Rational in an irrational market, is it possible? Case Study

[Andrew White]

Hi, here I'm presenting an active case study that I got myself into. I'm new to BiggerPockets so I haven't done too much on this site. My goal is to hear insight on the deal itself and gain knowledge from those that have been around the block more than me. Cap rates relative to now, used to be much more attractive - while I want to continue to be a real estate market participant in today's market I can't help but having the relative high asset prices and potential of the doom/gloom future nag at me as I am a strong believer in buying assets for below what they are worth. 

I'm currently under contract in Indianapolis (everyone is welcome to comment regardless of city). This wouldn't be my only property as I own one other investment - it's a house and it cash flows wonderfully. The property I'm under contract on is a 1948 duplex in a B-/C+ area at around $140,000. I have an inspection report in hand, it's a solid home just need cosmetic - nothing too major. As far as I can tell I can increase the current rents from $650 to potentially $750 without doing any work (if I increase rent to $700 I'd be around the 1% rule). If I was to do a remodel (maybe $15k of work) I can likely increase to $800 to $900 or so. It should note that the home currently has tenants and is cash flowing - tenants are each paying $650 per month (they are month to month) but one is leaving and the other I plan on increasing rent a bit and locking in a long term rental. Additionally, I think with a minor remodel I believe I can sell it for around $170,000. Of course, that's an assumption.

Under current market conditions the double seems to be a pretty good deal with some growth. My interest rate on a 30 yr, 20% down mortgage will be 3.625%. The rate is for an investment property. The returns on a home like this were superior 2-3 years ago. Where it could have been bought for $100,000 and produce the $1,300 monthly rents in it's as-is condition - this is my major hold up. It's hard to tell if the Indy market will regress to times like that (which I'd love) or if things are just getting more efficient. I'm confident I can increase rents to reflect home prices and still allow a margin of safety (even if it's not as strong as it used to be). If the market regresses substantially and if I was forced to reduce rents, I could still be making a tiny, undesirable cash over cash return. I'm focusing on worse case scenarios. It should be noted I plan to hold this property for 5-10 years - which should hopefully round out any crazy happenings in the market.

Some of my main concern is, the unpredictable, future of the market. Considering if interest rates were to rise asset values tend to decrease. I wasn't old enough to experience the implications of the last housing crash but I am fairly obsessive to ensure I don't set myself up for failure if something similar was to happen. From all I can tell the lending practices are still much better than that of 2008/2009 and the years leading up to it. We see home shortages, which have also been a contributing factor of increase in asset prices. The market does appear to have simmered down a little bit. I don't intend to over leverage myself in this market, yet I'm hopeful some veterans can chip in their two cents on the current market (it doesn't have to be in Indy) and and tell me if I'm being rational given the figures provided. Thank you for your time, I appreciate this community and your help!