How best to buy 1-2 properties a month in Indy

Question

Hi guys,

I will have $15-30k per month to invest in buy and hold rentals in the Indianapolis market over the next year. I've been here for 28 years so I know the area fairly well.

The plan is to put 20-25% down on multifamily residential properties.  I do not have a full time job and can manage these just fine.  I can also devote every single day to finding deals.

Where can I find the best deals on property in this market? Straight off the MLS? Wholesalers? I want to buy every single one at the 2% rule mark.

My goal is to make a six figure income with these by the end of the year. I already have about $2k net per month of passive income coming in from my other 5 units.

Any help as far as acquisition is concerned is much appreciated.

Mike D'Arrigo · Answer

@Steve A. First off, you're fortunate to be in a great cash flow market like Indianapolis. My recommendation however would be to start with single family homes first and get some goo investor experience under your belt. Multi family can be a big challenge and more times than not, the returns are not what the projections might lead you to believe. I know Indy well and I know how difficult duplexes are. Since you're building a pretty good size portfolio, you might want to built a stable income base through single family and as you expand the portfolio, add more risky multifamilies. Keep your exit strategy in mind also. With multifamily, you have only 1 exit strategy and that's to sell to another investor with low appreciation upside.

Mike

J Scott · Answer

First, you need to be clear on your plan and your goals.  A property that rents at 2% of purchase price per month (the 2% rule) will -- assuming about 50% expense ratio (the 50% rule) -- have a 12% cap rate.  With leverage, you can likely get that to about 15% cash-on-cash return, and if you manage it yourself, you can probably get closer to 18-20% cash-on-cash.  Let's say 20% and be optimistic.

You're looking to invest $15-30K per month for 1 year.  That's a total investment of between $180K and $360K.  Splitting it down the middle, you're looking at investing about $270K in that year.

Now, if you invest $270K and earn 20% cash-on-cash returns, you should expect your cash flow to be about $54K.  That's only about half the "six figure income" you are shooting for.

So, are you willing to accept the $54K/year in cash flow?  Or do you need to modify your plan to achieve the six figures you mentioned above?

Jynell Berkshire · Answer

Steve,

Have you looked at purchasing county-owned parcels? As you may know, Marion County has a surplus of properties in its inventory. There are some good deals but many properties need to rehabbed. These types of properties may be a good option for your portfolio.

Mike D'Arrigo · Answer

@Steve Smithy I just find the quality of tenant much lower with duplexes--high turn over, damage etc. True, you have 1 roof but you also have 2 furnaces, 2 AC's, 2 water heaters, 2 stoves etc. I know a lot of people like duplexes because they feel when 1 unit is vacant you have rent from the other, but what happens when both ate vacant? Multi family tenants are like apartment tenants--very transient. I'm glad to hear your experience has been good though.

Steve A. · Answer

@mike

Haha well honestly the 2% criteria is important to me because I've been doing alot of reading around here and it seems to be the gold standard.  Realistically, I would accept a nice SFR in an appreciating area for as low as 1.5%.  I am concerned primarily with cash flow, not appreciation, though, and this is why the 2% rule seems particularly relevant.  As far as cash flow is concerned, I would like to do 24 deals in the next 12 months.  The bare minimum I would find acceptable would be a $200 net per month per deal after accounting for the 50% rule and the mortgage.  Hopefully I'll do better than that.  I picked up a duplex today that should do $400, for example.  I can't give a number based on units or doors, since I'm doing a blend of SFRs and multifamilies and they are different animals.  Each of these deals assume a 60k purchase price and 15k down.  So if I did a 120k deal with 30k down, I'd want at least $400 net per month, for example.

As for ROI, I haven't really though about it to be honest.  This is all play money to me as I live on barely anything (single, roommate, simple tastes, paid off everything).  The absolute cash flow is much more important to me than squeezing out more ROI, although by all means it doesn't hurt!

Finally, I'll be taking 30 year mortgages and ideally will keep acquiring for at least the next 10 years before starting to deleverage.  The only principal paydown will be from the mortgage payment.  This could change if I hit a limit on the number of properties I can acquire or some other unforeseen issue...then I would have to start paying them off a bit quicker.

I should also mention I have no car payment and maintenance is maybe a couple hundred a year, no student loan, no wife or kids, very healthy, only real obligations are $900 house payment, $200 in utilities, $200 in gas, $300 in food so my overhead is pretty low here.  I'm not going to let loose and have fun until the job is done.

@Mike D'Arrigo undefined

@Barry Ratliff

Financing will be secured using my business partner's income, which is substantial.

@Taylor Jennings

Ah!  Can't believe I missed this.  When is the next one?  Inbox me and I'd be happy to exchange phone numbers.

Barry Ratliff · Answer

Is $2k per month net passive income and no full time job enough to qualify for perm loan? Or am I missing something here?

Taylor Jennings · Answer

Haha this was a popular post =) "As seen in BP Newsletter"

@Steve A. Come to our meetup tonight in Broadripple to chat with some of the REI listed above.

http://bit.ly/IndyREIMeetup

Mike D'Arrigo · Answer

@Steve A. you're right. You won't get 2% on single family. The only way to do that is to buy cheap stuff that rents for $600 in bad areas like @Shawn Holsapple said you'd have to do and you'd regret that. What is your overall goal and why is the 2% criteria important to you? Have you set a goal for how much cash flow you want each property to produce, what ROI you want and how soon you want to be able to pay off your mortgages with cash flow?

Steve A. · Answer

Wow, the outpouring of help is unbelievable.  Thanks everyone!

@Mike D'Arrigo  Thanks for the words of warning.  I do agree that multifamily tenants are of a lower quality on average.  I would indeed like to grab some SFRs for the portfolio, but it's difficult to find ay locally that meet the 2% rule.  I think I'm going to do it backwards...just a couple risky multifamilies up front to make sure I don't need to go back to a day job, then start adding some lower yielding, safer SFRs.

@Shawn Holsapple I definitely agree there are slim pickings on the MLS.  Luckily I have a decent intuition as to what renters like, being a renter myself for many years.  I actually picked up my 2 latest properties (SFRs) off the MLS for $42k and $54k and both rent for $750.  So not quite the 2% rule but not awful, and both are paid off. I'm going to use leverage from now on, though.

The issue with these uber-cheap homes is that no bank will finance me for a home like that.  The minimum appears to be $60k..that way I put $15k down and the bank finances $45k...they seem to have trouble doing loans for less than this.  I want traditional 30 year mortgages.

I'm hoping for rents in the $1000+ range to keep tenant quality decent, from now on.  This is for a SFR that I buy for the price I quoted.  However, I have higher expectations for my multifamilies.  I'm looking in Noblesville, Home Place, Shelbyville, Martinsville, Sheridan, Westfield (yeah right) and a couple other small areas.  I mostly stay away from Indianapolis because I am not experienced enough to deal with it yet.  I know the area well and can tell a good neighborhood from a bad one, but I am nervous.  I do own a house in broad ripple that appreciated 200%, but prices there are just too high to come near the 2% rule these days.

Any advice?

@Yang Xiao I am not preapproved because I am currently closing on the last rental I can finance by myself and do not want to rock the boat.  Immediately thereafter, I will be applying jointly for mortgages with a guy who has 5 years of 1 million $+ income.  We both have FICO scores near 800.  It should not be a problem.  Do you do turnkeys?  If so PM me.

@Andy Robison ndy and @Rob Anderson I worked a cubicle job and hated it until I started doing internet marketing.  It's pretty much passive.  It will probably not last forever, so I want to accumulate as much RE as I can, while following the best practices, to ensure I never go back to the cube. I bought the properties cash, I have never received $ from any relatives.  Is it really true that I could go to an REI meetup and find way more opportunities than by simply sitting here browsing the MLS?

@Jynell Berkshire  I have no problem doing a rehab, but as far as I know (noob alert) I can't finance any properties traditionally that cost under $60k, for reasons stated above.

Richard F. · Answer

Mike, +1 vote.  Some well given advice to Steve A.  Luckily my duplexes turned out good in the long-run however there was a few years of the difficulties: tenant issues/turnover, increased maintenance costs, and crime to name a few.

How best to buy 1-2 properties a month in Indy

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