Owning rental real estate is one of the most exciting and successful ventures you can participate in.
But, it can also be stressful and frustrating if you aren't equipped with the right tools and knowledge. If you're jumping into this thinking you're about to get rich overnight, you need to take a step back.
As we 'll discuss further, real estate is a long-term investment and you need to have that mindset from the get go.
After you're through reading this content, our hope is that you will walk away with a greater understanding of what it means to own rental property in Indianapolis!
These are 5 of the most common mistakes first-time real estate investors make.
If you are a new Landlord, I’m certain you’ve asked yourself, “Do I really need to hire a Property Manager?”
Should everyone hire a Property Management Company?
In fact, the vast majority of rental homes in the United States, as high as 70%, are self-managed. Here are a few reasons why you may not need a Property Manager for your rental home.
Quite often, we get questions from some of our new investors that surround insurance. Generally, they ask: “What type of insurance do I need as a Landlord?”
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.
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:
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
Landlord registration is an ordinance that the City of Indianapolis, after much debate, established in 2015. It requires all Landlords and Owners of residential rental properties in Marion County to register with the City of Indianapolis' Department of Code Enforcement (DCE).
If you are an out of state Owner, you are required to appoint a local representative for your property. This could be a Property Management Company, or just someone you trust enough to be responsible for your asset should something go wrong.
It only costs $5.00 to register but you could be fined up to $500.00 should you fail to register or forget to renew your registration by January 1st of each year. You have 30 days after you take ownership of a property to get registered.
Click here for a step-by-step guide to the Landlord Registry.
This is the most evident when it comes to getting your property rent ready. The majority of rental homes will need some sort of make ready work before it hits the market and you need to be willing to have that work conducted.
These are some common things that will need to be done to a property before it is ready to be leased:
Our experience shows that a home prepped in a high-level way will often times be returned in a similar state.
This is not an exhaustive list of possible expenses, but it should give you a pretty good idea of what to expect and plan for.
Maintenance is an expense that you will never be able to avoid.
Some months you may get hit with large repairs, and other months you may not have to fix anything. It's incredibly variable. There's a long list of different types of maintenance that you may have to perform for your Tenants.
Typically, we recommend that you budget 10% of your gross rental income for the year for maintenance. So, if your property rents for $1,000 a month ($12,000 a year), you should expect to spend $1,200 on maintenance for the year.
However, this number will vary depending on many factors including the age of the home and other unexpected expenses.
Learn more about rental property maintenance costs.
Turnover costs differ slightly from maintenance costs in that these are expenses incurred in between Tenants as opposed to while the Tenant is in the property.
Turnover costs could be relatively low, or extremely high depending on the level of work that needs to be done to get the home rent ready.
One rule of thumb is to allocate 10% of the total value of the lease for turnover cost at the end of the lease. So the longer the Tenant stays, the higher the typical turnover cost will be because of more “ normal” wear and tear.
If a Tenant stays for 3 years, at $1000 month, then you should anticipate at least $3,600 in needed turnover work to recondition the home for re marketing
When you decide to rent out a single family home, a typical homeowner ’ s policy will not provide adequate coverage.
A Rental Dwelling Policy not only covers damage to your investment, but also provides liability coverage in case your Tenants get hurt on the premises.
The cost of a Landlord policy varies depending on many factors such as geographic location, size of structure, amount of rental units, age and condition of the building, etc.
Typically, Landlord insurance will be a little more expensive than your average homeowner ' s insurance policy.
If you decide to hire an Indianapolis Property Manager to run your investment, that will incur additional fees every month. All PMs have different pricing structures, but typically there will be a leasing fee for the first month the property is leased, and then a management fee which is a certain percentage (usually 8%-12%) of the rent each month.
Some companies also charge on boarding fees, marketing fees, and even vacancy fees.
If you choose not to hire a PM, you will need to think about what kind of legal help you ’ll need to employ. At the very least, you 'll need to have a lawyer on hand that you can reach out to should you have to evict a tenant.
Some lawyers charge a flat fee for Landlord services, others charge hourly, but it' s going to be upwards of a few hundred dollars for that process.
Vacancy isn't a direct expense, but it' s something you need to take into consideration. For every month that your property isn't occupied, it' s a month that you don't have any income. We've said it before and we 'll say it again, vacancy is a cash flow killer.
If you have a Property Management company, they will take care of this for you. If not, you need to think about how you're going to fill your vacant property.
It' s worth spending the money to get it visible to as many people as possible in order to reduce vacancy time. There are a lot of channels you can use to advertise like Zillow, Craigslist, flyers, newspaper ads, for rent signs, etc
Another expense you may have if you don 't hire a PM is for some type of software or computer program that helps keep track of tenants, collects rent, generates work orders, screens etc. If you only have one property, you most likely wouldn't need this service. However, if you have a few or many properties, you 'll most likely want to invest in some sort of system to help maintain your business.
You would probably be shocked to know how many Landlords and Property Managers have been sued over housing discrimination issues due to ignorance of the law and what all it entails.
Violating Fair Housing guidelines isn’t as cut and dry as refusing to rent to someone because of the color of their skin.
There are numerous caveats and subtleties that you should be aware of to avoid an embarrassing and costly lawsuit.
There are 7 federally protected classes which are:
There are also additional protected classes at the state and municipal levels in Indiana.
The state recognizes Ancestry as a protected class and Marion County recognizes 3 additional protected classes which are:
As you can see, just knowing the national laws is not enough, you must be aware of your local ordinances as well
in order to fully comply with Fair Housing guidelines.
You may choose to hire a professional Property Management Company to handle all aspects of your property, including screening all potential Tenants.
But, you might also decide to self-manage.
And to perform your due diligence, you need to screen potential Tenants thoroughly.
You'll need to conduct a background check, run your own credit report, and talk to current and previous landlords.
But before all that, by simply conducting a series of pre-screening questions, almost like an interview, you can get a good feel for the individual before they even see the property.
This pre-screening interview helps reduce wasted time showing properties to unqualified prospects.
A hot topic in the world of Real Estate Investing right now, is whether or not Landlords should accept Section 8.
Or rather, if they have to accept Section 8.
Many municipalities across the country are opting to make “source of income” a protected class.
What does this mean for property Owners?
Basically, it makes your decision for you.
This increasingly popular trend ensures no Tenant is turned away due to being on a housing assistance program. In essence, you’re required to accept Section 8 vouchers.
So far, the state of Indiana has yet to implement this new protected class, but I’m sure it’s only a matter of time.
For now though, if you own rental properties in Indianapolis, you still have a choice.
The Section 8 program has a relatively negative connotation in the rental property industry, and not without warrant.
The system is far from perfect and there is no shortage of horror stories out there, but then again, there’s no shortage of Tenant horror stories period. Section 8 or not.
For some Landlords, accepting Section 8 vouchers can be very beneficial and there are some definite perks, so you shouldn’t automatically rule it out.
Security Deposits are extremely important.
Important to you as the Landlord, and important to your Tenant, because it's their money... until it isn't.
In fact, my guess is if you polled Property Management Companies and Landlords around the country, the majority would say Security Deposits generate the most friction in their businesses.
So, you need to have strong processes around Security Deposits, understand your state and local laws and still be prepared for some battles along the way.
Indiana has no ordinances dictating how much you can or can't charge.
We always advise our Central Indiana Investors to consider vacancy as an associated cost of owning a rental property and to budget accordingly. A general rule of thumb is to expect your property to be vacant for at least one month out of the year or, at a minimum, 8%. Most industry experts will argue that 10% is a better number.
Fortunately, vacancy is currently at a cyclical low nationally, and Indianapolis is set to see a vacancy rate of 6.9%, which is down 70 basis points from 2016 according to homeunion.com.
Even though single family home vacancy rates are on the decline, it’s critical to be prepared for when your property sits vacant longer than you anticipated.
Here are a few tips to help minimize vacancy time for your rental property:
When can I file?
You can file for an eviction whenever the Tenant breaches the Lease Agreement. The most common reason Landlords file for eviction is for non-payment of rent.
When you can file eviction really depends on what your Lease says. Most Leases spell out when rent is due and when it’s considered late.
Technically, if the Tenant doesn’t pay by the due date, you can file. Unless your Lease specifically provides for certain notices in the event of default, you need not provide any “please pay” letters before filing.
This is just one of many reasons why a strong lease is vital to a successful rental property experience.
When should I file?
You should file for an eviction when you feel like you’ve exhausted every other alternative.
Do I have to serve a 10-day notice?
Generally, no. If you’ve done Google searches on this topic, you’ll see that many sites indicate a 10-day notice is required in Indiana. This 10-day notice is only required if you don’t have a Lease in place that specifies when rent is due.
Practically speaking, I think a formal Pay or Quit notice is an effective collection tool. However, in most cases, it's not required.
How do I file?
Our suggestion is to hire a Lawyer. Yes, you will pay more for a Lawyer to file, but it will be done correctly and save you a lot of time and trouble if you aren’t an expert.
If you choose to file, you must obtain the property paperwork (Proof of Claim) from the Township where you property is located and submit the claim. Filing yourself will typically cost around $100.
There are several different scenarios that can affect how long the eviction process will take.
While owning rental real estate can be a great way to build wealth, it most certainly comes with its fair share of expenses.
Taxes are one of those expenses.
For every dollar you earn, you’ve got to give a few cents - or maybe more than a few cents - back to Uncle Sam.
No one can escape it.
Well, you can try, but that’s called tax evasion - a federal offense - so I wouldn’t recommend it.
Even though the IRS invokes fairly negative feelings by taxpayers, it isn’t all bad. In fact, the IRS offers rental property owners a hefty amount of tax breaks.
You just have to know where to look.
While Indiana Landlord-Tenant laws are not the most cut and dry, this issue is pretty clear.
In general, you are required to provide a safe, clean and habitable living space for each Tenant. Meaning the unit or property must meet all Health and Housing Codes and this mandate cannot be disclaimed or restricted by a Lease Agreement.
All rental homes must have:
In addition, any major component of the rental property that is present at the time of move-in, is your responsibility to maintain.
That goes for:
Yes, if you supply a washer and dryer, it is your responsibility to fix or replace them if they break.
If the HVAC system goes down, it’s on you to pay for it to be serviced.
If you think hiring a property management company means you can completely wash your hands of responsibility, think again.
It’s still YOUR property, and you need to be extremely careful who you turn it over to.
When you are conducting research to determine what company to hire - and you should conduct research, copious amounts of it - one of the major questions you will want to ask them is,"how do you handle maintenance?"
You will want to uncover their processes, if they have in-house technicians, how big their Vendor network is, how and when they will communicate with you, etc.
As I mentioned, it is still your property, and a PM may need your permission and input for various issues to be taken care of. This means you need to be willing and available to communicate so that they can do the job you hired them to do.
So, whether you are your own Property Manager, or you hire a third party, you need to make maintenance a priority.