Market Spotlight: Investing in Indianapolis | PREI 034
Why invest in Indianapolis?
On this episode we take a close look at the Indianapolis, Indiana market and why it has been a perennial market for real estate investors. The affordability, price points and quality of properties makes it one of the favorite markets among real estate investors.
The Indianapolis market is landlord friendly, and ranks as one of the cleanest and safest cities in the country.
If you’re looking for cash-flow in a solid stable market then Indianapolis turnkey rental properties may be the right addition for your portfolio. Find out more by contacting one of our Investment Counselors at Norada Real Estate Investments.
If you missed our last episode, be sure to listen to My Father’s Passing, Best Way to Get Started, Due on Sale, IRA Exit Strategy.
Enjoy the show!
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Market Spotlight: Investing in Indianapolis
It’s my pleasure to introduce one of our local market specialists in the Indianapolis market. Michael is one of our partners. We’ve been working with him for many, many years. In fact, it goes back to about 2008. He has been buying, rehabbing and selling turnkey investment properties in the Indy market since 2008. He has bought and sold 600 or maybe even more than 600 homes in that time frame. I’m glad to have met him a long time ago. We’ve had a great working relationship. I’m going to welcome Michael to the show.
Thank you, Marco, my friend. I’m glad to be here. Obviously, you and I are both are passionate about what we do and we like to help our investors out. I think your numbers are probably about the same as mine. We’re close to about 65%-75% of our businesses repeat and referral business. Glad to be a part of the team.
I’ve been wanting to do a market spotlight on the Indy market for a while now. This is our third one and we’ll probably do one for every single market. Indy is a popular market. It’s what I call a perennial market. We always get interest in it because it’s one of those linear markets. It doesn’t go up and down, like the Coastal markets of the US. Michael, tell us how you got involved in real estate. I always like to start off with a little bit about you and your background so people get a perspective and a context of where you’re coming from.
My background is in the stock market. I enjoy trading stocks and options. I love it. I just really enjoy either developing passive income or structuring passive income for myself. As fate would have it, my story is hopefully new and not familiar to you. When I was 31 years old, my dad passed away. My mom needed a steady source of income that didn’t rely on the stock market or any other investments. At that time, I think I had five or six homes at the time. My stock market investments would go up and down. A few of my other things were spotty at best. My Indianapolis real estate was just pretty consistent. It didn’t double in value in a year or two, but all it did is send me checks every single month. That’s really what my mom needed and wanted. I have done deals in about five different states, but my holdings and my consistent cashflow came from the Indianapolis market. With that positive experience underneath my arm, I decided to build a company that was built by investors for investors, as I like to say, in that area. It has gone gangbusters ever since.
You do put up a great product. I think that was a very smart decision to make that shift away from paper assets like stocks, bonds, mutual funds, and into hard assets like income-producing real estate, especially today. I don’t need to tell you how erratic and volatile the markets are. Frankly, they’re quite scary. I think this year and next year, we’ll probably see more and more people pull out of those markets and invest into more stable and secure investments that make a lot more sense. I can’t think of a better investment than real estate, can you?
In equity, there is a place for stocks. Their grandma may have left them Ford stock and will never sell it or something like that. We do that in Midwest, it seems. Here’s the bottom line, what are you going to do to replace your six-figure income? If you need your $10,000 or $20,000 a month to live on or whatever your number may be, where’s that going to come from? When I talk to investors, they might be in their 30’s or 40’s or 50’s or even older. They’ll say, “Stock market is great. But I need a consistent monthly income not based on the stock market.” They may still have 10%, 20%, 30% of their money in the market. But they need a consistent monthly income that doesn’t depend on that volatility. I agree.
We’re on the same page. Just to take that one step further, the saying is “The check is in the mail.” I know you’re very familiar with this phrase. That’s what real estate gives you. The difference I see between real estate and paper assets like securities is, one, with stocks, you’re going along for the ride and hoping for capital appreciation. There’s typically no cashflow. There are ways around that. Generally speaking, it’s a capital gain. You’re hoping that the value goes up. Whereas with real estate, you can get capital gains over time that equity builds, but you get income. You get cashflow from day one and every month thereafter. To me, that’s a huge differentiator.
I appreciate the billions and trillions of dollars and the people in the nice offices. It’s so funny. My dad took me to his financial planner one time and sat at a nice parking lot, and the nice lady offered us coffee. We sat in nice leather seats. He brought me aside. He said, “You know who pays for all this? I do, son, with my fees and all other things.” We’re all grown-ups here. We know that we pay fees and things like that. Of course, we don’t want to begrudge a professional, his or her fees. I get that. Also, why don’t these investment professionals introduce us or our parents or whoever they may be, to different types of paper assets?
The answer, of course, is they’re not in the food chain. They’re not in the commercial or in a commission structure rather of that. I can see where selfishly, it’s not in their better interest. I get that. Business is business. That said is we’ve got to take care of our friends and family. When someone comes up to me and wants to say, “I might be retiring in the next five or ten years or I’ve got two or three kids and I make X, what do I do?” I say, “With the mortgage rates where they’re at right now and with what the tenants are paying, you can get an excellent rate of return leveraged with a mortgage and not have a whole lot of risk.” I have those thoughts.
Indianapolis is somewhere around the twelfth or fourteenth largest city in the US. As I understand it, about 65% of the entire US population lives within a 700-mile radius of the city. I don’t remember who ranked this. I remember reading in the past that Indy was ranked as one of the cleanest and safest cities in the country. I don’t know how they measure that, quantify that, but it’s still a good accolade. It begs the question, why invest in Indianapolis? At a high level, what would you tell people? Why should they be investing in the City of Indianapolis?
Previously, Marco, when I would do investments, I would try to make excuses or reasons or do my pros and cons so I could go make money somewhere, whether it’s a stock or whatever it may be. Now that I’m a little bit older and I have some experience, now, what you really want to do, as Warren Buffett would say, “The number one rule of money is not to lose money.” Of course, the second rule of money is, “Don’t forget rule number one.” What external factors are there so that I can essentially not lose money? One of the things that I was always taught is you want to invest in a capital city. One of the main reasons is local and state and government tax money, revenue, will always flow seemingly into the capital city of the state.
Number two is even though we don’t really invest in college housing per se, is we want to invest in real estate that has some nearby universities or colleges. In good times, we do well. Even in recessionary periods of time, the kids preferably will move back in with the parents and go back to school. I think the last count is 20 or 30 universities or campuses, buildings and different campuses nearby. It’s not unusual for us to rent to a graduate student every now and again.
Lastly is we’re looking for a diverse economic phase. We don’t want maybe a coastal city or maybe an automotive city, if you will. Indianapolis area, I’m going to have to admit, it’s a little bit boring. We’ve got things like Eli Lilly, Rolls-Royce and State Farm, and a lot of logistical-based companies. You’re right. Within a one day’s drive is two-thirds of the American population. We’ve got a lot of external factors there. Also, in the 50s, 60s, and 70s and 80s, as the real estate that we buy, even if we have a lot of 2,000 newer construction, is there was no real reason to do a multi-unit as the land was very inexpensive. With our traffic system, a commute downtown at most of our properties is less than 30 minutes. It’s very easy to get around. Not only do we have a diverse economic base. The cost of real estate is inexpensive. The crime is low. The cashflow is excellent. It’s in a great tax advantaged area, and it’s very landlord-friendly. You’ll always find Indianapolis to come up on a top ten list usually of savvy investment reports or advisors.
The diverse economy part is very important to us. This is one thing I really like about the markets we’re in, particularly Indianapolis. You’ve got a broad feel or spectrum of sectors manufacturing, distribution, education, healthcare, finance. In Indy, you’ve got various things like major sporting events and you have a lot of conventions there. It’s not just Las Vegas. That broad spectrum is very important to keep that stability within the market. A boring market is not a bad thing. It’s actually a good thing. I get concerned when the price of oil drops below $30 for cities like Houston, Texas or Calgary, Canada, which is just getting hammered right now in terms of its economy. Those are all very good points.
Economically speaking, I don’t know if you could touch upon this or what you can say. The Indy market is a very large export market, which actually was a surprise to me. I didn’t realize that there was a large manufacturing base in Indy. I know back in 2013, it was ranked the twentieth largest export market in the US. That caught me by surprise. What can you say economically about this market?
Economically, as far as unemployment numbers, we’re well below the national average. I’m a bit of a marketing guy. What I do is I’ll produce an excellent, excellent product and then when we get tenants that apply for our properties, a lot of them have very healthy incomes; $40,000, $50,000, $60,000, $70,000, $80,000. We just had a pilot come in that makes a $100,000, relocated into one of our rentals. We don’t give, of course, a whole lot of people that are half million dollar income earners. Then again, they probably wouldn’t rent. We have just a great pool of renters to pool from. As far as the economy is concerned, it seems that the jobs are very, very plentiful. It’s a very, very positive environment for people, and you’re right there are a lot of those different environments, from engineering to logistics to whatever may have you.
The city has four major Interstate Highways, six railroads. You’ve got an international airport. I don’t know if you would call Indianapolis a major logistical hub, like Memphis would be or even Kansas City. It sounds like it is a fairly major crossroads for transport.
A perfect example is, just a handful years ago, we just spent $1.1 or $1.2 billion on a new airport. I think we sold the old one to either a FedEx or an Airborne Express or something like that. We just started laying new runways, etc., we just urban crawled one block, if you will, to the West. Investors will fly in to take a look at properties. They say, “This is not just new TV screens and new HDTV screens like you do when you get to Honolulu or something. This is a brand-spanking new airport.” The land was very, very inexpensive out here. Yes, I would say that it’s known as the crossroads. In fact, it’s the exact center of the United States. As you get more West to the Mississippi, of course our population density as a country gets less and less.
Let’s talk about housing there. One interesting and notable fact about Indy is it has been one of the most stable real estate markets in the US. Through the last ten years and through the last recession, that market has declined less than 7% as a whole. This will vary from suburb and neighborhood. It’s a very stable market. It’s what we call a linear market. It’s very flat, boring. Over time, it keeps up with inflation and that’s what you wanted to do. Indy is always in the top ten for the most affordable cities. I know a few years ago Forbes ranked it the fourth most affordable city, which says a lot. The most interesting ranking or note made about the Indy market is it was in the top three markets, at least this is in the words of the Wall Street Journal. They ranked Indianapolis as one of the top three markets for single-family rental properties. That’s a pretty major compliment, if you will, from the Wall Street Journal. Talk to us about the housing market there.
The housing market is very strong. After doing our first probably about a hundred or so rentals, we learned a lot. We learned a lot as far as our rehab is concerned, our marketing, our tenant, our underwriting, etc. Now, as we’ve gone to 200, 300, 400 homes that we have bought and rehabbed, we will take everything and we will reverse engineer our acquisitions to the schools. We buy only in areas that have good schools because we’re looking for that certain demographic of tenant. We know that if we have a vacancy in these areas, we know what is the demographic or the genre of the tenant that would apply for that type of house. We’re getting some excellent, excellent tenants.
That said, we do have a very, very good product. We do spend a little bit more money than our competitors or maybe some smaller operations just because I’m looking for my investor to have a good experience as far as a low maintenance experience. If I need to put in new flooring or a roof or air conditioner or furnace or water heater, I don’t want to say a spare-no expense to sound like you’re getting gold-plated faucets, but you’re getting a solid unit, so you’ll have a really, really great experience. When people see a little bit better quality rehab, they have no problem signing a multiyear lease. Our maintenance staff is on top of things. We respond to their maintenance concerns quickly and we expect them to pay rent on time as well. That relationship of respect has proven to be very, very fruitful for ourselves and in our investors.
One thing I like about Indianapolis or Indiana for that matter is it’s a landlord-friendly state. That, to me, is huge because if you have to have an eviction, you want that to be as smooth and friction-less as possible. The national average of renters versus homeowners is somewhere around 35%-34% right now. Indianapolis, at least the last statistic I read, said that Indy has a rental pool of 42%. 42% of the population are made up of renters, which is great. You’ve got a large pool of renters. Talk to us about the rental market, the quality of tenants, what people can expect about renters and rentals there.
What we found is that the investors that invest, we want to bear the risk prior to them getting involved with leasing, meaning if we all acquire the house, we’ll rehab the house and get a quality tenant in place usually before the investor takes over. What would be an example? Really, we have two different products in Indianapolis. We have a product that’s a little bit more appropriate for financing. We also have a product that’s a little bit better for cash purchase. Probably about 30% or 40% of our business is IRA or Roth IRA 401(k)-type businesses where they’ll just buy the property outright with no leverage or no mortgage and just enjoy that. What will you find? You’ll find families.
In fact, we have several Latin gals in our office. We cater to a Latin marketplace to a certain extent, because the work ethic is superb. A family of four with a couple of kids and a nice solid multi-year income. Many of our tenants, to be honest, Marco, I don’t even hear from. I’m just happy that the rent keeps coming in. Every now and again, they ask if they can put up a fence or do some gardening. I said, “Knock yourself out.” I’ve had some tenants for eight or nine years. I hardly remember who they are. They just think it’s their home. It’s wonderful.
We enjoy a great, great relationship with our tenants. But keep in mind, we’re a family-owned and operated business. All these homes start their own personal portfolio before an investor gets them. My staff doesn’t know if I own it or my mom or my sister or you or one of our clients. It’s all treated as a pool of homes that are family-owned and operated business run.
What have rental rates been doing over the last few years? I know rents have been going up. What are they doing right now?
Like you said, “Keep up with inflation.” We do everything so the investor is happy and it performs. In some areas, we can raise rents, a small percentage, like 4% annualized. On some areas, we realized that we’re at the ceiling. Could I rent it for more and could the tenant balance in a year? Sure. I’d rather have the investor have consistent monthly income. There is some elasticity in some areas. In some areas, anything above, say, about $1,200, $1,300, $1,400 a month, you’re getting into somebody who doesn’t really need a rent anymore. They can buy. I hesitate to raise rents in that area. That’s why I don’t have a lot of rentals that are that high in a monthly basis. No, rentals are solid and we will raise rents appropriately as long as it doesn’t affect the lease or the vacancy rate.
What’s the low-end of the rental market there? Is it like $700-$800?
We’re right about $700 to $750, it would be our low-end.
Let’s talk about a typical property. Describe what a typical investment property is and looks like, from a numbers perspective too. A lot of our listeners think about things at a high level from a rent-to-value, an RV ratio perspective. That’s not the “be all, end all.” At the end of the day, it’s the cash-on-cash return and the cashflow that’s being generated every month and every year.
In a high level, a lot of your listeners, Marco, I don’t even know how many hundreds of hundreds of clients you have, but they do enjoy a lot of leverage, meaning that a lot of the business that we do, we, of course, have no problem financing their real estate. Similarly like that, you’re looking at a $90,000 to $120,000 purchase price in that range, somewhere maybe on the low-end, $85,000 and on the high end, maybe $125,000. You’re looking at usually gross rental rates in anywhere between 12% to 14% gross rent over purchase price. Those would be some gross numbers. As you dial that down, another reason why people like that area, to echo your thoughts, is very landlord-friendly, number one.
Number two, there are no natural disasters in our area. You don’t find any storms or any expensive insurance area. Insurance is very inexpensive, say, $450 to $600 a year-type thing, guesstimate. The taxes are also very inexpensive. The taxes will be quoted per property. They also max out at a 2% of the tax assessed value. Let’s say, for example, we did a new build project. We built 70 new homes. They were sold to investors at about $105,000 to $109,000. They were tax assessed around $80,000 to $85,000. Those are some examples there.
When the numbers flush out, we’re finding our investors back of the napkin making, say, the goal would be $200 to $400 a month in a positive cashflow scenario on a 30-year mortgage, maybe a little bit less on a 15-year mortgage. We carry about a 9% property management rate. I hope that a lot of your investors are pretty savvy so they understand the numbers. That said, the properties will do very well. More importantly, the property management will be on top of it, to answer concerns and keep leases renewed. Our goal is not to just rent a property for two years. Our goal is to rent it for eight years or ten years and have very, very low maintenance. You combine a good solid property with a solid rehab, on top of the management team that stays on the properties and that’s why we have a lot of repeat business.
I know a lot of your properties are typically in the range of B, B+, A- and A-grade neighborhoods, at least from the information and demographics we’re pulling up. I think it’s pretty consistent with a B-neighborhood being the low-end of what you’re turning over, what you’re producing.
It’s just on performance. In my experience, you might look at a C or C+ neighborhood and you might think, “Look at me. I’m making 20% of my money.” Not really, buddy. After you go ahead and you pencil that out after a year or two or three, your turn cost on those and your vacancy rate, I’m going to make up a new category called “headache rate” or something like that, is just too much. Remember my litmus test. I treat investors and clients like I wish someone would treat my widowed mother. It’s just not in your best interest to buy in my area for performance to buy that C real estate. It just doesn’t pencil as well.
Over the last twelve plus years, we’ve moved away from the C, C+ type neighborhoods. We didn’t ever had a lot of them to begin with. You hit the nail on the head. The numbers on paper look incredibly attractive. At the end of the year or at the end of the first few years, when you look back, the turn cost have eaten up that extra return and that extra cashflow you were expecting to get off of the pro forma. What you end up with is something that’s going to be similar to buying a B or A-grade neighborhood property in the first place with less headache.
If you think about it, when you say turn cost, it’s perfect because you’re looking for top rent. I can’t get top rent unless the property is in top shape. I can’t have dirty carpet in your rental because it’s not going to get top rate. You have to spend the money to get that property. That’s one of the reasons we have hard surface floors. We don’t do carpeting. Regardless, we have to keep that. Otherwise, we’re going to get a less than market rate if you do a less than average turn on the property.
That’s a great bonus as far as how I look at this. You guys are putting hard floors instead of carpet. That’s the one thing that seems to me to be cleaned or replaced every time you have a turnover. That starts to add up. Having hard floors is such a smart idea.
It’s expensive on the way into the investor. I spent hundreds of thousands a year, but it’s what I would want. It works out real well. The tenant, after they get used to it, they don’t mind it at all. They really don’t. This just comes from experience. I bought semi-trucks full of chocolate-brown commercial-grade carpet and the cheapest pad I could find. It just doesn’t work as well as a hard surface flooring.
Just to compliment what you’re doing, we have clients that have bought many of your properties and they’re all very happy. They have good things to say about working with you and the experience and the quality of the product. Many want to come back and buy more over the course of the year. There’s a lot of positive feedback we get from your particular product. That’s why we work with you.
In today’s day and age, where everyone wants to cut corners and not pay, you just do what’s right. You just take care of people. You do what’s right. Every now and again, it’s not going to work out. Every now and again, you’re going to miss something. In my experience, my business is big enough. You just take care of people. What goes around comes around. It seems to be working out really, really well. It’s not perfect. There are tenants. Every now and again, they put in the InSinkErator in the sink. You have to snake a drain. When it’s all said and done, you just take care people. You respond quickly if there’s a concern and you’re transparent in your accounting and it seems to pay dividends to our clients and to our company.
Is there anything else you want to add or anything else I should have asked you about that I didn’t?
In closing, on a specific underwriting thing that I speak about in my seminars is, you want to get started now. Here’s what that means. If you’re buying with a finance opportunity, right now, your first one you don’t feel like butterflies in your stomach per se. Keep this in mind, your underwriter or your mortgage banker will likely say something like this: after two years of experience in rental real estate, they’re able to use a good portion of your rental income to go against your mortgage payment. Unless you have that experience on your tax returns, it’ll affect your DTI or debt-to-income ratio.
Once you have one down, if you will, your first property down, then it’s easier and easier to get properties, two, three, four and five. Or what I say sometimes is basically raise to your first four, because if we’re going back of the napkin look at $250 a month in positive cashflow in your first four, then every month we’re making a grand. Follow with me, four times 250 is a grand. Every two years, which would be, let’s just say, $24,000, we’ve got enough money saved up to go ahead and put down payment on property number five. At one point, seven, eight years, we have enough down payment for property number six, etc. Once you raise to number one, then raise to number four. A lot of people will build their ten house portfolios and that’s how you do it. You just got to get started.
It compounds on itself. Michael, great information. I think this clarifies a lot about the Indy market for people. If anybody is listening to this and they’re sitting on the fence trying to think about Indy as a potential market, hopefully this will help them take a step forward and maybe call one of our investment counselors to get more information. We can provide all kinds of information. If there’s anything that we can’t provide, we’re going to put them in touch with you. I appreciate your time today. This has been helpful. Again, thank you for your time today.
Absolutely, Marco. It’s a pleasure to be a part of your team.
You too. Thanks, Michael.
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