All Forum Posts by: Ross Denman

@Ben Fonohema I'm an investor and business developer for a property management company and work with a lot of OOS investors who have holdings in the Indianapolis Metro market. It's a good market, but you have to weed through the hype. Building a good team and learning to do your due diligence and properly evaluate deals is going to be the most important steps. I also recommend coming out and visiting the city at some point. There can be a discrepancy between the way the city is marketed and the actual reality of the city and I think it's important to see first hand. There are too many people marketing "up and coming" areas that are generally pretty risky for OOS investors if they don't have an adequate team and resources. I usually recommend starting with more of the straightforward stuff first and you can expand as you are more comfortable with your team and have more experience. The marketers who are supplying inventory tend to make things sound easier than they actually are and things can get rapidly frustrating for new investors.

Thanks @Noel R. for the referral.

@Jorge Pereira I'd be happy to answer any questions that you may have and give some guidance. Also, while Derek is a competitor, I can vouch that he works for a good PM company as well. Most of the troubling PM's have closed down in Indy so I think that there are a lot of decent options. I will tell you, I highly recommend that you make a trip to Indy before closing on your first purchase. The story you see from wholesalers and MLS listings can be quite different than actually walking a neighborhood as Indy really can be street by street in various areas and you need to have an understanding of what "up and coming" means, what a city initiative looks like, and they way those differ from already established areas. My job is to help our clients (and prospective clients) weed through a lot of the noise and get a realistic evaluation on a property. Being able to understand the risks associated with rental property types and areas will be a huge contribution to your success. It's easy to get hyped up on a podcast, video, or article, but there's usually a lot more to it than what's covered in a 30 minute success story... especially if they're selling something.

@Jeff Smith I just got access to about $500k and we're expanding our business model. Personally, I hate most wholesale deals in the area, but wouldn't mind partnering with a wholesaler if the numbers work. I am an investor myself and the business developer for a property management company, so I am in the trenches and very familiar with most of the areas and neighborhoods in the Indy area and would be happy to give you some insight. Just a caveat though... I'm not cheap, but I will do have somewhat stringent criteria for a deal to work. I've seen many ways that deals unravel and I always plan for the worst. The only thing worse than no deal... is a bad deal, and there are plenty to choose from.

I would love to team up with a seasoned wholesaler and be their lead buyer, as I'm not interested in wholesaling myself. Understand this... it seems that there are 2 new wholesalers each week in the Indy market and every absentee owner in the city gets a new mailer for their properties every couple of days. Wholesaling can be very competitive here, but there are always deals to be made.

Feel free to reach out if you'd like to have a discussion about opportunities here.

@Michael Svoboda I think that the best flips are done in the areas with the most retail activity... mainly the suburbs. My favorite suburbs to watch are actually Brownsburg, Avon, and Whitestown, but those are usually for nice rentals as it's tough to find adequate distress in the suburbs right now to make a decent flip. The best flips would be in Carmel, Fishers, or Zionsville, but finding opportunities can be tough. You might keep an eye on auctions and sheriff sales.

I'm not a fan of the "up and coming" areas of Indy as there were a lot of investors who have gotten caught in Bates and Fountain Square without being able to sell their homes at a reasonable price. Many of them ended up with a secondary strategy of BRRRRing the property instead, but they are probably not going to cash flow as it wasn't purchased with the BRRRR model in mind. I do like the near northside of Indianapolis right now as it's really hot, but finding a decent entrypoint can be a challenge. Herron Morton and Kennedy King neighborhoods really have great value right now, and anything near the Monon Trail should carry some more serious consideration as well. These are older homes and much bigger projects though. I've seen $150k rehabs in these areas and that's a huge project to try to manage if you aren't familiar with managing contractors.

@Brian Bistolfo We have a lot of clients building their portfolios using the BRRRR method, but it is getting very competitive. Personally, I'm not a fan of about 80+% of the wholesale deals that I see, but we have a decent network of realtors who shoot us pocket listings for homes that meet our criteria. We've also just started a team that is walking neighborhoods, knocking on doors, and engaging residents in target neighborhoods to get deals even closer to the seller. While direct mail works, I get about 5 mailers each month on all of my properties and they typically go straight to the trash. Talking face to face is much more effective and there are not a lot of investors doing this as it can be a very cumbersome activity.

As far as having a hard time finding PM's and GC's go... most of the bad PM's have been run off or put out of business, but many investors expect their PM's to do everything for free and don't want to spend any money in maintaining and protecting their properties and keeping their tenants happy. It always kills me to see investors complain about spend an extra few hundred dollars each year to maintain a property and keep a good tenant happy, then watch them leave, lose a good tenant, and then their home starts killing them with problems because they didn't want to clean the gutters or inspect the home periodically.

GC's are a different story. Good GC's are very busy right now. All of us have to protect our GC's and their time as well. Investors tend to have high expectations out of GC's, but don't want to pay for their time. They would rather be working on a job that is paying them than to spend 20 hours doing your 4 line itemized rehab budgets on potential homes. My GC's bend over backwards for me because they know that if I send them to a property for numbers, it likely means more work for them, because we are closers.

I think the best course of action is to get plugged in to an already active network and build your team from there. There are various things to consider about the BRRRR model that doesn't typically get discussed in the podcasts and articles that get everyone hyped. It is not an income model, it's a growth model. That means be prepared for very slim cash flow, keeping money tied up in reserves, and concern yourself less with how much money you can pull back out and look at the actual numbers. If your mortgage is higher than 45% of your rent rate, you're probably not in the best position if you have an investment property that is going to have a higher vacancy rate or maintenance load. You may cash flow every year, but when your tenant moves out, you may find that it wipes out 3 or 4 years worth of cash flow. The true power of the BRRRR is in the underlying equity growth from a leveraged position. Most deals should yield a 100% COC ROI in equity growth in 4-6 years if positioned correctly. Typically this is going to outpace cash flow by quite a bit, but because of the lack of cash flow, you have to retain liquidity to handle any major expenses that come up.

For instance... if you BRRRR a $75k home that rents for $900/mo and refinance all but $10k back out your probably looking at about $4,000 in cash flow over 5 years if you have a vacancy or two. That's only a 40% ROI or 8% annually on average. Not really a bad investment... but that home is going to grow in value around $2,500-$3,500 each year meaning that you will have another $12.5k+ in equity in 5 years. That's a 25% ROI annually. While principal paydown isn't usually going to come in to play in a 5 year period, you will also have more equity from the very beginning due to the value add. Selling in 5 years will likely net around $30k in total on a $10k investment. Even if you have to keep $5-$10k available for reserves for the property, you still have a very good ROI. If you hold it for 30 years and pay off the note, you will be in an amazing position, but most of us are holding properties that long.

@Ryan Ray we have clients doing BRRRR's and variations all year long. Deals are pretty competitive right now, but the market should soften over the next couple of months when school gets back in session. I'm actually expecting a pretty soft market until the election next year as the upcoming political circus will likely make a lot of people more hesitant to making major purchases.

With that being said, I would recommend building a good team and filling up your network. You will need help with acquisitions, renovations, and lending. I usually help my clients build their team with a variety of providers and professionals that many of my clients have worked with over the last couple of years.

Please understand that there is a lot of hype around the BRRRR method and while it's an extremely powerful way to build a portfolio, it's rare that you can actually refinance 100% of your money back out and cash flow as well. You have to have tons of equity and great rent rates to do this and I've only seen a few that fit this criteria. My goal is to have no more than 20% of the FMV invested over the long term. If I can't refinance that much, I should just purchase conventional with 20% down.

You will also want to ensure that you have adequate reserves. My personal rentals tend to cash flow about $1,000-$2,500/year and that's simply not enough income to handle any major overhead like vacancies or major repairs. Currently, I am putting in an insurance claim for a major wind and hail storm we had about 6 weeks ago. The estimate is over $10k, but I have a $5k deductible. That's going to take half of my reserves for the property and put me in the hole for cash flow for a few years if I don't have any other major expenses come up. Fortunately, I'm prepared for these kinds of things, but many new investors get caught off guard when issues come up and all of their money is tied up BRRRRing another property.

Feel free to reach out if you want to know more about what I'm seeing in the Indy market.

We've had clients find SFR deals in decent schools in most areas of Indianapolis and the metro area, but you will find them most frequently on the East side of Indianapolis in Warren and Lawrence Townships around German Church Rd. The eastside tends to have spots of high and violent crime, so it tends to have a worse reputation and lower values, but we still do pretty good with our rentals there.

We also see a few opportunities in the other in exterior townships as well. Keep an eye out in areas like Franklin Township around Thompson Rd or Southeastern Ave, most anywhere in Perry Township, Decatur Township around Camby Rd (Camby area,) and Southport Rd (Old Mill Park/Pheasant Run areas,) Wayne Township between High School Rd and Raceway Rd (Sungate, Cameron Meadows, Chapel Glen, Chapel Hills, Farley, etc.,) or Pike Township near 56th and Georgetown (Eagle Highlands, Eagle Glen), 56th St and Lafayette Rd (Deer Creek/Liberty Creek area,) or anywhere around Guion Rd north of 38th St. It's harder to find well priced deals in Washington Township as there are some of very nice and established areas. Keep an eye out for areas with flood zones though as they tend to keep property values low and attract more troublesome residents. We see these in areas like Mars Hill, parts of Eagledale, north of Pleasant Run Parkway, Ravenswood, etc. Locals can do ok, but I think OOS investors should be a little more selective as you will have to rely a lot on your property manager and they don't usually have the time to babysit tough properties all year long.

Basically, if you can find a rental of $900+/mo in the exterior township school systems that are better than the 1% rule, you'll do pretty good. I like to find homes that rent for $900/mo in a $75k range all the way to $1,200/mo rentals around $100k. It's tough to find decent rent ratios above the $1,200/mo mark.

I think a good property is more important than great numbers. A good property may not make your desired numbers in the first year or two, but over time they will usually be worth more and outperform the lower end homes. It's the difference between buying penny stocks or investing in Amazon.com. Consistency and predictability vs speculation and volatility.

We have a lot of OOS investors in Indianapolis, but I'm not a fan of duplexes. Cash flow is very inconsistent due to high vacancy rates and most duplexes are in lower income areas. Personally, I prefer SFR's until you get to 4 unit buildings or more. I just think they are more consistent in performance.

I'm not sure if you actually mean "house hacking" as that means that you will be using one of the units as a personal residence for a lower down payment. Of course that also means a higher mortgage cost, but typically, you get to live for free while someone else is paying down the principal. Are you planning on moving to your target city? Otherwise, you will likely need to put 20% down or by for cash and refi.

I think that crime is the number one thing to keep your eye on. Schools aren't as important, since these aren't usually catering to families with school age children, but gangs, drugs, murders, assaults, break-ins, etc. will ensure that you get amazing less than stellar tenants and all the complications that come along with that.

Best areas to consider in my opinion for multi's would be near Broad Ripple off of College Ave, but don't expect to find a deal. Good properties go for a premium. Be sure to work with a realtor and property manager or other investment firm to give you a better idea of the neighborhoods that you are targeting. We are in them all of the time.

@Marlo I. We have a lot of OOS clients looking for BRRRR's. We usually have 1-2 clients BRRRR'ing a property at any given time. The biggest issue is finding adequate inventory. The wholesale deals can be very lean and the MLS deals are very competitive. We have started some new activities to get more access to pocket listings or direct to owner deals for our clients, but as always, it takes time to build up the lead funnel.

A couple of caveats when checking in to the BRRRR strategy.

• Understand that the more distress you take on, the more likely that your budget will get blown apart
• Understand the impact of leverage on the cash flow. Pulling all of your money out may not always be the best strategy.
• What's more important, cash flow or getting all/most of your money back? I've seen BRRRR deals that end up coming out of pocket a few thousands of dollars during the first tenant turn. Make-ready expenses, mortgage payments, utilities, lawn care, realtor/PM placement fees, etc. If you pull too much money out and only cash flow $1,000/year and have to dip in to reserves or come out of pocket every so often, are you ok with that?
• Understand market timing. Appraisals for refi's will usually be stronger in the late summer/early fall than in the late winter. Appraisers only go back 6 months for comps and if you are in the wrong time of year, your appraisal may come back soft.
• Understand the lending requirements. If your lender requires seasoning, you may be limited to very few deals. Also, the understand that the more mortgages you have, the tighter the requirements and terms usually become.

Unfortunately, people do not realize that when investing, there are growth and income strategies. BRRRR is a growth strategy... not necessarily an income strategy. It kills me that people want to refinance 100% of their money out and cash flow $400/mo on a $900 rental. That's pretty unrealistic in most cases. Set reasonable expectations and out-perform them. Most BRRRR deals that I see average about $2,500/year cash flow until a tenant leaves. If you average the portfolio after a tenant leaves, it usually averages about $1,000-$1,500/year. Vacancy rate has a huge impact on this fluctuation, so it's important to invest with attracting and keeping good tenants in mind.

____________

So, my last rental ended up being a BRRRR, but it was unintentional as we were over budget and decided to rent and refi instead.

Purchased - $18,0000

Rehab - $71,000

Holding costs during rehab - $3,200

All-in - almost $93k

ARV (appraisal) - $122k

Refi amount - $77k (we chose this number to ensure cash flow.)

Mortgage - $453/mo

First year rent - $895/mo

Long-term investment - $16k

Last years cash flow - $1,100 (6.875% COC ROI)

Rent at second year - $950/mo (we should be close to 10% COC ROI this year)

We have about $50k equity in the deal as it sits right now.

This is not including the fact that we have $10k sitting in the bank for reserves. If you figure that as part of our investment our COC ROI is 4.23%. Not meeting most of your dream investments, but I'm still happy with it.

Lastly, good thing that we have that money in reserves. Just got a quote from a roofer/exterior repair company to evaluate the damage from the multiple wind/hail storms we've had this year. Almost $11k and we have a $5k insurance deductible. Guess that kills our cash flow for the next 4-5 years. Sounds like negative cash flow until year 5, but we'll have another $20k equity in the home or more though.

Happy BRRRR'ing!

So, early in my investing career, I took a job as the business manager for a GC. I was in charge of new business and estimates. I learned very quickly that people (especially investors) will constantly beat you up over your pricing. The slimeball GC that I worked with had a solution... give a low ball estimate and add change orders as you go to get the price where it should have been in the first place. I didn't like it, but the investors are asking for contractors to get over on them when they will not pay for their time and expertise.

Secondly, I've seen contractors who are so disgruntled over the pay and way that they are being treated, the work becomes sloppy and slow. I've seen contractors who others couldn't have success with do great work when they were treated well and paid adequately. Be careful how hard you tighten the screws on your contractors as it will frequently cost you more in the long run. I can't tell you how many times I've seen investors lose thousands over contractor issues. Time, quality, drama, fraud, theft, etc.

Lastly, I have a client who was doing a flip and after the work was done, the home was broken into, appliances stolen, and vandalized. I visited the property afterward and it seemed too perfect and efficient to be a random act. I did find out that his GC had issues with some of the subs and, although nobody can prove anything, they feel that the subcontractor may have been the culprit. Contractors are not usually the most sophisticated group, pursuing civil cases, etc... they are more likely to sabotage your home as they have the exact toolset for that.

@Jay Hinrichs mentioned a couple of pages ago that the most active investors usually manage their own projects and sub-contract a lot of things. While I've seen this, I have 2 clients who actually have partnered with GC's to be proprietary and have an equity stake in the deal or portfolio. Usually 10%-15%. They work on slimmer margins, take care of service requests on rentals, handle emergencies, etc. on long-term holds. They get the long-term upside from the partnership and know that it's a long-term relationship that benefits them.

I'm not sure at what point it should be a consideration for this kind of thing, but it makes sense to develop long-term relationships with your contractors... especially if you are out of state.

Example: Buy a home that needs $55k in rehab. The value after the BRRRR is complete is around $120k. If the GC does the work at a 10% discount (about $5,500 less) but gets a $12k stake in the property, gets 10% of the annual cash flow, as well as gets paid for ongoing work to sustain the rental property. This reduces your initial out of pocket expense and creates a long-term relationship that will be a big part of your future investments and success.