There are some warning signs and trends in the Indianapolis real estate investment market that you need to know about. My clients and I have purchased over 200 homes in the past three years in the Indy market. The volume of buyers continues to skyrocket, but the number of homes available has remained steady or declined. This imbalance of supply and demand has cause home prices to increase significantly. Unfortunately, the rent has not increased proportionately.
For example, one year ago, we could buy and rehab a home for $50,000 that would rent for $800 per month. Now, the exact same home that will rent for $800 will cost at least $60,000 to buy and rehab (the rehab costs have not increased). A year ago, you would have earned an 11% net cash flow after factoring in insurance, taxes, management, maintenance, and vacancy. Now, with an investment that is 20% higher, the cash flow is 20% lower, which is about 9% for the exact same property. This assumes you pay cash for the property. If you use financing, the returns are higher.
Given this change in the market, investors have three primary options:
1. Continue buying even though the prices are higher. If a 9% cash flow is fine with you, then there is no problem. Even if 9% cash flow is low, keep in mind that the property is appreciating much faster than normal and you should reap the rewards when you sell the property.
2. Wait on the sideline until the cash flows go back up. This could be months, but it could also take years. The only way for the returns go back up is for the price to go back down or for increases in rent to catch up to the increases in property prices. Neither of these will happen quickly.
3. Seek an alternate market. We have started investing in Anderson, Indiana. It is only 30 minutes from the edge of Indy and just 12 miles up the road from Noblesville, which is the "edge" of the Indy suburbs (and has the same supply/demand challenge as Indy). This City had some hard economic times and is starting to rebound. The home prices have been depressed but have recently turned around. If you like the idea of "Buy Low, Sell High" this is a great place to buy. Just last week, we acquired two properties that were 3br/2ba solid brick ranches with 2 car garages and over 1,000 square feet. They should get $825 and $850 in rent. The all in price (purchase plus minor repair) of each was UNDER $50,000. That same price-to-rent ratio in Indianapolis would currently cost $65,000 to $70,000.
If you have been having a hard time finding great "deals" in Indianapolis recently, now you know why. Good luck with your investing wherever it may be.
Steve Lawson
