Indianapolis is a city where many investors have decided to invest because it’s considered a “Cash flow Market.” We’re not a market, like in coastal cities, for example, that sees dramatic increase in property values, but we are considered a stable market that produces cash flow.
So, a common question we receive from investors, is “How Much Cash Flow Can I Expect in Indianapolis?”
Generally, investors that we work with want and expect around $200-$300 per month in cash flow for single family homes. However, more recently, Investors seem to be finding numbers in the $100-$150 range (if financing).
Calculating cash flow is one of the most important and basic calculations you can use to evaluate rental real estate. It’s basically just understanding two big buckets: Income and Expenses.
Simply put, to calculate cash flow, you use the following:
Cash Flow = Total Income – Total Expenses
Sounds easy, right? Well, it should be, if you have a good grasp on both your income and expenses.
Calculating Income for Your Indianapolis Investment Property
Let’s start with income. Let’s say that you purchase a single family home that will rent for $1,200 per month. Also assume that there’s no other forms of income for you, meaning there is no chance of laundry income, for example, that you might receive if you purchase a multi-family property.
So, your Total Income for that property should be $1,200 per month.
Calculating Expenses for Your Indianapolis Investment Home
Now, expenses can be more difficult to understand, because there can be all kinds of expenses to consider. Some of these expenses could include:
- Your Mortgage
- Property Taxes
- Property Insurance
- Crisis Maintenance
- Preventative Maintenance
- Property Management fees
- Reserves for capital improvements
- City registration fees
- Utilities that could be your responsibility
- HOA dues
If you choose to self-manage your home, you could run into additional expenses, including:
- Attorney fees to create a lease and consult on any numerous landlord-tenant issues
- Advertising fees
- Fuel to show the home and conduct move-ins/move-outs
Since individual situations may vary, I’ll just go right to the bottom line for our example and assume you have monthly expenses in the amount of $925.
So, your cash flow in this scenario would be $275.
Clearly, there are some factors you need to consider when assessing your cash flow.
1) Always budget for vacancy. Most people feel that 5% is a good number to use for single family homes. I think 10% is more acccurate. As we've discussed, vacancy is a cash flow killer, so it’s important to keep your Tenants happy and avoid the one-year-and-out scenarios.
2) Cash flow will not be evenly distributed. When we say that investors here in Indianapolis expect $200-$300 per month in income, we don’t mean that they will receive that amount every single month. Cash flow can vary significantly from month to month and from year to year. For example, there are some months that you may have no maintenance at all, and then you might have a month where you have a $700 furnace repair. Generally speaking, you should budget 10%-15% of your income toward maintenance costs for a newer home in relatively good condition. For older homes, you should budget closer to 20% or even higher in very old homes.
3) Err on the side of caution. Once you’ve set-up your budget and have a good idea of the cash flow you should expect, I suggest adding a fudge factor line to your expenses – maybe as high as 10% of your income – to help account for unexpected expenses. If you don’t end up using this money, I suggest adding this extra money to your reserve account to help pay for unexpected expenses down the road or capital improvements.
4) Cash flow is just one analysis. Clearly, cash flow is a very important model to use, but it doesn’t take into account several key components out there that are very important to consider in real estate, such as low pay down, market appreciate and tax savings.
I’ve linked to a web page with a very nice cash flow calculator along with a Maintenance and Vacancy Table for you to review:
As always, please don't hesitate to contact us with any questions.