The access we now have to information is simply incredible. The rate at which normal everyday people are learning how to invest in real estate is increasing every day. You cannot underestimate the force that is behind biggerpockets and what we have here as a community. 99% of the time this is a positive thing. However, I feel sometimes we lose perspective when we hear about an individual doing deals in a certain part of the country and assume that we can accomplish those same results. This post is guided toward the newer investor who is possibly looking to get into the Indianapolis area market.
I want to preface this by saying that not all investors are created equal. Some have a higher threshold when dealing with issues than others. Some want a turnkey experience but don't want to pay turnkey prices. This plays heavily into the results one can expect from buying a rental property here. It all depends on your risk tolerance. I have had several investors contact me recently declaring they would like an 8% to 10%. While that is possible it really depends on the price point you want to target. I can show you a few ways you can achieve this but only one will be a clear winner.
1. You can look at homes priced around $75,000 to $100,000 which will rent for around $900/mo to possibly $1100/mo.
2. This is what I call the sweet spot and it is from 125k up to about 160k. Rents here are around $1350/mo.
3. You can choose to go for a median-priced rental around northern Indianapolis, Fishers, Carmel, Noblesville, Zionsville for around 150k to 250k. On the higher end, you are looking at rents around $1900/mo. For the lower end of the spectrum, you are at around $1350/mo in rents. Neither example is going to get you rich overnight. But cap-ex and vacancy rates are going to be very low in general.
Getting to the heart of the matter:
Option #1- Why spend more if you don't have to? You can choose option #2 because that is where you might find the higher cash on cash return. Numbers on a spreadsheet only tell you part of the picture. You have to really analyze a deal over a few years to really know how it is going to go. In option #2 you can sometimes find deals for next to nothing and fix them up to rent. However, what you don't understand is that at this price point you are going to be dealing with a certain demographic that does not do well in the long term. Feeling all warm and fuzzy because the numbers on your spreadsheet look good so it obviously must be a good deal right? Wrong, those are the investors who are typically selling their houses after a few years of realizing this is not what they had in mind. With this group, you will typically be dealing with a home that is older. More than likely it was built prior to 1978 which means you more than likely have lead-based paint. It also means all of your mechanicals are either on their way out or have to be replaced. This is a lower class of tenant which means the lower you go the more possibility for issues in my experience.
Option #2 - This is a great place to start for an experienced investor. The type of investor who has a system in place. Who knows the area, knows they have a team of contractors at any given moment to help with a project. One that is well funded and has plenty of cash reserves on hand. At this price point, you are looking at a class of tenant that can actually afford to buy a home but they choose to rent instead. It is becoming quite common among younger and older generations who do not want to deal with the burdens of homeownership. An investor in this category will need to either be able to efficiently self manage or they have a property manager they can trust. One that can possibly cut them a break when it comes to maintenance issues or fees in general. This investor is going to have to run a tight ship. Every dollar is going to count when it comes to this category. So saving a little here or there is going to be the name of the game. Maximize profits while working to improve the chance for a lower vacancy rate. This is a product that will always sell. Most couples in this price point can afford to buy a home. So, it just makes sense to own rentals where people can actually afford them. More importantly, it makes sense to have the right rentals to attract the right tenants. You are going to see some deferred maintenance in this category which is why having a good contractor is going to mean the difference of cash flowing or not.
Option #3 This area is the prize in my opinion. Here you are looking at $175,000 to $250,000 so it is not for the faint of heart. This investor is going to be looking for more of a longterm strategy rather than wanting the magnificent 8-10% cash on cash return. This investor is looking to at least cashflow $100 a door but long term they understand they own real estate in one of the most highly prized areas to live in. This is for an investor who wants the least headaches and the least chance for major issues in the long run. The particular demographic of tenant in this price point is going to be very stable and likely have more than enough money to buy a home at this price. This is for the stable family who wants to settle down and watch their children go to one of the best schools this state has to offer for public education. Schools tend to be a driving force and this one is no exception. Schools, value for your money, and all of the amenities that come with this area are amazing. These values are also now exploding here. Investors and homeowners are driving the values into the stratosphere. Some neighborhoods have jumped $10,000 to $20,000 in just a year's time. Will it last? Who knows for sure. What is clear there is a limited amount of land in this area. Builders cannot keep up with the demand and people can get so much more bang for their buck when buying a previously owned home. The name of the game in this category is longterm appreciation, and stability. Stability is the #1 asset for this area and category. This is what drives so many to this area. No investment can be considered safe but if there is one that could come pretty close this would be about as good as it gets for being "safe" in my opinion.
Wrap it up: In short, every investor has to decide what fits them best. I can argue against any of these areas I have mentioned in the opposite way and tell you not to invest in any of them. (Not sure why I would but I am sure someone can or will) What is important is to have the right team in place. You are not going to do real estate investing totally on your own. You are going to need contacts, people you can depend on. I just hear investors who come to me saying they want this or that % cash on cash return. I can find ridiculously high returns at really low price points too! But I would not want to even drive through those areas let alone think about owning a home there. You have to recognize that results will vary. Do you want "safer" investments or do you want massive cashflow investments (that come with potential pitfalls)? You can have your cake and eat it too. You just need to know what it is exactly that you want. From there it is easy!
A final word of caution: Be very wary of turnkey outfits, agents, wholesalers, or investors who are claiming a certain percentage of return. Maybe they will say it is a 10% to 14% return. You have to consider the hidden factors like crime, poverty, deferred maintenance, etc. In the end, you have to decide what fits best for you.
