Deal analysis on a turnkey property in Indianapolis IN

11 Replies

Purchase price: $152,000

20% down: $30,400

Closing costs: $2500

Monthly rent: $1295

Monthly cash flow: $250 (after mortgage payment, property taxes, insurance, 5% vacancy, 5% repairs and maintenance, 5% capEx)

Looks like a good deal to me. Since this is my first ever real estate investment, looking for another set of eyes to look at this, and an expert opinion.

@Kunal Lakhwani not sure how you came to $250 cash flow but am guessing you are overoptimistic on your expenses. Your mortgage alone is going to set you back around $550 - $600 per month. Property taxes will be a bit over 2% of assessed value so figure $260 per month. Property management will be around 10% or $130 per month. Insurance for a rental property will depend on the square footage and what you claim as a replacement value. Just guessing here but that could be $100 - $150 per month or more. Those alone put you at $1,040 - $1,140 per month before you add in repairs and maintenance, vacancy and capital expenditures. Depending on the age and shape of the house, those could add up significantly. Also, without knowing the details or location of your property, it's hard to give an opinion on rental values but, sellers will generally overstate those numbers and first time investors are often apt to envision higher rents than are realistic.

I agree with @Ric Ernst .  Looking at your spreadsheet, you said you accounted for cap ex but I don't see it on the sheet.  You have "repairs and maintenance" listed but that is separate from cap ex.  In addition, it is highly unlikely that 5% of gross rents budgeted will cover your repair expenses, and unless it's new construction definitely not cap ex. If this is an older property (built >40 years ago) you'd be surprised how quickly repairs add up and $65/month isn't going to get you very far to cover them. Other things to take into consideration are that PM companies will generally charge a leasing fee of 1/2 to 1 months rent and often charge some type of releasing fee annually as well which really eats away at profits.  In regards to property taxes, if this property was last owned by an owner occupant then you need to consider that the homestead exemption on the taxes will go away as a non-occupying owner and your tax rate will increase as a result so factor in a bump in property taxes.   Based on the info I'd be surprised if this property cash flowed much, if at all, over the next few years.  I own a property in Plainfield with a 105k loan and $1250 rent and it is basically breaking even now because of the repeated maintenance needs. 

Property taxes will be closer to $3,200 per year depending on the assessed value. The only way insurance will be that cheap is if you insure it with a $50,000 replacement value. $100,000 replacement value will probably be closer to $1,300 per year. You also need to consider if the property falls into a flood plain which will jack insurance up significantly. That's a broad zip code so hard to know exactly what you are looking at. But, in general, houses in this area are 80 - 120 years old and no matter how good of a job your TK seller did getting it into shape, you will have expensive repairs at some point. That said, could it be a good investment? Sure! Just go in clear eyed and know exactly what you are getting and don't plan on a windfall. If the house is in great shape, has a newer roof, newer windows, newer AC and water heater, updated electrical and the foundation is solid, you may get away with lower expenses to start. If you get lucky and have a great tenant that stays for a few years, you won't likely lose money and may even see some appreciation. However, if you have lose a tenant, not only will you lose a month's rent, you'll also be plowing $1,000 - $2,000 into it to repaint and clean it up to prep for the next tenant. There's risk in this game.

Looks like your maintenance costs listed as Annual Operating Expenses aren't used in your Total Operating Expenses calculation (and it should be a negative number when you do add it).  That would take $777 off your cash flow, in addition to the missing Cap Ex costs someone else already mentioned, which brings you down to $120/mo cash flow.  Also, talk to your insurance agent to get an accurate number there before committing to purchase if you haven't already.

Originally posted by @Ric Ernst :

Property taxes will be closer to $3,200 per year depending on the assessed value. The only way insurance will be that cheap is if you insure it with a $50,000 replacement value. $100,000 replacement value will probably be closer to $1,300 per year. You also need to consider if the property falls into a flood plain which will jack insurance up significantly. That's a broad zip code so hard to know exactly what you are looking at. But, in general, houses in this area are 80 - 120 years old and no matter how good of a job your TK seller did getting it into shape, you will have expensive repairs at some point. That said, could it be a good investment? Sure! Just go in clear eyed and know exactly what you are getting and don't plan on a windfall. If the house is in great shape, has a newer roof, newer windows, newer AC and water heater, updated electrical and the foundation is solid, you may get away with lower expenses to start. If you get lucky and have a great tenant that stays for a few years, you won't likely lose money and may even see some appreciation. However, if you have lose a tenant, not only will you lose a month's rent, you'll also be plowing $1,000 - $2,000 into it to repaint and clean it up to prep for the next tenant. There's risk in this game.

I wonder if perhaps he's thinking the stated property tax amount is an annual cost not realizing that Indiana is bi-annual? Makes a lot more sense if you assume his $1700 tax number he wrote is actually only for half the year and thus he's another $1700 short. That alone would kill this deal for me (at least if using the numbers he had stated on his spreadsheet, which I agree some of his other numbers also look low to boot).