All Forum Posts by: Devon Shaw

Hi Vik! I'm an investor focused agent in the Indianapolis market and my company also does full service property management. 

I personally don't think CoC is the best metric to judge real estate if you're looking for long term wealth building strategy. You'll definitely miss out on good opportunities if that's a key driver. In my opinion you need to look at all the profit centers that real estate provides which goes beyond cash flow (Appreciation, principal paydown, tax benefits, inflation hedging, etc.)

Indianapolis is a fantastic market though. We have a very strong local economy and strong rental demand in most areas. You will also get solid appreciation in most neighborhoods around Central Indiana. 

My investor clients have had great success in Anderson, IN the last few years and on paper the city is less than stellar, however, everything I've helped purchase there has performed pretty well. There is solid rental demand, good tenant quality, very affordable properties and appreciation to boot. 

Definitely important to have experienced boots on the ground that has the real world insight into where to buy. 

I would be happy to connect and be a resource if you have any further questions about Indy! 

@Christopher Ochoa The lull was really only through about the 1st quarter of this year. It's picked back up so good cash flow is definitely tough to find. Still finding deals that work though! There's just not an onslaught. 

Hello to anyone who may stumble upon this post! 

I'm Devon, an investor focused agent in the Central Indiana market, I've been helping real estate investors purchase properties for about the last 4 years and it's been a very interesting journey to say the least. I thought I would take a few minutes just to share some insight into how 2023 has been going in case you are interested in exploring the Indianapolis market for yourself. 

- First and foremost, and not unique to Indy, obviously interest rates have been the main character in the story for anyone looking to buy. We saw quite a lull in Q1 of this year and were actually able to get some pretty good deals and negotiate offers more than I've see in the last 2 years. This was pretty short lived, however, and once spring hit we saw things go back a pretty "normal" competition level. Luckily I'm not seeing the craziness that was 2020 and 2021 such as offers 50K over asking, waived inspection and appraisal contingencies, etc but you still have to put your best foot forward. 

- Currently, most deals we are getting under contract are at least at asking and maybe 5K-10K over at most. I have been having some success negotiating seller paid closing costs to help with rate buy down as well. 

- If you see a property that makes sense, I encourage you to get an offer in ASAP. I'm seeing a lot of properties go in 24 hours or less after hitting the market. 

- The suburbs and areas with desirable school districts are HOT. If you're looking to purchase in these types of neighborhoods be prepared to act quickly and competitively. Owner Occupants are trying to scoop these houses up too so you'll have to make your offer appealing. 

- Anderson, IN has been a very successful area for my investor clients. It's a city of around 55,000 about 40 minutes north east of Indianapolis and price to rent ratios are better than what you will find in Indy when taking into account area and tenant quality. I would consider it a working class town and we have seen great rental demand and had great leasing experience there with the roughly 35 properties that we manage. I've also seen solid appreciation for the homes we've helped purchase in Anderson as well. 

- When dealing with inspection negotiations, I have found that sellers respond better if we ask for concessions as opposed having the seller complete repairs prior to closing. We have contractors who can get us estimates for inspection items and we use that to negotiate.

A couple more pieces of advice I would like to leave you with:

- Make sure your Agent is knowledgeable about rental properties and what it takes to get them rent ready. "Rent Ready" for a tenant and "Move in Ready" for an owner occupant are two completely different things. Your property can be in pretty good shape and easily need another 5K-10K to get it where it needs to be from a rental standpoint. We have had numerous Clients come to our property management team that were told their property was in great shape and basically move in ready only to have our property manager walk it and have a list of 20+ things they find that should be done before placing a tenant. It can obviously be a blindside and wreck your initial calculations for your ROI.

This is not to say you can expect an Agent to catch everything and we are by no means inspectors or contractors, but anyone helping you purchase a rental property should have a basic understanding of rental standards to put out a good product that will attract a good tenant. 

- Lastly, if you are looking at real estate as a long term buy and hold strategy, you have to look beyond just cash flow. It's absolutely an important metric, but it's not the end all be all and it's not how you build wealth with real estate. There are 4 other key aspects to consider when analyzing deals and they are - tax savings, principal paydown/equity building, appreciation, and inflation hedging. 

I recommend getting a good CPA that is experienced in the real estate niche to help you put some of these puzzle pieces together. 

Think about the big picture and your goals when it comes buying rental real estate or you may be passing by on some solid opportunities!

I would love to hear YOUR experiences and other tips you may have to share about your successes or mistakes!

Please feel free to DM me if you have any follow up questions or would just like to connect :)

Hi Lisa! 

I hope you're having a great Thursday. I would love to connect to see if we could be a good fit. I am a 100% investor focused agent in the Indianapolis market and our company also does full service property management so we are a one stop shop. 

We can add a ton of value to your real estate journey I promise you that. 

Please feel free to shoot me a DM! :)

Hi Wendy!

I'm an investor focused agent in the Indianapolis area and would love to connect! I can definitely educate you on our market and provide some good resources while you're in the research phase. 

Thanks!

Hi Dan!

I'm an investor focused agent in the Indianapolis, IN area. I have a heavy focus/passion for investor education and would be happy to connect at any point to talk more about our market!

Feel free to shoot me a message anytime! :) 

I just sent you a connection request. I can shoot you some recommendations! 

I know a lot of people will read the headline of this blog and move right along to something else.

Because, in reality, there’s definitely a segment of investors - particularly new investors - who aren’t in the position to actually pay cash for an investment property… at least an investment property that’s habitable and in a respectable area.

But, for those of you in the position where you could pay all cash for an investment home, I’m sure you’ve debated the idea of paying cash, or using a mortgage - leverage - to help pay for the property.

This is a long-standing debate in the investment world and one that really doesn’t have a magic bullet answer.

At the end of the day, the answer all comes down to your personal needs and wants and what makes the best sense for you as an investor.

So, I thought I would spend some time discussing Pros/Cons of both and also talk about how we’ve used both over the years during our investment ventures.

Pros of Paying Cash for a Rental Home

1. Initial Cost Savings - Mortgages aren’t free. If you’ve ever bought a home, you know the various fees involved with obtaining and closing that loan:
   
   
   • Origination Fees
   • Processing Fees
   • Underwriting Fees
   • Appraisal Fees
   • Recording Fees
   • Discount Points
   • Etc.

   In Indiana, you can expect to pay around $2,000 to simply obtain a mortgage. Obviously, if you pay cash, you eliminate all these costs.

2. Initial Time Savings - Not only are mortgages expensive, they can also take a lot of time, particularly with all the heightened underwriting requirements. We generally plan on 45 days from the time an offer is written until the closing can occur. Most of the time needed is to simply get the loan approved and funded.
   
   If you are like most investors, you want to get down to business quickly. A cash closing can occur very fast - in a matter of days in some cases, which will allow you to begin your project much faster.
   
3. More Attractive Offers - Sellers like cash offers, particularly any seller who has had to deal with low appraisals or deals that have blown apart because of underwriting problems. All things being equal, your offer will likely be chosen if you come in with cash and competing offers have mortgage contingencies.
   
   Note: Don’t expect sellers to necessarily take less of a net profit from your cash offer. A mortgage doesn’t really “cost” the seller anything, so the net is the net. But, in some cases, and with some sellers, your cash offer will win out.
4. Better Monthly Cash Flow - Not only will paying cash save you the initial mortgage expense, but you will also never pay mortgage interest each month, which will increase your monthly cash flow potential. As you know, the majority of a loan payment during the first several years will go toward mortgage interest. While this interest can be tax deductible, it’s still a hit to cash flow.

Cons of Paying All Cash for a Rental Home

Paying all cash can essentially place one very large egg in your investment basket. For example, if you have $100,000 to invest, and you invest it all in one property, you take on some risk. Not only are you 100% in real estate, you are 100% in one specific neighborhood in one specific city in one specific state. If that neighborhood were to fall into disfavor (it does happen, trust me) you have a lot to lose. While you reduce your risk if you pay cash for multiple properties in different areas, it’s still a lot of money tied up in one single investment.

Pros of Financing (Leveraging)

1. Less Funds Needed. Obviously, if you buy a $100,000 house and you pay cash, you’ll need at least $100,000 to make that happen. If you leverage the investment, you’ll need much less. Most lenders like to see investors put down 20% of the purchase price. In that case, you’ll need to come up with a $20,000 down payment, considerably less than paying cash.
2. Greater Buying Power. If you are like most investors, you have limited capital to invest. Let’s say that you have $200,000 in savings that you want to invest in real estate. If you choose to buy properties in the $100,000 range, you’ll be able to buy two properties if you pay cash. If you leverage, you’ll be able to buy 10 properties, assuming a 20% down payment. That’s obviously a massive difference.

Cons of Leveraging

Any investor who was involved in real estate during 2007-2008 knows the risk of having a mortgage. Foreclosures still happen every day, but they happened en masse during that time. Property values plummeted, sub-prime mortgage rates skyrocketed, and many investors, particularly those who probably weren’t prepared to be investors in the first place, lost their properties.

Any mortgage has inherent risk. If you choose to leverage, make sure you prepare yourself accordingly.

Our Story

Our Rental Homes - If you’ve spent any time on our website, or read other blogs of ours, you’ll know that my business partner and I own a decent amount of rental properties.

And, we chose to use mortgages for all of these properties.

ell, “chose” probably isn't the best word. When we first started investing, we didn’t have a choice. We started buying in our 20’s, when we had very little money to invest, and used the power of leverage to acquire many properties. Lending practices were, by today’s comparison, very loose. In some cases, we only had to put down 10% as a down payment, which allowed us to buy a lot of homes with relatively little cash out of pocket.

We started with the idea of buying one home a year. But, after we bought the first home, and had some good success with it, we started buying around one a month for a while. We kept our lender busy, we used investment savings for our down payments, and we built a nice portfolio of single family and small multi-family properties with not a huge amount of capital investment.

Now, 17 years after buying that first property, the power of leverage has worked its magic for us. While being a Landlord has been a grind at times, we’ve used our Tenant’s rent money to significantly pay down our mortgages, benefited from all the great tax benefits real estate provides, and have seen some nice appreciation with most of our homes.

The bottom line is that we could have never achieved this kind of success without leverage. It was our only solution and, as it turns out, our best solution as well.

Flipping Properties - We are still actively buying properties to buy, rehab and sell. We used to do a decent amount of volume several years ago. However, with fewer foreclosures available and more and more competition, we now have a hard time competing in that arena.

When we do get lucky and buy a flip candidate, we always pay cash. The main reason is that the Marion County Sheriff Sale requires cash at purchase. But also, since our time frame to sell the home is generally short, we don't want to incur the extra cost or waste the additional time that amortgage requires.

So, if you want to maximize your return on homes you flip, cash is definitely the best option.

What’s Your Best Solution?

Again, your best solution will depend on your specific investment goals. But, here are some general thoughts that you may find beneficial. Keep in mind that we are not financial advisors, and we encourage you to discuss your long-term investment goals with your financial advisor.

Young investor with a long-term perspective - If you are relatively young (I’ll let you decide what that means) and plan on being in real estate for a long time (at least 10-20 years), I suggest using leverage to buy your homes.

It will be difficult at times. You’ll question why you bought real estate to begin with. But, in most cases, you will build wealth without a large capital investment.

Older investor with a short-term perspective -
We represent a lot of near-retirement or retired investors who have decided to invest in real estate and generally use cash. In some cases, these are self-directed IRA products.

In many cases, these investors have a 5-year time frame, where they hope to buy, earn some cash flow along the way, and sell for a profit. Using cash eliminates the up-front cost of a mortgage and provides the opportunity to greater cash flow since there’s no mortgage.

Warning: Even if you pay all cash and, therefore, should have a greater chance for positive cash flow, DO NOT count on a consistent cash flow stream each and every month. This is something we preach to all of our customers… there’s no guarantee in real estate. If you need a new roof, a new HVAC system, or suffer an eviction, for example, you will have a cash flow issue.

In closing, whatever method you choose to buy your investment property, you'll be fine. The most important decision is made when you decide to actually purchase an investment property. How you choose to finance it, in the whole scheme of things, is secondary.

1. Do the owners of the PM Company own rental real estate? This is a critical question to get answered right away. If they don’t own their own rental real estate, or have never owned rental real estate, it’s a huge red flag.
   
   Would you hire a stock broker that didn’t invest in the stock market? Would you hire a coach who had no experience playing the sport? Of course not.
   
   Owners of PM Companies that own rental real estate have tremendous insight into the pain points, needs, and wants of fellow investors. They have walked in your shoes and generally know what’s important to you.
   
   I do not buy the claim that these owners, generally, will fill their vacancies before yours. Well-run companies will use consistent marketing methods for all homes. You could use the same argument for management companies that could manage dozens or even hundreds of homes for a single organization… what’s to prevent them from pushing their larger client’s properties ahead of yours?
   
   Bottom line: You have to trust the management company you choose. In order to gain that trust, call them, research them, and don’t move forward until you are comfortable.
2. Understand ALL the fees. Unfortunately, management companies generally do a very poor job of listing their fees on their website. That’s why you’ll not only need to get a copy of a Property Management Agreement, but also ask the specific question, “Can you tell me allthe fees I will have to pay for your services?”
   
   Price is important, but it shouldn't necessarily be the most important factor in your decision. Generally, well-run, experienced Property Management companies will charge higher than average fees. But, in return, they should provide a higher level of service, get your properties rented more quickly, and attend to maintenance more efficiently. This all translates into a higher return for you.
   
3. Understand Communication Policies. Again, the number one complaint about Property Managers is the lack of communication. That’s likely because most management companies have not created a company culture that stresses communication, or they don’t have the property staffing in place to allow for prompt communication.
   
   Ask what their corporate policy is regarding communication. What is the preferred method of communication? How fast will your inquiry be returned?
   
   Few things will frustate you more than not getting your questions answered. Your investment is very important to you and when you need answers, you need a property management partner who will provide them... promptly.
   
4. Ask about the Staff Size & Experience. If the management company doesn’t have a full staff listing on its website, you’ll need to uncover this information during the interview. It’s critical that whatever company you choose is fully staffed to meet your needs. There are not any perfect ratios out there, but if the solution you are considering has more than a 50:1 ratio (50 properties for every employee) you should probably continue your search.
   
   Along with this, a woefully inexperienced staff can be just as dangerous. Not only should you ask how long the company has been in business (not just in real estate, but managing 3rd party properties) but also ask for the average experience of its employees. Experience matters greatly, so don’t discount or overlook it.
   
5. Understand maintenance protocols. Every management company should document, exactly, how they will handle maintenance within their Property Management Agreement. If they don’t, you should be concerned. You’ll need to understand when the PM must get your approval for maintenance, or when/how you will be notified when maintenance occurs.
   
   You should also understand how your Tenant - your customer - can expect maintenance to be handled. What's the best method for the Tenant to submit work orders? What response time should the Tenant expect? What emergency maintenance protocols are in place? 

Insurance.

I get it.

Real estate is filled with lots of exciting stuff, but insurance generally isn’t considered one of them. Insurance ranks right up there with property taxes... just another expense to throw on the pile.

Real estate is filled with lots of exciting stuff, but insurance generally isn’t considered one of them. Insurance ranks right up there with property taxes... just another expense to throw on the pile.

But, as a real estate investor, insurance is VERY important. You hope you never need it, but you absolutely must ensure that you have the proper insurance in place.

Quite often, I get questions from some of our new investors that surround insurance. Generally, they ask:

“What type of insurance do I need as a Landlord?”

So, I thought I would spend some time discussing insurance for investment properties.

At the end of the day, there’s not a big difference in the policy you have on your personal home and the policy you’ll need for your rental property. And in many cases, you can use the same insurance carrier you currently use for your personal residence. This is especially helpful if you are converting your personal residence into a rental home.

Rental Dwelling Policy

The policy you receive for your rental home is called a “Rental Dwelling Policy.” These types of policies usually cost a little more than a standard Homeowners policy and they contain three basic coverages:

• Structural – Like the traditional homeowners policy, your rental dwelling policy will protect your home against damage caused by fire, lightening, wind, hail and other covered perils. There’s nothing different about this coverage at all.
• Liability – All rental policies also come with liability coverage. A standard homeowners policy provides personal liability, but that liability would not cover Landlord associated risks that a Rental Dwelling Policy does.
  
  Now, in terms of liability, you need to seriously consider the proper coverage limits. A standard policy will generally come with around $300,000 of liability coverage. We suggest you increase the coverage to at least $500,000 or even more.
  
  If you are a high net worth individual, you might want to increase this coverage to match your net worth. In addition, if you hold the property under an LLC, the liability coverage should match the assets of the LLC.
  
  Unfortunately, we live in a litigious society. Let’s say the Tenant falls down the stairs and is severely injured, or a furnace explodes and your Tenants are injured or even killed. Your liability coverage is there to protect you against severe financial loss.
• Lost Rents – Finally, a coverage unique to a rental policy is lost rents. If your home suffers a fire, for example, and the Tenants have to relocate, your insurance company will pay you for your lost rents during the vacancy. Generally, this coverage lasts for no more than one year.

Other Insurance Considerations

There are a couple of other items I wanted to mention about a Rental Dwelling Policy.

• Deductible -- Consult your insurance agent or even a financial advisor, about the proper deductible for you. The amount of deductible you choose will greatly impact your annual premium. As you probably know, the higher the deductible, the lower the premium. Whether you choose a high or low deductible completely depends on your individual needs and wants.
• Tax Benefits -- Unlike a standard Homeowners Policy, Rental Dwelling Policies are tax deductible. Insurance is considered part of your business expenses and you can deduct that cost accordingly.

Don't Forget Renters Insurance

Finally, as you consider insurance, do not forget to require Renters Insurance from any Tenant that you place in your property. This is a very important coverage for both you and your Tenant.

Again, while insurance isn’t necessarily an exciting topic, it’s a topic that you must address and address carefully.