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.
A question that we hear all the time from new Landlords is, "Should I have a home inspection?"
We always advise clients to have a home inspection. Without it, you would have no clear way of knowing if everything is working properly and is up to code. There are two main benefits to having a home inspection done.
1) Peace of Mind: The first main benefit to a home inspection is to help give you a peace of mind. During your initial walk through, you probably only looked at the house, room sizes, appliances and other cosmetic things. But you didn 't climb on the roof, go in the attic, or go in the crawl space.
These are all things the home inspector will do for you. When the inspection is complete, you will get a full copy of the inspection report.
2) Inspection Response: The second main benefit to having a home inspection done is that it will work in your advantage during the inspection response process. Once you get the inspection report in your hand, you can sit down with your agent and look at each item to determine which items you feel are in need of repair before the closing.
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
Property taxes are important, and if you’re investing in Indianapolis or you plan to invest here, you need to understand our property tax rules.
I can't tell you the number of phone calls we've taken over the past several years from our customers regarding property taxes. And, trust me, they are not fun phone calls.
Me: "Hi Joe Investor. Good to hear from you. How can I help?"
Joe Investor: (very panicked voice) "Jeremy, I just received my tax bill and my property taxes doubled!! What's going on??"
That's followed by a few minutes of Joe discussing how his cash flow is killed, we have to raise rents immediately, being a Landlord is the worst idea ever, etc.
The bottom line is that Joe didn't understand how property taxes work BEFORE buying his investment property. And Joe clearly didn't use us to help buy his home, or Joe would have known exactly what to expect.
So, don't be Joe.
Take a few minutes to understand how our taxes work here in Indiana. They are a little different, and depending on how and what you buy, you may have to adjust your budget and your cash flow expectations to account for taxes.
Here are some factors to consider when assessing return models:
1. Always budget for vacancy - Most people feel that 5% is a good number to use for single family homes. We think 10% is more accurate
2. Cash flow will not be evenly distributed - 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.
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 improvement.
A note about breaking even:
Ideally, single family homes WILL produce cashflow. But a consistent theme we discuss in our blog, and one we stress with our customers, is that single family investments can be a grind.
Some years are better than others. In fact, some years can be downright disastrous, particularly if you own just one rental property and that one rental property needs a new roof, or a new HVAC system, or suffers an eviction.
We’ve always been of the opinion that real estate is a long-term proposition and should be evaluated as such. So, assuming you do break even after 5 years, you might wonder… “How can this be a good thing? I got into this investment to make money, not to break even.”
Well, even though you broke even, you will have reduced your taxable income and, likely, added some wealth
to your personal financial statement during that 5-year period. So, hardly a waste of time.
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.
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.
As we discussed earlier, Indiana follows the 1-2-3 Tax Cap Rule. You 'll be paying 2% of your property's assessed value.
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.
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 personally use what's called a risk-based deposit model which simply means that we base the amount we charge on a variety of factors such as credit score, rental history and monthly income. Depending on the outcome of the applicant's processed app, we may charge up to 2 month's rent for the Security Deposit.
A well-priced Security Deposit protects you from potential damage and encourages residents to respect the property.
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.