What do you think of this deal?

Question

Just put this under contract yesterday for $62,500:

209-211 N Randolph St, Indianapolis IN

Looks like a 3/1 duplex with about 1700 sqft each side. Looks like it was bought as a turnkey rental in 2013. Each side is currently rented for $675. One lease expires 3/2018 and another 3/2019. COC return looks solid but y main reason to buy is that that area (Arsenal Heights) looks like it may pop soon and get fully gentrified (new bike trail being built on New York St, several flips and a spec built home all around). Rents are still lower but may be worth holding onto. Thoughts?

Next week I'll be doing an inspection and sewer scope, any other recommendations?

Lee Smith · Answer

@Gustavo Munoz Castro Duplexes are a mixed bag in Indy. Most of them are 1900's-1950's and have been neglected pretty heavily.

I would factor $50-75 per unit for water/sewer. A lot of times they only have the one water meter running into the property so you can't force the residents to pay it outside of your lease. Best way is just to increase the rent and you be responsible for it.

We just took over management of a property where the previous PM worked a deal with the tenant in one unit. They gave her a discounted rate, but she had to pay the water bill.. Guess what? She couldn't afford the water bill. She pays her rent, but not the water..... So we either evict, or hope she will agree to a raised rent... Because we had to turn the water on in our name.

In Indianapolis: When dealing with most multifams, you need to be aware of a couple of different things.

Higher vacancy rates, instead of 2-4 weeks to fill a single fam, you are looking at 4-8 weeks to fill a multifam. It’s not for lack of applicants, but lack of GOOD applicants.

Higher turnover rates.. While my single fam renters generally rent for 4+ years on average, my multifams only rent for 1-2 years on average. The premium for single family houses is not that much more, and most residents will gladly pay that amount to not have neighbors.

Watch out for owner paid utilities. These can break the deal. While water/sewer is easy to deal with, anytime you are paying for heat you are looking for trouble. Residents crank the heat up in the winter and then open a window to cool off...

I am not trying to scare you off, just you need to budget for them.

Alex Deacon · Answer

@Gustavo Munoz Castro make sure your numbers work at the current rent values and current sales price. If so then go ahead with the deal once you get through the inspection period. The speculation of the area being on the rise is just that. Speculation. If that does come to fruition then good for you thats the icing on the cake but if it doesn't then you are still making money. If you base your entire portfolio on speculation chances are you will find yourself dumpster diving someday soon but if you are solid on your numbers and research then its ok to buy a few here and there on speculation.

good luck Gustavo.

Samantha Soto · Answer

@Neil Goradia for one thing, the washington corridor has some retail that has cleaned up a lot and will likely attract some good businesses.  Also, Niedhammer coffee/cider shop on Washington, there is a public library as well as a puerto rican cafe.  It's definitely still a rough neighborhood. But I see promise.  As a millennial myself, I do want to be closer to downtown, but as an investor, I can't justify spending 200k+ on a fancy neighborhood that has already gentrified.  The numbers work, it's close to downtown, and there are some cool businesses already.  That's my 2 cents.

Spencer Gray · Answer

@Neil Goradia - In general I like the near East side. While it's still one of the patchiest parts of the city, Holy Corss, Woodruf Place and Cottage Home having been gaining more and more traction for quite a few years and their attractiveness is spreading to nearby neighborhoods and blocks. It's a popular alternative for millennials who want to be close to downtown, aren't into fountain square or are looking for a little more value. His specific address on Randolf wouldn't be my first choice but as a long term hold might not be too bad.

Neil Goradia · Answer

@Gustavo Munoz Castro, glad you were able to get a house under contract!

@Samantha Soto and @Spencer Gray, can I ask what makes the area desirable in your opinion as fellow hoosiers? I have a property on State st in that area and never considered it an up and coming or highly desirable area. Although - the La Parada mexican restaurant there is excellent! haha.

I understand north of Michigan st is highly desirable but didn't know it extended that far south.

Dan Trinh · Answer

I did the numbers and they look okay even if you included water and sewage (i ballparked 200/month) and also guessed 10% for repairs and 10% for cap ex since its an old house. What i have a question with is the current owners of this property are investors from california.... so, if the numbers look good, why are they bailing out? I guess that would be part of your due diligence so see why they are selling. I'll be heading to Indianapolis in a couple of weeks to meet up with some PMs and agents to see if I can acquire my first indy deal. Wish me luck!

Gustavo Munoz Castro · Answer

@Charles Bradford thanks for the insight, looks like I had the size wrong. I also just found out that the owner pays for water/sewer, which sucks since this will bring my cash flow projections down 20-30%. It's not the screaming deal I thought it was, at least not at $62500 I think. Tomorrow is the inspection and my first time inside the property so we'll see whats up and whether this deal is dead or lives on.

I'm already in Indy, if you have some time Wednesday would love to chat.

Samantha Soto · Answer

I was eyeballing that property myself.  I like that area, but just wasn't ready to buy yet.  Let me know how it works out.

Neil Goradia · Answer

@Samantha Soto makes sense, thanks for clarifying! Now that you guys mention it, I don't mind the area either. I think the large number of vacant lots and empty businesses will turn around soon as you say as well. As the Windsor Park, Woodruff Pl areas run out of space, it's bound to come further south. They're already beautifying the street near Arsenal Tech as well, so I can see it happening in the next 5 years or so.

Neil Goradia · Answer

@Spencer Gray Very well said, thanks for your insight!

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