All Forum Posts by: Ross Denman

@Josh Levan Every market is a little bit different and has different market dynamics. NW Indiana has influences from the Chicago market. South Bend has a lot of influence from Notre Dame. Fort Wayne and Indianapolis are larger cities with their own internal dynamics as well. All of these areas are great, but will need to have local expertise in each market. While you can get broad information on the state and the local markets, there are providers and professionals who will have an accurate pulse on the local market that will provide even greater detail.

My personal opinion is that a good property manager will have the best insight.

Local investors are great, but if they are trying to sell you something, the picture that they paint will likely be skewed in their favor.

Realtors can be great, but unless they are investors or work exclusively with investors, most of their expertise will be in higher priced areas that won't generate any cash flow for investors.

Insurance agents and lenders can be a good source as they look at data to better understand risks and liabilities.

Property managers tend to be in the trenches and they have financial incentives that are going to be in greater alignment with your goals. Vacant properties or properties that are in difficult neighborhoods with difficult tenant demographics are not where most property managers care to be. Our jobs are easiest when we are dealing with well maintained homes, in decent areas, that draw in prospective tenants with means and options. Lower end products tend to take much more effort to manage and pay much less.

Some great resources that I frequently use and share with my clients are:

Trulia's crime maps: Trulia’s Crime Map - https://www.trulia.com/real_estate/Indianapolis-Indiana/crime/ This is the easiest way to general data regarding crime in an area or for the overall city. Great tool. (sorry, this is the Indianapolis link.)

City-Data.com, Point2Homes.com, and Niche.com are great places to find demographic and other information about various neighborhoods and areas you may be looking. Things to look at are household incomes, education levels, quality of schools, ratio of rentals to home owners, etc. If the average household income in an area is $25k and most residents do not have any college education, don't expect to ever have a $1,000 rental there. Most residents in this area will be paycheck to paycheck at best... and more likely, hand to mouth. These are tough areas to rent homes as residents are more likely to have trouble paying rent, are not the best at keeping homes clean and repaired, and likely to engage or be victims of criminal activity. It's also difficult to keep decent tenants in tough neighborhoods. All of these things will interrupt the performance of our rental property, increase expenses, reduce cash flow, and impact overall ROI.

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $18,000
Cash invested: $92,000

This was a highly distressed home with foundation problems, previous fire damage, bullet holes, etc. This is the biggest rehab that I have personally done to date.

What made you interested in investing in this type of deal?

This was originally going to be a retail flip in one of my favorite neighborhoods in Indianapolis. This was by far the largest rehab that I have personally invested in. Unfortunately, I ended up over budget and decided to refinance and hold it as a rental property.

How did you find this deal and how did you negotiate it?

This deal came to me from a wholesaler. I did negotiate a price reduction due to the condition of the property, but it was pretty cheap from the beginning.

How did you finance this deal?

This was originally an all cash deal, but as the budget got tighter, I did have to take a private money loan from another investor in my network to ensure that I was capitalized properly.

How did you add value to the deal?

Addressed the foundation issues.
Gutted the home to the studs, removed some walls to rearrange the flow of the home and give it an open-concept feel.
New subflooring, sheet rock, windows, doors, fixtures, etc.
Upgraded the electrical to a 200 amp service panel and removed the gas utility from the home.
Installed new all-electric HVAC including the first central air installation
Installed an electric insert in the fireplace
New kitchen and bathroom
Moved washer/dryer hook-up to main floor

What was the outcome?

Currently renting to a great tenant who is renewing his lease next month.

Lessons learned? Challenges?

Get good bids on foundation work
Ensure that you have enough capital to complete the project

There are multiple things to consider. I do a lot of consulting with people looking to invest in Indianapolis and you have to start by identifying your goals and resources. There are also lots of different types of investing available in this market and several others. Indianapolis is one of the better cash flow markets in the country. Couple that with the investor friendly laws, it makes Indy a great place for rental property investing.

We also have several gentrifying areas where out of state investors are doing retail flips for a good ROI. I would recommend building a network and team instead of trying to go it alone. I just got a message from a CA investor who is doing 2 flips in the Bates-Hendricks area (I believe that BildWise did the contracting work) but he sent his realtor out there to find out that the back door had been kicked in, appliances stolen, and granite counter tops cracked. Unfortunately, other than working with BildWise, he didn't really work with any other local professionals and didn't have proper guidance on how to adequately secure a property. Now that the contractors are not there several times weekly, it's more vulnerable to theft and vandalism. Always find a local to help guide you through your first few projects.

Currently, I'm in the middle of a joint-venture with a Canadian client who was falling behind because of poorly managed contractors. He finally reached out to me and I helped him find another GC and I'm helping him to manage the contractors as well as market the home for sell. Networking and team building with experience providers and professionals will help save you a lot of headaches and probably a lot of money as well.

Some BP members started a niche facebook group a few months back that has really been helpful to out of state investors. I highly recommend checking it out.
https://www.facebook.com/groups/260862967817696/

Best of Luck! Feel free to post questions, connect, and reach out here as BP is the best free REI community on the net. Lots of great people here and they will help to reduce your learning curve, build your team, and give you the best opportunity for success.

@Ken Yeung I like Irvington and the rentals that we have out there are pretty decent. Irvington is established and predictable for the most part. Be sure to understand whether or not your home is under the Historic Society as they limit the types of materials you can use for rehabs.

We try to stay out of room shares, although there is a new company in town preaching it.

There are several complexities that have to be addressed and I haven't seen a business model that properly manages all of the liabilities that come along with this type of investing.

First, you're targeting young professionals, as mentioned above, which likely means more wear and tear, occasional partying, higher tenant turnover.

Secondly, common area damages are a concern. How are damages determined and how are tenants to be held accountable.

Depending on how your structuring your lease terms,  you are likely running 4 different leases that end at different times. In Indiana, we are not allowed to break security deposit until the lease is completed. So if one tenant moves out and there is damage to a common area, who pays and how/when do you access the money.

Other questions are:

How utilities are paid?

Who takes care of lawn/snow maintenance?

Is there parking and storage? Are they private and secure or are they shared?

I'm not saying that there's not a way to do it safely, but you will certainly want to think it out thoroughly and have an attorney help draw up the lease.

@Hendra Lim I don't know much about Jacksonville, but if you are interested in Indy, there is a Facebook group that is just for Indianapolis Out of State Investors. Great place to learn and network

https://www.facebook.com/groups/260862967817696

There are plenty of good markets out there with different types of opportunities. I think that the most important thing is to build a good team in one of your chosen markets (acquisitions, financing, project management, property management, etc.) Different cities/markets have different strategies that work differently as well, so ensure that you are listening to your team and understanding some of the nuances of that market. An Israeli associate of mine was telling me how they flopped a big development project in Birmingham because the design they chose was hip/trendy in Israel, but unappealing in Alabama and it was never as profitable as it was planned to be. I recommend visiting your target markets, meeting prospective members of your team, driving (and walking) neighborhoods and homes, and get a feeling for the city and its people.

I have discussed this many times with clients and prospective clients. Having the right team is more important than having the best market. I feel that your property manager and/or an investor oriented realtor are going to be the core of your team. If you are struggling to find decent inventory, then you need to tweak your team or look to see if there are better opportunities in other markets. I live, work, and invest in the Indianapolis area and I occasionally look into markets that may have different opportunities than we have here... and I've already started building relationships in many of those markets in case I do decide to take advantage of an opportunity. There are deals out there, both on market and off-market. I have clients who purchased 9 units last month, 2 units this month, we already have 2 set to close in Feb and still looking for more potential deals. I have a feeling that you need to add some more people to your network. If you haven't checked, there are a few Indianapolis dedicated Facebook Groups that will help you meet other investors and local providers and professionals.

We don't cover Lafayette, but the fees that you mentioned are pretty similar to what we see here in Indianapolis. I don't know of anyone offering a 12% PM fee, seems a little high, but the other fees seem to be pretty standard. We got rid of start-up fees a couple of years ago and have no monthly marketing or banking fees, but we do have a higher tenant placement fee which covers a lot of those costs.

Truth is this. The difference in costs from one PM to another is probably $200-$500 annually. The cost of poor property management is thousands. Bad tenants, unplanned and/or extended vacancies, high evictions, lots of turnover, unknown lease compliance issues or damages going on at homes, etc. I get phone calls every month from investors who are self-managing, using a private individual, or who are failing with another property manager.

Last year we turned around a portfolio of 12 homes. When we received the portfolio... 10 homes were tenanted, but all about $100 under market. The homes had been poorly maintained, took forever to rent (so they kept lowering the price,) and the tenanted units had several ongoing problems (mold, roof problems, mechanical issues, bad windows, etc.)

It took us about 6 months, but we were able to get most of the homes up to market rents, almost all vacancies were leased in less than 2 weeks since we took over, some tenants renewed their leases when they had planned on moving because things are now getting addressed.

I just spoke with this owner last week and it appears that they are going to have nearly an $11k gross increase from their portfolio over previous years, but they have spent about $35k this year to correct some problems that had been previously ignored. The previous PM was a realtor who managed about 50 properties, but did so on his own while running a brokerage. He never really had time to dedicate to property management (which can be very time consuming.) Brokering deals simply pays better and takes less time and effort.

A property management company usually has the ability to reduce material and labor costs for maintenance. For instance, we have the ability to source some materials from distributors instead of big box stores. Our HVAC company gives us below retail labor rates and does not charge us for after hour or weekend rates. I just had an emergency furnace failure late last Saturday. The original quote to fix the furnace was $850. After our account rep was finished with it, our price was just over $650 (about a 20% discount for an after hour emergency.)

We try to staff about 50 to 1, but many PM's staff about 100 to 1. You can leverage technology to assist with things, but 100 to 1 companies tend to have the worst communications problems. If you consider the business numbers... Our average rental as of yesterday was $932.73... We'll call it $930. This means $93/mo on average for property management fees.

At 50 to 1... that's $4,650/mo per employee. This doesn't include office lease, insurance, technology costs, licensing costs, etc. Our average employee makes between $40k-$55k annually, so there's very little profit at staffing at 50 to 1. We certainly couldn't do it if our average rental was $700/mo. The only way that we can stay in business and offer the level of service that we do is to ensure that we are managing stable, income producing homes in above median neighborhoods and rent ranges.

Personally, my most successful investors have managed properties at some point. I think that it's an invaluable experience that will probably make you appreciate your PM's more and understand that you can make a lot more money investing than spending your time on property management.

I do find it crazy that everyone calls this a difficult time... Isn't it just back to normal. Just because a rare opportunity existed 8 years ago, doesn't mean that normal should be difficult. There are always deals to be made, you just have to be prepared to move when they come and have a toolbox full of options.

Here's my framework for pre-screening deals:

• Buy with at least a 10% discount rate. i.e. $120k homes at $105k or $100k homes at $90k. This is including rehab budget, holding, and closing costs. This will ensure instant equity and higher ROI.
• When purchasing with conventional (20% down or more) financing, look for homes that hit a price ratio around 80 X 1 gross month's rent. This can also be figured as 1.25% of the full cost of the investment (acquisition, closing, rehab, and holding costs.)
• Run several models and if you need more cash flow, than either pay down points or put a larger down payment down. 

Here's where the real wealth building comes in to play. In a typical, established, Indianapolis neighborhood (C+ to B Class)... we see predictable appreciation of 2.5%-3.5% annually. With a 25% down payment, you are leveraged 4 to 1. This means that the COC ROI on appreciation will be 10%-14% (2.5% or 3.5% X 4.) This doesn't even include cash flow or principal paydown.

The clients that I have who are investing like this are doubling their initial cash investments every 4-6 years. This is because of the internal nestegg that builds faster and better than the cash flow it produces. Unfortunately, equity is not cash, but you can leverage the equity in various ways to increase the size or quality of your portfolio and/or reposition it for higher cash flow.

There are many models for real estate investments and various positions that they can be done from, but I find that IRR and understanding the equity growth are not looked at deeply enough by many newer investors. I've seen too many investors build portfolios over 10-15 years that started with $50-$100k and now have $1M+ net portfolio value. Much of it has to do with leveraging and compounding the growth of all facets of your investment properties. While I don't recommend investing on speculative numbers, the icing on the cake is often times better than the cake.

My last private money loan was from another investor in my network. I filled out a Deed of Trust for the property (essentially a lien against the property) and the terms were 5 points up front and 1% interest only payments monthly for up to 12 months with the balance due in 12 months (no prepayment penalty.) 

He would have loaned me 100% of the funds needed for the project, but to keep my holding costs down, I put $40k of my own money in and borrowed $50k for the remainder. I rehabbed, rented, and refinanced the property allowing me to pay off of the loan. The home now has about $25k equity and I should have an average cash flow of about $1,500/year. I kept about $12k in the deal to ensure cash flow and I have another $8k set aside for reserves. I have been able to recycle about $25k of my money out for the next deal while I allow this nest egg to build over time.