Author Topic: Better than 2% - What's the catch?  (Read 2711 times)

StreetCat

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Better than 2% - What's the catch?
« on: June 25, 2017, 11:12:39 AM »
I came across this redfin listing.  They are selling 9 rental homes for a total of 323k.  Claimed rent is 80k per year, which is 6.7k per month: https://www.redfin.com/IN/Indianapolis/1729-N-Somerset-Ave-46222/home/82256910

I'm not planning to pursue this, but what's the deal with Indianapolis?  The home prices are lower than national average, and rent to own ratio seems quite high.

Is there something wrong/risky about the city?


If the numbers in the listing are anywhere near accurate, I can FIRE with that tomorrow :-)  But I have 0.0% experience with landlording, so not planning to do that :-(

waltworks

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Re: Better than 2% - What's the catch?
« Reply #1 on: June 25, 2017, 01:41:19 PM »
There is nothing wrong overall with Indy. I'm not familiar enough to say anything about any of the particular houses, though. They are right by the Speedway (ie, Indy 500), which is presumably *insanely* loud at times. But since you don't plan to live there, that's not necessarily a problem.

First due diligence step here is to ask to see the last few years of the owner's schedule C (or however they are filing this income). They may be vastly overstating the gross rents. If not, next step is to analyze the neighborhood(s) and what you'd need to manage the properties.

-W
« Last Edit: June 25, 2017, 01:43:44 PM by waltworks »

StreetCat

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Re: Better than 2% - What's the catch?
« Reply #2 on: June 25, 2017, 01:43:34 PM »
Thanks waltworks.

waltworks

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Re: Better than 2% - What's the catch?
« Reply #3 on: June 25, 2017, 01:57:41 PM »
Reading the fine print, that first house has ~$900/year in property taxes, too. If you figure they're all in that ballpark, that will hurt returns quite a bit. 3 of 9 are listed as vacant, which is a lot (assuming it's under some form of management and they're trying to keep the houses rented).

The larger picture, though, is that Indy, like other rust belt cities, is slowly contracting. There will be no appreciation in price/value on these houses, and at some point there may be diminishing rents as well. Whole neighborhoods can go dark (though I'd be surprised if this one did) and you can lose basically everything, in a worst case scenario. 

It could *still* be a great investment. But it definitely rings the "too good to be true" alarm bells.

-W

tralfamadorian

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Re: Better than 2% - What's the catch?
« Reply #4 on: June 25, 2017, 02:59:38 PM »
I don't invest in the rust belt so am not familiar with the details of the city but doing a quick and dirty check-

Looking at greatschools.org, the school districts appear to be poor to fair (2-5) and the rental vacancy rate in the city is 9.8% according to the US census, which is high.  So the rental market is probably relatively soft in the neighborhoods these houses are in.  This lines up with the fact that three of the properties are vacant.   

Second, a portfolio of nine houses worth $323k is more difficult and more expensive to manage than a portfolio of one house worth $323k.  There are nine roofs, nine HVACs, nine hot water heaters, etc.  In general, it is going to cost a much greater percentage of rent is maintain those nine houses than it is going to cost to maintain that one house in a more expensive location.  Is a new roof in a more expensive location going to cost 2x more than one on these homes?  Maybe.  Is it going to be 9x?  No way.

Third, as walt pointed out, the population in this area of the country is shrinking.  Chances are these houses will have no appreciation over the term of ownership.  While appreciation shouldn't be relied on for property profitability, it's unwise to ignore population and job growth when choosing investment locations. 

People are lazy.  They want to use a rule of thumb- 1%, 2%!  And they're only 30k a piece!  What a deal! 

Thankfully, mustashians are not.  If you sit down and calculate the actual cost of ownership on these 30k houses...
Rent: $750
P&I: $136 (presumed a 4.5% portfolio loan; 1/9th share)
Taxes: $75
Insurance: $45
Management: $75
Vacancy: $247 (real time vacancy of 33.3%)
Repairs: $75
CapEx: $250
Total: -$253

CapEx from a nifty table in a biggerpockets article on 30K houses:

waltworks

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Re: Better than 2% - What's the catch?
« Reply #5 on: June 25, 2017, 05:02:54 PM »
Yeah, that's the issue with super cheap rentals no matter where they are - fixed costs to maintain a $30k house aren't 1/10 of the cost of a $300k house. They might be 1/2, but that maintenance still kills you.

I mean, if I *gave* you a single family house that rented for, say, $250 a month, would you take it? Running even a basic set of numbers will quickly tell you that the answer is "no" and probably "hell no", unless your plan is to just let the place deteriorate until it falls apart and then try to sell the land/avoid paying to clean up the eyesore.

-W

anonymouscow

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Re: Better than 2% - What's the catch?
« Reply #6 on: June 26, 2017, 11:11:31 AM »
I live the next state over, it's probably a pretty similar market to where I am.

High crime, poor performing schools. You will end up with high vacancy rates, you're not going to have the best tenants to select from. A friend of mine has rentals in a similar market, 50k duplexes that rent for 750 a side. It seems like way more trouble than I could ever deal with. People not paying rent after the first month, clearing out dumpster loads full of trash and dog crap, putting in a new furnace and having it stolen.

Vindicated

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Re: Better than 2% - What's the catch?
« Reply #7 on: June 26, 2017, 11:30:45 AM »
I live in Indy, and I know the area of the first house you listed.  It's a pretty poor area.  It's "close" to the Speedway, but in an area that has fallen into disrepair over the years.  Could you rent it for $750?  Maybe.  Seems possible.  Could you maintain it on the profits?  I'd say it's probable.  However, the other 9 properties are likely in worse shape.  The owner listed this one because it's their best.

If you want to buy in Indy, there are a lot of better areas.
 - Fountain Square, Broad Ripple and Irvington have some potential, and are gentrifying a lot.  Lots of new restaurants and stuff.  Plus they're all within bike distance to downtown.  Although, I would hesitate to bike from Irvington or Broad Ripple.  Some not-so-nice areas between them and downtown.  We have friends that live in Irvinton and love it.  We got married there actually.
 - The area around the Zoo is probably going to skyrocket in the coming years.  They recently announced that the old GM stamping plant near the Zoo is going to be redeveloped into condos and shops right along White River.  Across the street from this property you can find $50k houses that are in similar shape to the one you shared.  I'd rather buy one of those if I was going to speculate on RE.  It's also right next to downtown.
 - The suburb that seems to have the most potential (based on what I've seen) is Greenwood.  I live near Greenwood, and have thought about moving to the "old towne" area.  We go to the park often, and the library is really nice.  There is also a nice golf course and some housing connected from bike paths.  I've also read about some development plans that are going to make the area even nicer.
 - Everyone in Indy would admit that the North side of town currently has the nicest suburbs.  It's just a bit more expensive, so I'm not sure it's has as much growth potential.  Zionsville, Westfield, Carmel, Fishers, and Noblesville, if you want to look them up.

StreetCat

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Re: Better than 2% - What's the catch?
« Reply #8 on: June 26, 2017, 08:21:46 PM »
Thanks everyone, those are some very useful perspectives.  If the RE scene was really as good as it seemed, I guess everyone would have jumped on it and arbitraged it away by now.  As they say, if it seems too good to be true, it probably is.

NoNonsenseLandlord

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Re: Better than 2% - What's the catch?
« Reply #9 on: July 09, 2017, 10:49:15 PM »
You will have a higher maintenance cost n lower income areas.  Plan on 20%.