From Utah to Muncie Indiana

[Jake Maughan]

Guys, I need some help.  

I'm currently looking for my first rental and after scouring the MLS, I realized that I needed to be creative to find a good investment. I reached out to a mentor who has been in the rental business for decades; his speciality is storage units, but I know that he also owns many single and multifamily units. After many emails, he let me know that he just purchased a new storage facility and was unloading his small properties to focus on this facility. He has several SFR close to my (and his) house, but after doing some quick calculations, I realized that they would only be cash flowing about $200 a month after the mortgage, taxes and insurance. It's difficult to find a SFR of Multi in Utah County that will do much more than that right now and, from what I know (which isn't much), you have to depend on appreciation, depreciation and long-term gains to really get your value out of buy-and-holds here. It's nearly impossible to find a property that meets the 2% or 50% rule here.

He also offered me his 5 units in Muncie, Indiana.  He's been upfront with me and told me that the rentals are in a terrible part of town, they usually attract lousy tenants, there are a lot of evictions, they're old houses so they require upkeep (however, he's put a lot of money into fixing them up), and he has to be careful of theft when they're vacant.  He has a management company managing them though, so he doesn't have to worry about any of that and after all expenses (including mgmt fees), they net him around $500-$800 per month.  He bought them during the crash and is offering them to me for $50,000 (total).  He's been assuming that the market in Muncie will come back (as it has everywhere else), but it hasn't yet.  He's tired of them and allocating his money elsewhere.  

Everyone says that you should buy in your backyard and you should manage your first property yourself to get the experience, but the returns here are so dramatically different.  I need some expert advice.  I could purchase the Muncie properties with cash (should I?) or I could finance the properties here.  Or should I keep looking?

Any advice/feedback is greatly appreciated!

[Account Closed]

As you can tell from my profile, I live, work and invest in Muncie. I now have 3 rental properties in Muncie, having just completed a rehab on our 3rd and the selected tenant signed a year lease today. 

I agree with some of the sentiments expressed above concerning Muncie. However, with Indiana's property tax caps, property taxes on single family homes is quite reasonable. State law limits the property tax on rental property to 2% of the assessed value, annually. So that really is not a big expense for our properties. Before the tax caps, property taxes were, in my opinion, quite high. Contributing to that plight has been a declining tax base (due to industry -- GM, Borg Warner, for example) closing shop, growth in the non-profit sector (Ball State, IU Ball Health Hospital, Youth Opportunity Center), and the fact that half of this freakin' county is located in a TIF district. So, all of those property taxes from TIF districts go into a special fund and not to the general coffers of the county/city.

I will not contest that Muncie faces serious challenges. I have lived here for 11 years and we have not seen any meaningful appreciation since we purchased our own home. And we are not counting on appreciation for any of our rentals (however, we have fixed each of them up to the point where we have significantly increased their value). And Muncie has lost much of its manufacturing base. However, there is increasing investment in providing amenities for residents -- new sidewalks, new parks, an arts initiative downtown, and a downtown hotel being built to serve the convention center. Nobody will confuse Muncie with Fishers, Noblesville or even Pendleton. However, I would much rather be in this market than I would be in similar markets like Marion, Kokomo, Anderson, or New Castle. That being said, there are neighborhoods where I asolutely would not buy a house in Muncie (industry south/central, the old west end, and whitely come to mind). However, there are not areas in Muncie where it is perfectly fine to invest in, Unless you know the area where your are purchasing the property, you can easily get burned buying what seems like cheap houses in Muncie. In fact, we picked up our first rental from a former out-of-state former owner (it was a foreclosure when we purchased it).

If I or the other posters have not scared you away from investing in Muncie, I would be happy to give you my (unexpert) opinion of the properties in question by doing a drive by. I would be happy to tell you whether I would personally invest in the properties and that particular neighborhood. It is kind of what I do for fun anyway. Just send me a personal message with the details of the properties. 

One additional thought. Our first two properties are located in what I would categorize as a Class C area -- mix or working class owners and rentals; homes built primarily in the 1940s; most 2 br but some 3 br. Some houses fixed up and others where I would not let my dog live in. Our strategy has been to fix up our rentals to the level where we would like them if they were our own residence. So, we have put in stainless steel appliances, tile backsplashes, new cabinets and bathrooms, along with new Allure floors. They look really good and it cuts down on maintenance and repairs. Then, we price them slightly below market. Consequently, we get a flood of high quality applicants. We probably average 20 inquiries within the first 24 hours of posting. Then, we can be very selective as to who we choose. So, we have only had minor repairs to any of our properties. And, to date, we have not had a month where we have been unoccupied. This last house, we listed it last Wednesday at 10 pm, showed it all day Sunday, and have a signed year's lease today. And we have dozens and dozens of new inquiries and requests from qualified potential tenants to keep them on our list should any of our other properties open up. I guess my point is that you can get good tenants who respect your properties in Class C neighborhoods. You just have to be picky as to who you rent to. I would rather give up a couple month's worth of rent in order to secure the right tenant. So far, we have not had to do that. But we put too much time and money into our properties to see them destroyed by a crappy tenant.

Good luck!