Facebook
X
Pinterest
Copy Link
If you’re buying a rental near Indianapolis, you need a few rules that keep you from the mistakes that end investors. If not, one bad loan or partner deal can take it all. But if you do, you start with a blueprint.
1. The 1031 trap. A 1031 exchange is a booster rocket, but it boxes you in: 45 days to identify the next property and 180 days to close. Buy a house that needs rehab, where one vacancy and $8K of paint and flooring cut a hole in your return, and you have no room to force appreciation. Buy a running duplex that qualifies on its income, and you are golden. Never use a 1031 to trade into something you wouldn’t buy if you weren’t trading.
2. Your banker trusts cash. $10K in a Fidelity account impresses your jaundiced banker more than a claimed, non-liquid $100K of equity in an LLC.
3. Five-year loans. A house gets thirty-year financing. Commercial loans run five to ten years. If values drop 20% (2008 saw them tank 40%), a thirty-year fixed loan leaves you uncomfortable. A five-year loan leaves you needing to refinance. Would you have any equity left? Carry as little debt as possible, at fixed rates, for the longest term you can get.
4. Hot partner money. You project 12% and get 9%. But you promised your partner 10%, with any shortfall added to their capital account and compounding at 10%. You can’t make that return. The partner takes over, and you walk away with a piece of string and a spare button from your pocket.
5. Walk it every two weeks. Not a windshield inspection at 5 mph. Look roots to roofs, take pictures, check water meters for hidden leaks, and keep your plumber and tree removal on 24-hour speed dial.
6. If nobody opposes you, ask why. If the city is eager to wave your development through, ask why no one else is building there. Do you alone see the value, or do they see something you don’t?
You never go broke taking a profit.
Sources: John McNellis, Making It in Real Estate.
You don’t need a house picked out or a plan. If you’re wondering what may or may not be possible for you, email me at nlamkin@c21scheetz.com and let’s talk it through.
