Indianapolis - can lower CAP rate actually be better?

Question

Hi,

I'm new to BiggerPocket and glad to find this community.  Me and my husband purchased several rentals in San Diego but new to out-of-state investing.  We are currently looking for out-of-state properties to get better cash flow, specifically in Indianapolis area.

Seems like we can go 2 routes:

- Go with higher CAP rates (10%+) w/ older homes (1960 or older), just OK area, and usually not so good schools.

- Go with lower CAP rates (around 8%) w/ newer homes and excellent area w/ low crime and good schools.  Greenwood is one example area that we are looking at.

At the end, I'm looking at the ROI - in 5 years which route will give me better ROI (including real estate appreciation).

Any advice on which route we should go with?

Thanks in advance.

Account Closed · Answer

Go to Arizona, New Mexico or Texas. I bought Commercial Real estate in NM, 9.7% Cap with a 5year net lease to a Taco Bell, pretty reliable tenants for less money then you think, and also got a 13% cap Multifamily 25 units ,I have had interest partnership for 4 years in a semi-run down neighborhood in San Antonio, and almost always has been on time. but if you want to build equity and watch your property appreciate I would stay in SD.

Ming Zhao · Answer

Thank you all for the responses.

@Andre Alonzo Indianapolis seems to be a good area to generate cash flow.  I'd like to balance my SD properties (that mainly about appreciation) with cash producing properties.  And we do plan to keep our SD properties.

Mike D'Arrigo · Answer

@ming zhao choosing a property class is an important decision and depends on a lot of factors. I don't recommend buying D class properties in rough areas at all. You can however do well with high ROI properties in good working class neighborhhods with well screened tenants. The choice of A or B class may depend on several factors other than cash flow. This is the topic of my next Pinnacle Perspective podcast show this week, I'd be happy to share my thoughts on the advantages/disadvantages of property classes if you want to contact me.

Harry Zhou · Answer

Ill vote for a mixture of different classes. It is like diversities in stocks.

Andre Alonzo · Answer

I'm a new member to BP as well and I think we both have similar goals.  I also have 5 rentals in San Diego that I bought in 2009-2010.  All of them have appreciated nicely and I'm also wondering how I can go about getting more cash flow.

I currently have 2 SFHs in Houston and Salt Lake City in great areas, but with cap rates at around 6%.  Appreciation is small (compared to CA).  I don't have many problems with them, but I wish cash flow is higher.  Tenants pay on time and there's low turnover.

I don't have any properties with a high cap rate (10%+), so I'm not sure what that's like.

What made you decide on Indianapolis?

Are you planning on selling your San Diego properties?

Erin Donlan · Answer

Hi Ming! Welcome to BP. I think the question you pose has an easy answer - it's all up to you and your level of risk. Without generalizing too much, the properties in the OK areas typically have lower rents which leaves you open for more vacancies/transient tenants, which can affect overall ROI. Obviously this can be helped with a great property manager here in Indy (there are quite a few around this site!), who can throughly screen your tenants for you. Greenwood and like areas tend to lend to higher rents and a more consistent paying tenant base. There are exceptions to both rules obviously, but that's the basic rule of thumb I've found.

The biggest piece of advice is to get someone who knows the market and do your due diligence on any property you're thinking of purchasing. I'm a agent in the area and happy to answer any questions you have on any specific properties. Hope this helps!

Indianapolis - can lower CAP rate actually be better?

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