, are nieghborhoods can vary greatly block by block. I would suggest you get your PM's opionion of the area. Of course getting a solid PM is another challenge in it's self. I'd recommend interviewing several to find a match for you and your needs. PM if you would like a couple recommendations.

Also, feel free to send me the address & scope of work outlined for a quick evaluation and feedback.

@Jason L.

What are you hoping to accomplish with this investment? Monthly cash flow of $130 is basically break even in my experience. If you have trouble finding a renter, or have unexpected expenses, you may have to subsidize out of pocket.

Other questions:

How long will you hold your rental?

Is it rented now?

What is your expectation for appreciation?

Are you confident that your property manager is a good one?

I’ve purchased a few turnkeys and they’re my worst performers. I also first invested out of state and personally think that approach comes with higher risk. As an out of state investor, you can do everything remotely, but you’ll have to trust your local contacts and it takes time to find and develop those relationships.

Your rents and expenses look reasonable, but I don’t know the market in terms of rental demand, taxes, home price trends, etc.

There might be an upside to your deal, but I don’t see one based on your numbers, unless you’re getting the property below market. As a turn key, that seems unlikely.

If I assume a 10 year hold, with 1% conservative price appreciation, you could see an internal rate of return at 10-11%, but low monthly net cash flow is still a concern.

Good luck with your search and feel free to let me know if you want to talk about long-distance investing.

@Jason L.

Hi Jason,

IMO the property would need to be in a solid B+ or A class area to justify the price and rent.

I know the entry price for Midwest turn key properties is normally much less.

In saying that I do not know the Indianapolis market.

Thanks for reading and have a great day.

Medium list n sell logo designEngelo Rumora, List'n Sell Realty | [email protected] | 419 740 6999 | https://agentscomefirst.com/ | Podcast Guest on Show #89

@Jason Leong I own several homes in the Indy market. I dont know of many 3/1.5 that would command $1K rent. Most of the 3/1.5 homes are older since most recent construction would be 3/2. Even many of those may rent for $900-$950. If you give the address, people could comment more on the area.

Thanks @Shawn!

In this case, the PM and seller are part of the same turnkey company. Hard to get unbiased PM input there. I like your suggestion of seeking independent PM opinion...

@Jason L.

Since the seller and pm are the same. I would definitely call around to other property management companies and get their opinion.

Originally posted by @Susan Gillespie:
@Jason L.

What are you hoping to accomplish with this investment? Monthly cash flow of $130 is basically break even in my experience. If you have trouble finding a renter, or have unexpected expenses, you may have to subsidize out of pocket.

Other questions:

How long will you hold your rental?

Is it rented now?

What is your expectation for appreciation?

Are you confident that your property manager is a good one?

I’ve purchased a few turnkeys and they’re my worst performers. I also first invested out of state and personally think that approach comes with higher risk. As an out of state investor, you can do everything remotely, but you’ll have to trust your local contacts and it takes time to find and develop those relationships.

Your rents and expenses look reasonable, but I don’t know the market in terms of rental demand, taxes, home price trends, etc.

There might be an upside to your deal, but I don’t see one based on your numbers, unless you’re getting the property below market. As a turn key, that seems unlikely.

If I assume a 10 year hold, with 1% conservative price appreciation, you could see an internal rate of return at 10-11%, but low monthly net cash flow is still a concern.

Good luck with your search and feel free to let me know if you want to talk about long-distance investing.

I appreciate the thought-provoking questions @Susan Gillespie !

Mainly, I hope for this property to be cash flow positive. A modest monthly cash flow is fine as far as I'm concerned so long as my reserves are large enough to protect me against vacancy and maintenance costs. I'll settle for moderate cash flow as long as my risk exposure is in line with the modest expected return.

My hope is that this first property will help me save towards the next property, and so on. In this way, I hope to build a passive income portfolio of rental income properties over the next several years. So I do intend to hold each rental forever, unless appreciation accelerates to the point where selling becomes a no-brainer. I'm not counting on that to happen, however.

I've done minimal due diligence so far with the property manager that comes with this turnkey outfit. (I don't like the way that sentence just sounded!) I guess I'm relying on the testimonies of a few other investors I've spoken with, who've generally had good experiences.

I think the upside of this deal, if any, is that the property would come to me fully rehabbed (roof, furnace, windows, flooring, kitchen, bathroom, garage door, etc), thus requiring minimal maintenance for the first several years. Plus from what I can tell, the property is located in a relatively good area, at least as far as turnkey properties go (hence, the higher than normal price for a mid-west turnkey).

Your 10-year projection piques my curiosity. I'd be interested in learning more about the model you're using as well as the assumptions on which it is based.

Originally posted by @Mike D'Arrigo :
@Jason L

another thing--keep in mind that when you do have a vacancy, you'll have a $1000 lease up fee from the PM to get it re rented and whatever turn over costs there are to spruce it up and get it rent ready again. One turn over in the year and you have a loss if you only have $1568 cash flow for the year.

Good point Mike. That $130/month cash flow is looking pretty slim right now.

How might I set up my cash flow analysis to account for lease up fees and turn over costs? I would have thought that these costs would come out of my vacancy reserves. Or would I need to beef up that vacancy reserve beyond 10% to also absorb tenant turnover costs of the kind you mentioned?

Thanks, @Engelo Rumora

87K is higher then what I'd imagine paying to gain entry into the midwest market. I'm being told that I'm paying for the neighborhood plus the fact that the house is rehabbed from top to bottom (new roof, furnace, flooring, windows, kitchen, bathrooms, windows, garage door, etc.).

I'm not sure exactly the neighborhood level myself. I'm pretty sure it's not an A. Maybe a B-/C+?

Originally posted by @Anish Tolia :
@Jason L. I own several homes in the Indy market. I dont know of many 3/1.5 that would command $1K rent. Most of the 3/1.5 homes are older since most recent construction would be 3/2. Even many of those may rent for $900-$950. If you give the address, people could comment more on the area.

Thanks for the reply, Anish Tolia ! I agree, the 87k asking price does seem high to me. I'd include the address -- I do want the feedback -- but since I'm new here and unfamiliar with forum etiquette, I thought I'd play it safe and leave the address off this thread.

Thanks Elizabeth Colegrove Looks like I've got some work ahead of me!

Originally posted by @Jason Leong :
Thanks, @Engelo Rumora

87K is higher then what I'd imagine paying to gain entry into the midwest market. I'm being told that I'm paying for the neighborhood plus the fact that the house is rehabbed from top to bottom (new roof, furnace, flooring, windows, kitchen, bathrooms, windows, garage door, etc.).

I'm not sure exactly the neighborhood level myself. I'm pretty sure it's not an A. Maybe a B-/C+?

Thanks Jason,

As mentioned unless the property is in a very solid area I believe you can find a better deal.

The guys on the forum from Indy can easily tell you the class of area.

Just a few quick tips. If its a newer build home and majority of owners are actually owner occupiers and not investors it is most likely a minimum B class area.

Thanks for reading.

Medium list n sell logo designEngelo Rumora, List'n Sell Realty | [email protected] | 419 740 6999 | https://agentscomefirst.com/ | Podcast Guest on Show #89

Originally posted by @Jason Leong :
I'd include the address -- I do want the feedback -- but since I'm new here and unfamiliar with forum etiquette, I thought I'd play it safe and leave the address off this thread.

You could always just state the cross streets if you don't want to divulge the address -- example: 53rd and Main Street.

Dawn Anastasi, Core Properties, LLC | http://www.coreprop.biz | Podcast Guest on Show #29

I know that area very well. I just sold a turn-key less than a mile away. The price might be a little high but I don't think it's too far off. The home I sold is much newer (built in 2000) and rented for $1000. I think $900 is a more realistic rent for this home.

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

Originally posted by @Dawn Anastasi :
Originally posted by @Jason L.:
I'd include the address -- I do want the feedback -- but since I'm new here and unfamiliar with forum etiquette, I thought I'd play it safe and leave the address off this thread.

You could always just state the cross streets if you don't want to divulge the address -- example: 53rd and Main Street.

Good idea.

The home is near Winship Dr. & Furnas Ct.

@Jason L.,

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Raymond

Looks slim with the cash flow, but you've already been told that, but you did say the Maintenance should be low...that is if you get a great tenant.

However, the area is great. I'm not sure why the Turnkey company wouldn't sell it Retail to an Owner Occupant.

If you're willing to invest 10k to 20k in rehab you can find some great deals in Indianapolis.

Medium web logoBen G., Ben Buys Indy Houses | 317.455.6768 | http://www.benbuysindyhouses.com | Podcast Guest on Show #91