Indianapolis, IN: 32.0% Return on Investment (2011)
Indianapolis has experienced repeated value fluctuations in 2009, resulting from the release of foreclosures into the housing inventory. When foreclosures were introduced into the market, they suppressed values and spurred capital inflows from owners and investors, which triggered the introduction of more foreclosed properties to capitalize on the uptick in values. These fluctuations have occurred within a relatively narrow value band, and have significantly reduced the foreclosure inventory in the Indianapolis market area. Currently, approximately 16% of listings are from foreclosures.
The Indianapolis market currently produces large levels of cash flow because of the strong market rents in conjunction with the market prices that have been depressed by foreclosures. Many of these foreclosed properties require additional capital for rehabilitation after the property is acquired. This results in the ROI mix t
ilting away from leveraged appreciation toward higher cash flow. Another opportunity for investors in Indianapolis is ‘built-in’ appreciation from properties purchased below the cost of construction as market prices regress toward replacement cost. Our preferred term for investments in the Indianapolis market are that of an “income property bond” since much of the total returns come from cash flows.
The superior cash flows produced in Indianapolis relative to many other market areas has produced some very unique economics. With a large inflow of investment capital from people seeking to capture high rates of cash flow that properties in Indianapolis exhibit, it has facilitated a faster than expected regression of values back to a long-term equilibrium. The reason for this is because many foreclosure properties in Indianapolis were priced below the cost to re-build them (aka ‘replacement cost’). Outside of this phenomenon, Indianapolis is a very linear market where investors should expect modest rates of normal value appreciation in conjunction with the cash flow.