All Forum Posts by: Richie Thomas

Hey y'all, I'm yet another out-of-state investor looking for his first deal in Indianapolis.  I hope to set myself apart from the pack by a) building a local team of experts who I trust, and b) analyzing a lot of local properties in different neighborhoods in order to educate myself before pulling the trigger.  That 2nd point is what this post is about.

As an educational exercise, I've analyzed this MLS property as a BRRRR deal, even though I'm not considering it as a purchase because it doesn't meet my cash-on-cash % criteria. I'm much more interested in getting my erroneous assumptions corrected, and learning where I'm missing the mark. I know that Indianapolis can change character quite quickly from one block to the next, but I've heard that north of 38th St. is less risky than many other parts of town.

Here's the link to the research I've done so far- PDF copies of the BiggerPockets calculations, the MLS listing on Realtor.com, and the Rentometer estimates. In addition, since I know that Rentometer's estimates can be optimistic sometimes, I found a few 2-bedroom for-rent listings on Craigslist. These properties look nearby and their condition is similar to what I am aiming for post-rehab.

I see the property has been on the market for almost 6 months now. Even with the relatively low COC %, I feel like there's still something I'm missing about why this property hasn't sold. It's not far from Butler University, and Ravenswood appears to be a decent neighborhood.  The local K-12 school ratings aren't uniformly amazing, but they're not terrible either. I feel like, at the very least, a college student or someone would have picked this up as a house hack by now. It does appear to be in a flood zone (next to the river)- could that be it? The listing says tenant pays both electric and gas (which I know are the two big local utility expenses), so that seems like a selling point. The property was built in 1975, so there may well be some deferred maintenance going on. But the water heater looks to be in good shape and the roof doesn't look terrible. Maybe it's just the smell from all those cats in the MLS photo that are driving people away haha.

Anyway, curious to hear what y'all think.  Thanks for helping me understand your market!

Just bought my ticket and am looking forward to meeting everyone. I'm an experienced Airbnb house hacker, aspiring investor, and current software engineer in San Francisco. I'm actively looking for my first out-of-state, multi-family BRRRR deal, and am leaning heavily toward Indianapolis as a farm area. I am open to learning about other farm areas which are investor-friendly (i.e. has landlord-friendly tenant laws, low property taxes, etc.) for my next property.

Feel to reach out and say hi!

@Shaunte' Spangler-Drayton, if your gut is telling you this deal is too good to be true, you should trust it.  The deal description says "Seller is willing to do the work if included in the price."  I'd be wary of any seller who makes such a declaration.  Every single time, I'd ask them to credit me on the purchase price instead.  Repairs cost more than preventative maintenance.  If they didn't care to maintain the property when they were the owner, why would they care to spend even more to repair it, if they're the seller?

Verify all the things. Never ever *ever* trust the numbers given to you by a seller.  Either make that verification part of your contingencies, or build a margin of safety into your maximum offer price, so your deal is profitable even in the worst-case scenario.

Where does "$15,000 to make it rent-ready" or "$400 a unit Full capacity overhead costs" come from?  I know your rehab budget is a full 50% of the purchase price, but it's still only $5,000 more than that $15k quoted rehab price.  And there are so many ways it could grow beyond that amount.  What if bad weather hits, delaying the construction time and increasing your holding costs?  What if thieves rip out the drywall, in order to sell the underlying copper piping?  What if the pipes freeze before they get a chance to do so?  What if your permitting process reveals improvement work a prior owner had done, which wasn't up-to-code?  I'm guessing the figures above are seller assertions, in which case you need to verify them with disinterested 3rd parties, such as a trusted appraiser or contractor.  Again, add them to your running list of contingencies or ask the seller to deduct them from the initial purchase price.

I see you've budgeted 2% for property management.  I'd budget at least 10%.  Closer to 12% in a D-class area.  In that kind of neighborhood, you want someone in place for whom this is not their first rodeo, and who will hold tenants to the agreements they signed in their leases, without exceptions.  Not for the purpose of extracting every last dime from tenants.  This is about avoiding liability.  Making exceptions for one tenant can put them (and you) in a situation where you are legally obligated to make exceptions for all other tenants as well.  Otherwise, you open yourselves up to accusations of selective enforcement (and therefore, housing discrimination).  From a tenant's perspective, why would you let that other tenant (but not me) get away with rule XYZ, unless you are discriminating against me?  

Another equally important reason to get a property manager- you want this property to be making money for you while you sleep, right?  If you're managing the property yourself, you haven't bought an investment- you've bought a job.

Not sure how old the property is, but unless it's on the new side, you should be budgeting 15-20% combined every month for CapEx + Repairs. That's in addition to you initial repair budget. If I were bidding on this deal, I'd budget closer to 20%.

Call it a hunch.

You won't necessarily be paying this out to repair contractors every month, but you will need to set it aside for the day when a major expense does occur, such as an urgent roof / foundation / HVAC repair.  When that day comes (and it will come eventually), you'll be glad you've prepared for it.

Vacancy is the silent killer of multi-family investments.  One month of vacancy can cost you 8-9% of your revenue (which translates to 2 or 3 months of profit).  So that's another expense you want to set money aside for.  I'd say 10% at least, but talk to a local property manager about what's realistic, given the turnover in your area.

Find out whether your local county has an online Property Tax portal, and whether you can plug in the property's address to get historical tax data to use for your assumptions.  Find out from local landlords whether tenants or owners are expected to pay some or all of the utilities, and how much those tend to cost in summer and winter months.  Find out whether there are seasonal expenses such as snow removal or landscaping maintenance.  Find out from the seller what repairs have been made to the property and when they were performed, then find out from county records office when the last construction permits were issued for this property, and what the permits were for.  If those records don't line up with each other, press for more info or just walk away from the deal.

In a way, it's good that the property is completely vacant.  That means you won't need to add a contingency to the sale about the current tenants' credit history, criminal background, income verification, etc.  Furthermore, you'll be selecting the tenants, which means you can be as stringent as you like on the criteria.  I've heard of landlords who require a walk-through of the tenants' current living situation, before approving their application.  If that's not your style, have them meet you at the property and ask to inspect their car.  That can sometimes be a good proxy for judging how they'll take care of your rental.

If this is your first deal, the allure of sub-$50k properties can be attractive. But you may be better off going with a B-class or above area at first, if only to get your bearings before attempting more challenging deals.

I know I'm a bit more paranoid / guarded / etc. than you may expect. That's because avoiding a losing deal is more important than finding a winning deal. If you lose out on a winning deal, there's always another one down the road. But if you invest in a losing deal which costs you 40% of your capital, your next deal must have a 66% ROI simply for you to get back to break-even.

@Mark Futalan congrats on the purchase and successful conversion.

How did the recording process go? Was it as simple as having an inspector visit the property and verify it was up-to-code? Do you remember how long the process took, and / or how much it cost? I’m considering this same strategy and your experience and opinions would be useful here.

@Mark Futalan I know your comment is 10 months old, but hopefully this will be useful if others have the same question:

I'm not sure I fully understood your question, but it sounded like the listing agent claimed that the room is currently a den, but in the past it was a 3rd bedroom.  If I were trying to verify that information, I'd call the county and ask what the requirements would be for making the opposite conversion (i.e. converting a den (or any other room) into an official bedroom, and have it recorded as such).  Then I'd ask for the section of the building code which documents those requirements.

If the "den" already meets all the qualifications for a bedroom, you should have no trouble converting it back to its original state.  If there are qualifications that it doesn't currently meet (i.e. minimum ceiling height or room dimensions, total minimum square footage, presence of heating and cooling elements, # of methods if ingress/egress, size of the window, etc.), then you'd have a problem on your hands if you purchased the property as a 3BR.

@Dallas Campochiaro, looks like your expenses are light.  The property is almost 17 years old, which is old enough for some components to start showing their age.  For example, according to this link, HVAC systems suffering from deferred maintenance can expire in 15-18 years.  

Also, your vacancy budget is quite low. One month of vacancy can eat up almost more than 8% of your total *income* (which means much more than 8% of your total profit). CapEx, Repairs, and Vacancy are not expenses you'll incur on a monthly basis. They're expenses you set aside money for on a monthly basis. Because when they hit, they hit hard.

Property management is another expense that I notice is absent.  Even if you're planning on managing the property yourself, you'll want to budget for this expense in case you get burnt out and need to extricate yourself from those duties.  If your goal is to make money while you sleep, you need to get comfortable with finding and hiring honest and talented professionals to take the reins, so you can focus on the next deal, and the next one after that.  Otherwise, you aren't investing- you're buying a job.

Closing costs are only $2,000?  Is that common in your area?  I've been budgeting 6% of the purchase price (3% for listing agent and 3% for buyer's agent), because I know in some areas it's common for one side or the other to pay both agents' fees.

I would definitely confirm with an FHA lender that you'll qualify for a loan at 3.7% with no points. From the research I've done, it seems there are usually fees and points associated with these kinds of loans, such as a mortgage insurance premium (MIP) of around 1.5-2% of the purchase price, due at closing.  That's in addition to the myriad other fees (title search, recording, appraisal, attorneys, inspections, etc.) that you'll encounter over the course of the transaction.

There are other questions I have about this deal, but the above are the biggest questions.  It looks like insurance budget are twice what it should be, and property taxes are half what they should be.  Gauging the accuracy of your income numbers is another great reason to talk to a property manager, but if you're planning on living in one of the units then your income estimates line up with what I'm seeing on Rentometer:

One other risk to call out is the after-repair value.  Gauging the comps in this area seems really tricky, since recent purchase prices are few and far between:

@Vivian Doyle you wouldn't have to pay PMI if you're putting down 20%, but that's not what kills this deal. It's simply that the margins between PITI and income are too thin. It's great that you were conservative with the estimates for CapEx and property management. But unless the property is brand-new or went through a top-to-bottom rehab in the very recent past, the assumptions of 5% for vacancy and repairs are simply too optimistic. To steal from @Andrew Angerer in this post:

There's a few other things which handicap this deal, such as the property taxes, but the real killer is the lean spread between cash in and cash out.  But that doesn't mean this deal is completely unworkable.  What does the market for short-term / Airbnb rentals look like in your area, in terms of both demand and regulations?  Is the area popular with tourists?  What is the path of progress in the vicinity, and does the property stand to gain from that progress?  Is the property close to any major hospitals, universities, etc. which could make it attractive to traveling professionals such as nurses or academics?  How long has the property been on the market?  What does a walk-through tell you about the condition of components such as the roof or foundation, and could those be used to work the seller down on their price?  What does your research on the owners, their mortgage, and their general financial situation tell you about their level of motivation to sell?  Depending on the answers to these and other questions, could this be re-analyzed as a flip deal?

> were not truly comps as these duplex are still for sale to this day

@Michael Henry, it sounds like you've already learned to get your comps from "Sold" properties (as opposed to "For Sale" properties).  Nothing will take the place of a licensed agent's comparative market analysis, but as a first step I like to use Realtor.com's "Sold" page.

I also highly recommend frequenting this very forum and using the BP calculators to analyze the deals that other investors post here.  If you do one per day, within a few weeks you'll start to develop a sixth sense for whether the numbers will work before you even plug them into a spreadsheet.  For instance, I don't even need to plug the provided numbers into a calculator to know that a $280,000 purchase price with a $1000 rental income won't pencil out, even if the other unit is for you to live rent-free.  That's especially true with a 5% down-payment.

Ideally, the house hack should be cash-flow positive even with you living in it.  That way, you're protected in the event of a market downturn.  In this particular example, even if you were renting out both units, I still can't make the math work out in your favor.  Here's a report I did showing both units rented at the higher rate you mentioned ($1,300 per unit).  It's still a negative carry of $315 per month, or -8% cash-on-cash return.

The post-rehab photos look nice.  Do you have a sense of how the property now looks and feels in comparison to the other neighborhood properties?  If it's nicer, is it significantly nicer?  The danger in using your own personal standards when rehabbing is that you may have higher standards than others in the neighborhood, and you'll end up spending money on the rehab that doesn't pay for itself.

One thing I've heard around the campfire is that appraisers have different methodologies in different farm areas.  Some use quantitative measures like the property's square footage as the main factor in their decision, while others use more qualitative measures such as age of the roof, condition of the foundation, etc.  If you're committed to this farm area, talk to local appraisers and see which method predominates, and base your rehab strategy on what you learn from those conversations.  It may turn out that you're better off buying an oversized 2-bedroom and converting it to a 3-bedroom, converting a Florida room into a 3rd-bedroom, or some similar strategy.

Gamel, @Abel Curiel gave you some good advice.  If college is in your plans, one option is saving for a down-payment now, so you can house-hack and pick your own roommates, while others are living on-campus.  Also, consider choosing a college which specializes in real-estate finance.  If college is not in your plans, consider a trade school which will teach you about rehabbing, inspections, and/or appraisal.  Or look for a job as an assistant at a high-performing brokerage in your area.

No matter what, get a head-start on your credit, so that you can negotiate better terms when it comes time to leverage OPM (other people's money) to do your first deal.  Establish a record of paying your bills on time, saving a significant portion of any income you make (aka paying yourself first), and generally living below your means.

Thanks @Chris Clothier.  It says a lot about Mid South when even similar businesses in the same market have only good things to say about them. As I mentioned to David, the $150 in miscellaneous expenses was for snow removal, yard maintenance, and an extra safety cushion. The fact that it ended up being 19% of expenses was partially down to my ignorance on how much those things cost, coupled with the relatively low monthly rent.

That said, I'm trying to learn how to walk that line between being overly optimistic and overly conservative, and so far I've tried to err on the side of caution. It's important to me that I avoid the burnout that a huge mistake on my first deal might cause me, but I know there are dangers to being overly cautious as well. Thanks for lending your opinion.