Recently, I consulted on which of two properties in the same neighborhood in Indianapolis would be better. The purchase prices were similar, but one had a higher rent while the other had a lower property tax. Simply comparing the rent made the first property seem more advantageous, but when we actually calculated the yield, the results were reversed.

The average home value in Indianapolis is around $223,697, and the median rent in the area is reported to be $1,445 per month. Based on this, the total yield can be calculated by dividing the annual rental income of $17,340 by the purchase price, resulting in about 7.8 percent. This area has a relatively high rent compared to the purchase price among Midwestern cities.

According to the 1 percent rule, for a property priced at $223,697 to pass, the monthly rent should be at least $2,237. However, the actual median rent of $1,445 falls short of this benchmark, although the gap is much smaller compared to other cities. This suggests a relatively balanced market in terms of rent compared to purchase price.

Here, property tax plays a variable role. The median effective property tax rate in Marion County is about 1.15 percent, but due to Indiana's property tax cap, owner-occupied homes are capped at 1 percent of the total assessed value, while rental and investment properties are capped at 2 percent. This means that even for the same purchase price, the actual property tax burden can differ between owner-occupied and investment purchases.

Returning to the case of comparing the two properties, the one with the higher rent also had a higher assessed value for property tax, which significantly reduced the difference in terms of net operating income. Conversely, the property with lower rent but also a lower assessed value actually performed better in terms of cap rate. If we had judged solely based on total yield, we would have reached the opposite conclusion.

In terms of total yield, Indianapolis is often evaluated as a balanced market where cap rates and price appreciation do not heavily favor one side. The purchase prices are low enough that the speed of asset growth due to loan principal repayment can be felt relatively quickly, making it a region frequently considered by investors looking for both cash flow and long-term asset formation.

When considering cash-on-cash returns, the down payment ratio and loan interest rates become additional variables. In areas like Indianapolis, where purchase prices are lower than the national average, the leverage effect tends to be relatively significant, so even with the same cap rate, the cash-on-cash return can vary greatly depending on loan conditions.

Indianapolis has several school districts preferred by Korean families, so when looking at investment properties, it can be helpful to consider school ratings and rental demand together. If relocating from another state, it's also important to check how Indiana's property tax cap structure operates differently from your previous residence.

Depreciation benefits should also be considered. In Indianapolis, where purchase prices are lower than the national average, depreciating the building value over 27.5 years can significantly reduce taxable income each year, resulting in after-tax income improvements that are not apparent from cap rates alone.

Another aspect that can be easily overlooked when comparing two properties is insurance costs. Indiana is prone to weather risks like tornadoes, so standard homeowners insurance premiums may be set higher than in other Midwestern cities, making it wise to separately verify insurance costs in the operating expenses.

Closing costs can also be an easily missed factor. In Indiana, title insurance premiums and registration fees are generally lower than in other states, so considering this when estimating the initial investment amount can lead to more accurate cash-on-cash calculations.

Tax and rental-related conditions can vary by county and property, so it's advisable to verify based on the specific address and consult with professionals before making an actual purchase. This article does not substitute for investment or legal advice.