I can't find any cash-flowing properties?

Question

Recently, I started working with an agent to find a rental property in Indianapolis. I keep hearing that it's one of the best markets for cash flow, and yet, I can't seem to find a property where the numbers work. I'm looking for single-family homes with 3+ bedrooms in good areas (good schools and low crime rates) and my ideal price range is $100,000 to $150,000. I looked at a few properties and the rent seems to be around 0.8% of the purchase price, at least according to Zillow. I ran some analyses with the Biggerpockets rental calculator, and pretty much any property ends up having minimal or negative cash flow.
Is there anything that I'm doing wrong? (I am new to real estate and this is my first time trying to buy a rental property.)

Ross Denman · Answer

I do find it crazy that everyone calls this a difficult time... Isn't it just back to normal. Just because a rare opportunity existed 8 years ago, doesn't mean that normal should be difficult. There are always deals to be made, you just have to be prepared to move when they come and have a toolbox full of options.

Here's my framework for pre-screening deals:

• Buy with at least a 10% discount rate. i.e. $120k homes at $105k or $100k homes at $90k. This is including rehab budget, holding, and closing costs. This will ensure instant equity and higher ROI.
• When purchasing with conventional (20% down or more) financing, look for homes that hit a price ratio around 80 X 1 gross month's rent. This can also be figured as 1.25% of the full cost of the investment (acquisition, closing, rehab, and holding costs.)
• Run several models and if you need more cash flow, than either pay down points or put a larger down payment down.

Here's where the real wealth building comes in to play. In a typical, established, Indianapolis neighborhood (C+ to B Class)... we see predictable appreciation of 2.5%-3.5% annually. With a 25% down payment, you are leveraged 4 to 1. This means that the COC ROI on appreciation will be 10%-14% (2.5% or 3.5% X 4.) This doesn't even include cash flow or principal paydown.

The clients that I have who are investing like this are doubling their initial cash investments every 4-6 years. This is because of the internal nestegg that builds faster and better than the cash flow it produces. Unfortunately, equity is not cash, but you can leverage the equity in various ways to increase the size or quality of your portfolio and/or reposition it for higher cash flow.

There are many models for real estate investments and various positions that they can be done from, but I find that IRR and understanding the equity growth are not looked at deeply enough by many newer investors. I've seen too many investors build portfolios over 10-15 years that started with $50-$100k and now have $1M+ net portfolio value. Much of it has to do with leveraging and compounding the growth of all facets of your investment properties. While I don't recommend investing on speculative numbers, the icing on the cake is often times better than the cake.

Jay Hinrichs · Answer

yes pay cash refi.  and just keep more equity in the deal to where you get cash flow..  all properties cash flow when you pay cash.

In addition I think this fixation that a deal is no good unless it cash flows with 20% down or whatever metric all these folks talk about when they talk about it wont cash flow.. has created some really over leveraged situations that when we hit some bumps in the road here.. your going to have investors wondering why they did what they did and re thinking max debt is the way to increase return and such.

Arie Bitton · Answer

There are defiantly opportunities like you are looking for in the off-market, but you need to take into consideration you will have to pay cash and most likely to deal with some kind of repairs/renovation . On the MLS you could find deals, like you are looking for but more in the C class areas. properties ranging in the 65k-80k area. With all of that being said, my biggest concern as an out of the state investor would be finding the right property manager, that is more important than finding a great deal, at least that is the way I see it.

Nick C. · Answer

Unfortunately the only thing you're doing wrong is entering the market at a very difficult time. 8 years ago the house you're looking for would have been everywhere.

The best thing you can do now is to not compound the problem by settling for a property that doesn't work. It's better to have no property at all than one that isn't a good investment.

Mihir Bhimaraju · Answer

Account Closed there are several factors to think about. Is the agent familiar with investment properties and running numbers? Have you guys talked about the realistic returns in A/B areas vs C areas? In short, if you're shooting for nicer areas with good school systems, you'll be expected to pay close to retail price (for on market deals). It's not always you'll find 1% deals in the higher end areas. Your agent needs to work with you in finding a trade off between nicer areas and deals with good returns.

Have you looked into the off market situation? You'll have to put in some work in most cases but you can find discounted properties that'll get you better returns. From my experience, I've bought quite a few off market  & on market deals over the past few months and the returns are as expected based on the neighborhood I got into. More established neighborhood = consistent returns, better quality of life,  1-1.3% rent/price ratios. Gentrifying areas = in the path of progress, higher returns and > 1.5%.

Feel free to reach out if you have questions. Good luck!

Mark Jones · Answer

Account Closed what you’re likely doing wrong is going off the MLS. As previously mentioned you’re looking for a property type that is in high demand right now from both investors and retail buyers. You’ll probably find more opportunities going thru a local wholesaler and finding something with some value-add potential.

Dan Rowley · Answer

Basically it's what many of the other contributors are saying = macro/market dynamics.  In Indy as even in most other  'good' investments markets there's no longer a lot of cash flow sitting out there, especially in A/B.  Prices have risen and cap rates have been compressed, plus financing is now more expensive.

Maybe you can find some wholesale / off MLS prices that are lower but those are generally not in A/B areas and typically require rehab or 'tlc'

And you could still probably get some cash flow from B- / C area properties off MLS, but likely you'll have more headaches for sure and the investment won't be as 'passive' as you hoped it would be.

I'd also agree it's best to not buy something than to overpay on something and then regret it.

Brent Shaffer · Answer

From what I have fund being a newbie as well most of the homes that cash flow in Indy are the $65-85,000 range in C class neighborhoods.  You can get decent rents in some of these areas.  It seems that the opportunities are with some of the homes that need a bit of work.  Try the Lawrence and Speedway areas.

Mike D'Arrigo · Answer

Account Closed Indianapolis is a strong cash flow market so there could be a number of reasons. The firs thing you should do is get a handle on what the real rent will be not what Zillow says. Zillow is not an accurate estimate. You're also looking at the higher end of the market which isn't going to cash flow well. You don't need to be at the $150,000 price range for a good rental so you might want to evaluate your criteria.

Tom Campone · Answer

I would contact some wholesalers too. They can be a wealth of off market deals.

I can't find any cash-flowing properties?

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