Rents On The Rise Nationwide

This article from Reuters says apartment rents are now the highest they have been since 2007 and vacancies are at a 10 year low. This seems to be consistent with what we are seeing at the Houston apartment complex.

May Apartment Update

I received the May financials for the Houston apartment complex and I'm pleased to see the numbers continue their improvement. Last month's record income was exceeded by almost $3,000, setting another new record for the highest income since 2010. Also, as mentioned last month, we received a reimbursement from our insurance company for some electrical work that was done last month. Just as the expense depressed our monthly income last month, the refund inflated our monthly income this month. However, if we exclude that amount, the property actually showed a $1,200 profit this month! That's the first time in a long time the property has been in positive territory. Looking at the entire year so far, it's still underwater, but it's possible the property  may be emerging from the red sea.

Will this trend continue? I hope so. In what may or may not be an ominous sign, management did not give an indication of how June was shaping up.

Security At Houston Apartment Complex

Last month, I noticed that the financials for the Houston apartment complex showed the security expense had dropped from between $1,500 and $3,000 a month to zero. My concern was that management eliminated some security measures as a cost cutting move. I was worried that this might result in an increase in vandalism and crime-related expenses. I emailed management about this and, it took a while, but I finally got a response.

It turns out, management was able to cancel the private on-site security patrols they were using because they were able to install security cameras owned by the Houston Police Department at no cost. In the couple of months these have been in operation, there has not been in increase in criminal activity, so it seems to be a positive move.

April Apartment Update

As hinted at last month, the April numbers for the Houston apartment complex were good. Revenue hit $184,000, which is the highest since 2010. The water conservation program management implemented last year is working well - costs this year are running about 25% below last year's numbers. That's an annual savings of over $24,000.

The property still showed a loss this month, but that was due to an emergency repair that was needed. A high voltage line went out, causing half of the property to lose power. This happened on a weekend, so the emergency repair bill was $30,000. The good news is that the full amount will be recovered from insurance. Unfortunately, the expense shows up in this month's numbers and the insurance reimbursement won't show until next month's numbers, so for this month, we show a large loss. We also had slightly higher legal expenses due to working out a payment schedule with some vendors we owed money to. That expense should also be gone next month. Excluding these two one-time expenses, the property lost about $3,000 in April. This is down from a loss of $9,000 in March, $10,500 in February, and $30,000 in January. Clearly, things are moving in the right direction.


Management projects May's revenue will be slightly higher than April and the property should reach break-even in a couple of months and continue improving from there.

Houston Apartment Turnaround?

I finally got the March numbers for the Houston apartment complex. Numbers were generally comparable to February - rent income in both months were up $10,000 over January numbers. Admin expenses were up $2,000 over February due to some legal bills incurred in working out late payments with vendors. Net income continues to improve, going from -$30,000 in January to -$10,500 in February to -$8,000 in March.

But a closer look reveals things may not be as rosy as they seem. One line item expense went from $2,000 in January to $3,000 in February to zero in March. This item? Security Services. No explanation was given and I've emailed management to ask what happened. If they got rid of security services, that might help the monthly bottom line (if you put it back in, we'd have basically the same net income as February), but we could get hit with vandalism repair bills in the future. I'm interested in hearing management's explanation for this.

But the better news is, because this report was so late, they were able to look at preliminary numbers for April and things look much better. April's total income looks to be $10,000 higher than March's and the highest revenue number since November 2010! Additionally, for May, the apartments are 95% occupied and 99% leased. This is due to increased marketing efforts and, according to management, an improving economy in the property's market area. Marketing costs in March rose $1,000 from February and rent concessions rose about $3,000. We'll see how those numbers compare to April. I should also note that, while rent concessions rose, the total amount is still $1,000 under the budgeted amount. This was pretty much offset, however, by the marketing costs being $1,000 over budget.

We've seen strong months come and go with this property. Things seem to improve for a couple months, only to fall back down again later. Hopefully the improvement will be sustained this time. That 99% leased number is quite encouraging.

February Update

Things are looking better at the Houston apartment complex. Of course, the previous times I’ve said this it’s usually turned out to be a short-lived turn-around, but still, a good month is a good month. Rental income increased in February by almost $10,000, mainly due to decreased rent concessions. This month saw the highest rent revenue since April 2011. We had t pay out $3,800 for some repairs to the roof and access gate, but other expenses are running according to budget. Management implemented  a water conservation plan and that has resulted in significantly decreased water and sewer bills. They are now moving forward with a gas billback program. This means the residents will start paying a portion of the gas bill. They currently pay a portion of the water bill and with the reduction in that expense, management feels the gas billback will be accepted by the tenants. They should still have an overall lower billback cost than they had prior to the water conservation program. They also installed a separate water meter for landscaping so they can begin a billback program for landscape water usage.

Now, it’s been a long time since I lived in an apartment – at least 20 years. Maybe things have changed since then, but I know I never paid any sort of utility billback for general landscaping or anything. I paid my rent and that was it. If I recall, the units were individually metered and all the utilities were in my name, so that might be part of the reason. Off hand, I can’t remember how the units in the Houston complex are metered. It just seems strange to me to bill renters for water used for landscaping. Of course, this might also be a regional thing too. If that’s how things are done in Houston, then it makes sense that we do it too.

Last month, management asked the investors to inject another $250,000 into the property to help it get through the current rough financial situation. I opted not to contribute and apparently, I wasn’t the only one. They raised $140,000, well short of their goal. However, they are using this money to catch up on payments with vendors who we still owe money to. Management is also using the funds to make ready more units to help improve the occupancy number. They didn’t give an occupancy percentage with this report, but if I use the gross rent and vacancy numbers from the financial report, it looks like we are at about 91% occupancy right now.

On the hard money lending side of things, I didn’t blog about it, but my partner said last month that things seemed to be picking up and he was short of funds. Well, a lot can change in a month and things have now reversed and he has money waiting for investments. Our main borrower says deals have slowed down a bit, although he is still buying a couple properties a day. A short time ago, he was doing two to three times that amount. As my partner says, the business is often cyclical and he has learned to be patient and wait for good deals rather than invest in questionable deals just to get funds invested in something. That's how you go 20 years in this business without losing a penny of your investors' principle.

On a more personal note, I got my taxes back from my accountant this weekend and I got hammered on my federal taxes. I owe a couple thousand. I wasn’t sure how that could have happened until I remembered that in 2010 I converted a traditional IRA into a Roth IRA and elected to report the income over two years. I should have adjusted my withholding rate last year to help alleviate this, but I guess I forgot. The good news is that next year, I won’t be hit with another big tax bill (hopefully), as that conversion has now been fully reported. The Houston apartment complex gave me a roughly $7,000 passive loss I can claim. Unfortunately, it can only be used to offset passive gains, of which I have none. So that loss will just get carried forward until I have some passive gains I can use it against. I had thought that the interest from my hard money lending was passive income, but my accountant reminded me it is not. Based on my current investments and future outlook, I think this loss will probably end up being carried forward until the Houston apartment is sold. But that’s OK. It just means I’ll be getting a nice surprise in the future, as I’ll probably forget about it. That actually happened to me this year on my state return. I had a $400 credit from 2009 that  was carried forward, adding to my state tax refund this year.

Apartment Update And 3 Year Outlook

As Another Investor predicted about 2 hours before it actually happened, investors in the Houston apartment complex got a request to contribute more cash. The management company is asking for a total of $250,000 more from investors to make it through the year.

Management sent out budget projections for 2012 through 2014. The projections assume the complex will be sold at then end of 2014. (The original plan at purchase was to look at selling the property after 5 years, or in 2013.) Also, buried in a footnote, it says the projection also assumes no distributions of cash flow will be made to investors during 2012, 2013, and 2014. The monthly projection for 2012 shows the property losing money each month until June, when it returns to profitability for the remainder of the months of the year. Still finishes the year with an overall loss though.

The analysis also includes a look at the Houston economy and apartment market. In short, its been a very bumpy ride. Unemployment drops for a few months, then shoots back up one month, then drops for a couple more months. Occupancy at the property has consistently trended about 3 percentage points higher than the Houston apartment market in general, so that's one positive. However, that appears to be a result of having rents about $10 to $35 lower per unit than the market average.

Management predicts 2012 will be a turnaround year and the property should achieve breakeven status mid-year and return to profitability for 2013 and 2014. Management continues to defer their management fees to help keep expenses down. (Their contract gives them a percentage of the profit when the property sells, so they have a vested interested in getting the property back in the black.) The property itself is in good physical condition and should benefit from an improving economic environment.

Looking at selling the property at the end of 2014 using a 6.5% cap rate, they figure investors will get an annualized ROI of 10.77% on their initial investment. Just for the heck of it, I went back and looked at the original projections made at the time of purchase. The sale price after 5 years was $2 million higher than the current sales price projection and the investor's ROI was 20%.

Of course, management is trying to paint a rosy picture. Everything pretty much depends on the Houston economy picking up again. It looks like it is on the mend, but it is a very slow process which seems to be subject to frequent setbacks.

So.. Where does that leave us investors? Management says the property is operating very close to break even and with an additional $250,000, should be able to make it through 2012, after which they see the economy picking up. Investors are being asked to contribute a pro-rata share of $250,000 based on their initial investment amount. The investment was sold in $50,000 blocks, so they are asking for an additional $4,545 per block that you own. Investors are not required to contribute more, but if they do not, management warns that "alternative financing sources will be considered," which may or may not be available and will probably come with high interest rates and/or investment participation (meaning the lenders would become part owners of the property in exchange for lending funds). If any members do not fund their pro-rata share, the members that are contributing more will be contacted to see if they are willing to make up the shortfall before any alternative funding is obtained. Of course, everyone's ownership percentage will be adjusted to reflect any additional capital input. And should all that fail, losing the property to foreclosure is a possibility.

I think I'm going to pass on this. I might have contributed had the projections included some cash flow back to investors at some point, but it doesn't. I've always looked at this investment as a capital gains play. While I do appreciate the potential capital gains, over the past couple of years investing, I've realized I enjoy cashflow more than capital gains and I believe I can put my funds to better use elsewhere. That said, there are risks involved with not providing the additional funding. If the other investors do not step up, management might be forced to get a loan at a high interest rate, further reducing profits and increasing the time it takes to turn the property around. Or, they might need to give up some ownership of the property, which would reduce my share and hence, my return on my investment. And foreclosure is always a possibility, although I seriously doubt it will come to that.

Apartment Update

Received the November report for the Houston apartment complex and it was not good. Occupancy has dropped to 89% with 26 move-outs, 12 of which were without notice. So rent concession costs increased to fill the empty units. Expenses are still going lower, which is a small positive. Some exterior wood replacement needed to be done that cost $31,000 but that was paid directly from the replacement escrow account with our lender, so it did not affect cashflow. The manager's report includes this ominous phrase: "...outstanding aged accounts payable continue to place considerable strain on property operations." Total revenue for November was $175,000 and the balance sheet shows $233,000 of Accounts Payable, so yeah, I can see that would cause a strain.

Truthfully, I am getting tired of this investment. I don't think the investors have gotten a payment in over a year. I know the problem is high unemployment and the soft economy, but it gets pretty old hearing month after month that the place is just limping along. This investment was made with an eye towards capital gains, not monthly income, so I need to keep that in mind. Still, it is somewhat frustrating to know there is little that can be done to turn things around. I guess I am still used to the rehab mindset of being able to improve a property and sell it.

I'm starting to see why my hard money lending partner likes lending so much. Rentals require dealing with tenants and repairs, etc. Investing in apartment complexes does too, although a management company keeps those factors one step removed from the investor. Hard money lending on the other hand, is relatively hassle-free, once you have a set of good, regular borrowers lined up. Lending also lets me spread out my investment over several properties, reducing the risk from any single one. I think once this apartment investment ends, I'll stick to hard money lending. You do lose out on all the nice depreciation deductions and tax-deferral options though.

July Update

Things have not been too eventful lately.. Hard Money Loan #16 was supposed to be paid off a week ago, but apparently that sale fell through. My partner contacted the escrow company a couple times to try to give them a payoff amount, but his calls were never returned. And we just received another regular loan payment, so all indications are the sale fell through.

Also received a payment on hml #17. Payments have been coming in on that one like clockwork.

Unfortunately, the Houston apartment complex has had another not so good month. After having an occupancy of 90% in May, June's figure rose slightly to 91% but that came at the cost of increased concessions. June also experienced high turnover along with the increased costs that brings (marketing, cleaning, etc). Management expects July's revenue to rebound to about $7,000 more than June.

Expenses actually declined a bit, although the utilities cost rose due to the higher temperatures of summer. Our management company has deferred their fees to help improve the bottom line. Our mortgage switches from interest only to interest plus principal in July, which will raise our monthly payment by about $10,000.

Management is still cautiously optimistic about the second half of the year and they do feel like the overall market is improving. However, the concessions given to attract tenants tend to delay those improvements from showing up in the bottom line for a bit. For the first six months of this year, we are actually running about $105,000 ahead of our budgeted net operating income, although 10% of that amount can be attributed to the management company delaying their fees.

In other news, tomorrow marks the seven year anniversary of this blog!

Rolling Along

My funds from the closed loan #13 have been reinvested in a new hard money loan #18. This one is actually a pretty sweet deal for the borrower. The property is a 4 bed, 2.5 bath two story single family home built in 1979. The property was purchased at auction for $105,000. Our loan is for the full amount. The property is currently occupied. The exterior looks to be in fairly good shape - new paint is needed and that's about it. No idea on the inside. Current value is estimated to be $180,000 and after rehab, about $195,000. So our LTV based on the after rehab value is 53%. Using the current value, it's 58%.

What makes this a good deal for the buyer is that it appears some websites might have led people astray. ForeclosureRadar.com, which is a site used by many of the people who buy at these auctions, lists the property as 1,649 square feet. In fact, our borrower was the only one who bid on it at the auction, probably for this reason. But a visit to the property shows it looks bigger. In fact, it turns out the property is about 2,049 square feet - a room was added on above the garage. And the work was done with the proper permits and the larger square footage is reflected in the tax records for the property.

The borrower is a first time customer for us, but he is a licensed Realtor and often buys properties for our biggest borrower, so he knows his stuff. He is also personally guaranteeing the loan. Looks like he did his homework and found a good deal. This is a good example of why I like to use official records when checking out properties.

In other news, the April financials for the Houston apartment complex are in.Occupancy remained stable at 93% and total income was up about $1,000 over March, mainly due to increased collection of late fees. We had another month of positive cash flow - about $4,300. The year to date positive cash flow is about $21,000. Mangement is cautiously optimistic that we will have a strong second half of the year. Some maintenance of the exterior wood will be starting in June, but it shouldn't affect cash flows as it will be paid for from the replacement reserve account that is in escrow with our lender.

March Apartment Update

Got the management report and the March financials for the Houston apartment complex yesterday. Things continue to look good. Occupancy remained steady at 93% and revenue stayed about the same as February. Expenses due to marketing, turnover, utilities, and property taxes dropped. The property had a positive cashflow of about $7,500 for the month - a nice change after running in the red for so long. The property is also in the black to the tune of $17,000 for the year.

The positive cash flow will be used to pay down some of the bills that had accrued during the lean prior 12 months. Management doesn't expect to resume investor payments in the near term, but I'm pretty confident they will happen before September. As a reminder, our loan switches from interest only to interest and principal in June (it was interest only for the first three years), so that will add about $3,000 to the monthly expenses. But this was budgeted for in our projections, so it's nothing unexpected.

Management feels the property performed fairly well during the recession and I agree. The goal of this investment has always been to make money by improving the performance of the property and selling it, rather than strictly through cashflow. I think that goal is still on track.

February Apartment Financials

Before I get into the latest financials for the apartment, let me say the Chez Cliff blog has shut down. Cliff started out blogging about REI and, after being laid off, moved into a consultant role and steered his blog in that direction (very similar to what Kenric has done.) Cliff's last post mentioned that he didn't want to be posting on his blog just to post. I can understand that. It's easy to fall into the trap of feeling like you have to post something every week or every X days. I've felt that way too, but my desire to post informative items tends to outweigh that desire, so I can resist that urge, it seems. (Case in point: I noticed I didn't post at all last month.) A while ago, I wrote a post musing about where all the old bloggers that I used to follow went. Many have given up on their blog and / or (presumably) moved on from REI. I'm sorry to add Cliff to that list. But it's pretty clear that he's not abandoning what he was doing. In fact, it's obvious he is enjoying his new consulting business. He just got tired of blogging. It's sad to lose another blogger that I regularly followed, but I understand Cliff's reasons and I wish him the best. (P.S. I'd link to his old blog, but he seems to have taken it down. That's a decision I personally disagree with. Even if I didn't want to blog anymore, I'd still leave the blog up - simply because I think it's got a lot of useful information that people might learn from, even if no new content was being added.)

On to the latest apartment news.

The February numbers are in and the financials continue to improve. February showed a $2,600 increase in revenue from January and more than a $7,000 improvement over December. This is not quite as big a jump as management expected (last month they said they expected a $5,000 revenue increase), but it's still nothing to sneeze at. This month, managment says they are expecting a $2,000 increase in March.

Occupancy inched up another percentage point to 94% while rent concessions dropped by about 10%. Marketing and retention costs also dropped by almost 20%. Perhaps this is a sign the economy in Texas is improving. We received almost $50,000 back from the escrow impound account after the yearly escrow analysis. This is a one-time gain and the money was used to pay off some old bills that were not paid during the leaner months of last year. Overall, for the first two months of the year, we are running about $40,000 ahead of our budgeted income. Granted, that large chunk of change from the escrow impound refund helped us, but moving foward, I think we'll be in better shape. As mentioned last month, our March loan payment will be about $8,000 a month less due to our property tax valuation appeal from last year. That will definitely improve the bottom line. I'm crossing my fingers, but it looks like we might have turned the corner here.

In other news, I have completed the rollover of my Roth 401(k) into my self-directed Roth IRA. As soon as my partner finds a new hard money loan, I'll put those funds into action.

HML #15 Closed And Apartment January Financials.

Escrow closed on this property on Monday, so hard money loan #15 was paid off. Looking for another place to invest now.

The January financials for the apartment have arrived and, as we expected, things continue to improve. Occupancy increased to 93%, up from 88% in December. Revenue increased by $5,000 and management expects the same increase for February. Our property tax impound amount will drop by about $8,000 per month with the March payment following our successful property tax valuation appeal last August. The property still lost money in January, but occupancy is heading up and expenses are heading down, so we are moving in the right direction. For January, our budget called for an $8,500 loss and our actual loss was closer to $11,500, so we are $3,000 off of our budget. If trends continue, we should be looking good for February.

Apartment Had A Bad December

The financial report from the Houston apartment complex for December was not good. Occupancy dropped to 88% due to a large number of move outs in November. About 40% of the move outs were people who left without notice. This most often happens after a job loss, so it would seem November was a bad month for unemployment in Houston. The good news is occupancy is currently back to 92% with 96% leased. Still waiting for the clarification on the difference between "occupied" and "leased," but I'm guessing "leased" includes people who have signed leases but have not yet moved in or started paying rent - for instance, people waiting for the first of the month to move in.

Rent concessions, which I wrote about last time as something I hoped would be able to be reduced, went up, due I'm sure, to the large number of unexpected move outs. New playground equipment was installed, which should attract more renters. One half of the cost of that was paid for from funds in the lender's replacement escrow account, so it did not affect cash flow.

Hopefully, December was just momentary setback on the path to recovery. Management expects January revenue to be only slightly improved due to the increased rent concessions, but they think February will see a decent increase in revenue. The loss for December was approximately $7,500 compared to a loss of just $1,500 in November. The biannual investor conference call is coming up soon, so hopefully, we will get some more detailed information then.

Hard Money Loan #14 Paid Off

The property behind hard money loan #14 was sold and closed escrow on December 30 and I received my final payment today. The loan lasted about 6 months. My principle is sitting with my partner, waiting for the next opportunity.

In other news, my wife and I are starting a remodel of a couple rooms in our house. We're paying for this using our HELOC, which I had previously been using for investing. Actually, I'll still be able to use my funds from that for investing and the remodel will be paid for from the unused portion of the HELOC, which will now be maxed out. The HELOC payments are interest only and the payments I receive from my investments will still cover the entire HELOC payment, even including the funds I use for the remodel, plus a little more. So my remodel costs will be paid for by the investments. My HELOC is at 3.25% and I'm investing at between 9% and 10% and pocketing the difference. Although, since it's not my money I am investing, my ROI technically is infinite.

Of course, as I feel compelled to say every time I bring this up, this is not without risks and I don't recommend everyone do this. If interest rates go up, I could end up losing money. But I don't think rates will rise anytime within the next year and the investments I make are for one year or less, so I could get my money back and pay down the line of credit rather quickly if I have to. There is also a pretty large spread between what I am being charged and what my investments are earning, so rates would have to jump by a large amount before I start losing money. Also, I opened this line of credit during the real estate bubble, so the maxed out HELOC plus my outstanding mortgage balance total more than the home is currently worth - meaning I would not be able to sell the home, should I have to. But that's not something we are planning on anyway. And again, my investments are pretty short term, so I could pay down the HELOC in fairly short order if I did need to sell for some reason. And, in the worst case scenario, I could still make the HELOC payments should all my investments go belly up.

Still, it's exciting to think that my passive income will pay for our remodel! The real estate investments I've made over the past two and a half years have also been paying for the loss I took on Rental #1. That loss has been just over 50% recovered. It's been slow going, especially since the apartment investment payments have been suspended for almost a year. (If they hadn't been suspended, my loss would be about 80% recovered.) But still, it's nice to know that all these things are being paid for from investment income and not from any money out of my pocket. (Yes, you could argue it is money out of my pocket since I don't get to keep my investment returns, but you know what I mean. I'm not writing a check to pay them.)

Loan Closing And Apartment Financials Improving

The property behind hard money #14 has been sold and is supposed to close escrow this week. If it does, this will have been a 6 month loan, which is pretty good. (The mortgage note was for a one year term.) The property was rehabbed in two months and was on the market for four months.

Things are turning around slowly at the Houston apartment complex too. Occupancy for November was 90% and we saw a decline of about $3,000 in rent concessions as well. Revenue is up about $3,000 from the late summer months and $20,000 higher than March, which was the lowest month this year. Expenses dropped due to some management-negotiated utility rebates from overbilling. Management also waived some management fees - not sure why. Cash flow was about negative $1,600, the lowest it's been since February. Things definitely seem to be turning around. Rent concessions, while dropping, are still higher than I'd like to see. They are roughly four times higher than they were in January of this year and three times over the budgeted amount. If we can cut that expense down, the property will easily be back in the black. But that all depends on if the local economy can support that.

In looking at the income statement in more detail, I just noticed not only did management waive their fee in November, but they did in October as well. That's a $4,800 a month savings for the last two months. Obviously, that won't continue. And I believe our mortgage switches from interest-only to interest and principle soon after the first of the year. So we're not out of the woods yet, but we are on the right track.

Rolling Along

Nothing much new has been happening on the investment property front. My hard money loans are being paid on time. Operations at the Houston apartment complex were essentially unchanged for September (the last month I have data for) from August. As I mentioned after the last investor conference call, the property is currently losing money, but things are slowly turning around. Management expects a return to profitability in early 2011 and a resumption of investor payments at that time. I think some of the other investors are getting impatient for distributions to start again - management sent out a notice today reiterating what they said in the yearly conference call. I guess many of the investors were not on that call so didn't know the situation.

The property behind hard money loan #15 will be ready to be listed in about 2 weeks. Back when our borrower first got the property at a foreclosure auction, it was still inhabited by the prior owners and their brood - a total of 8 adults, 2 kids, and 3 dogs. The prior owner wanted $6,000 and 1.5 months to move out. We offered $1,500 and 4 weeks. He came back and asked for $3,000. We told him no way. He threatened to take all the windows when he left. I've now found out that we did have to hire an attorney to file a suit to get him out, but as soon as he was served, he moved out without damaging the property. It cost $900 for the attorney, so we saved $600 over what we had offered him and he got nothing from us.

The property for hard money loan #14 is still on the market. It went up for sale in mid-August for $499,000. Our borrower has dropped the price now to $475,000. If I was the seller, I'd drop the price more to sell it quickly, but as long as the borrower keeps paying, let him list it for whatever he wants :-) Even with the price reduction, he's got close to a $100,000 profit waiting for him when it sells.

I don't know the current status of the property behind hard money loan #13, but I received another payment on the loan yesterday, so it's current.

Status Update

Time for a status update. All my active hard money loans are current and have been paying on time. Hard money #14, which was just made mid-June, might be paid off soon. The property has been fixed up and is on the market. This guy works fast! Here's a shot of the place when my borrower purchased it:

And here it is now:

Looks much nicer. He took down the fence, which is something I probably wouldn't have thought to do. Also fixed up the landscaping. He are some pictures of the inside. He's got the place staged nicely!

And he did all this in two months. Very fast! It's listed for $499,000. Our mortgage is for $198,000.


On the Houston apartment front, we had the semi-annual investor conference call last week. Things are starting to turn around there, although the property is still in a negative cashflow situation. First, an update on the Houston economy: times are still tough there. Class B and C apartment complexes have been hit hard. (We are a class B complex in a class A location, so I'd say we are a slightly higher end class B.) Sixty-seven percent of apartment complexes in Houston are offering concessions. Rents have declined 4.1% in the months of January through April. Job losses are slowing, although employment in Houston is very erratic - the number of jobs has fluctuated +/- 30,000 over the last 1 year.

Now for the good news: Occupancy is trending up in 2010. We are currently at 92%, up from a low of 87% in January. Move outs and move ins, a sign of tenant turnover, are trending down - only about 4 in the last month from a high of 27 in June. Cashflow is negative about $4,000 a month, but this is also trending up, from around negative $15,000 a month a couple months ago. The negative cashflow is mainly due to insurance and taxes. We did have a successful appeal of the property valuation for tax purposes, so that will result in a lower tax bill. Insurance has also been renegotiated and will be lower in the future. Unfortunately, both of these items are required to be collected in an escrow account by our lender, so the reductions will not be seen immediately, as we will have to wait until the next yearly escrow analysis for the decrease to be seen.

Comparing the actual numbers with the pro forma numbers that were figured going into the deal shows we are actually fairly close. Total operating expenses on a per unit basis are $4,645 and the pro forma number was $4,470. The increase is due to higher utilities, taxes, insurance, and security. Management fees are slightly lower than the pro forma numbers.

Management is taking steps to bring down our per unit operating expenses. Besides the taxes and insurance, the biggest expense was security. We had inherited a security contract when we bought the property that was fairly expensive. That contract has since expired and we have switched to a new security company, which reduces the cost to about 20% of what it was, resulting in a savings of over $190,000 per year.  Altogether, the changes should bring our per unit operating expenses down to around $4,150 - even better than our pro forma number.

Management is also taking some unique steps to attract and keep tenants. They are contacting large employers in the area and trying to get contracts for 10% of the units. They are offering tenants a job loss addendum on their leases. This says if they lose their job within 6 months of moving in, they can resign for a new 1 year lease and get one month free rent - which they must pay back at the end of the year. So it basically delays the income for us, but could possibly keep the tenant from moving out, while also extending their lease. They are also offering a 20% discount to current or retired police officers who live on site, with an additional $25 discount if they park a marked car on site. The property is already a Blue Star certified complex, a designation bestowed by the Houston Police Department for properties that have taken significant steps to deter crime and provide a safe environment.

The loan on the property switches from interest only to amortizing in July of next year, so that will cause our loan payments to rise. However, since we are repaying principle, this is really equal to a return of our principle to us, only we won't get it until we sell the property. Management is looking to resume quarterly distributions to investors early next year. That will give them time to return to a positive cash flow and also build up a small contingency fund.

April Apartment Complex Report

Time for another Houston apartment update! This report is much nicer than the last one. Occupancy has increased to 93% from 90% in January. This is a very nice improvement over the declining values we were seeing the last couple of months. As occupancy rose, so too did revenue – a $10,000 increase in April over March. Management expects another $5,000 increase in revenue in May. Rent concessions are down about $2,000 from March, but still at a fairly high $20,000 (!). Hopefully, as occupancy increases and the economy improves, this number will continue to decrease. As a comparison, the budgeted amount for concessions is $5,000 per month.

The good news of increasing revenue was counter-balanced somewhat by some not so good news. Our monthly real estate tax escrow amount increased by almost $9,000 per month. This was partially offset by a decrease in insurance escrow of about $6,500 per month. (The new insurance cost is about half of the old cost.) The silver lining is that the property’s assessed value declined by 5.5% in 2010, so the real estate tax escrow next year will go down again.

Expenses increased a bit. The quarterly unit inspections took place and resulted in an increase in the Repairs and Maintenance category. Some capital expenses also took place - one of the central water heaters failed and had to be replaced.

Overall, the property still lost money in April – about $17,000. Hopefully, the property will return to profitability soon!

One loan ends, another starts.

Sometimes everything just falls into place at the right time. Hard money loan #10 was paid off and just a day or two later, another opportunity came up. I can roll my funds into that one with no time spent not earning interest while searching for a deal.

The new opportunity is a single family house, 5 bedroom, 2.5 baths,  in a nice area of San Leandro (Northern California). The borrower is a well-experienced borrower who we have done business with in the past. At the height of the real estate boom, this property sold for over $800,000. Of course, that’s pretty much a worthless number now and I am always amused when I see such figures in the analysis data that gets sent to me. The more important numbers are as follows: The property was bought at auction for approximately $475,000. The buyer is putting  25% of his own money into this and we are lending the remaining. After repair value of the property is approximately $560,000 with an average days on market of just over 1 month. Using the ARV of the property, our LTV is 63%. Using the buy price, it is, as mentioned, 75%. Nearby and similar properties rent for just over $2,700 a month, so if we foreclose, we are looking at $33,000 gross rental income per year. It is in a stable neighborhood (few other houses for sale).

Here is a picture of the front of the property. There isn’t much fix up needed and the property is already vacant. We expect this loan will be paid off in 3 to 6 months, although the loan term is for 1 year. Standard deal – 10%, interest only, 1 year balloon, no pre-pay penalty. This will be labeled hard money #12.

All is not quite so rosy with the apartment complex in Houston. The last month I have data for, February, showed a decline in revenue, even as occupancy increased. This was due to increased concessions to get people to move in. Occupancy is fluctuating between 88% and 90% as the area continues to be hit by poor economic conditions. Cashflow is running breakeven. Management expects it to remain this way through the end of the first quarter and to pick up in the second quarter, as occupancy is increased.

Hard money loan #4, the motorcycle loan I did for a co-worker, should also be paid off in a day or two. I was told the payoff check was mailed yesterday.

The self-directed IRA is proceeding slowly, mainly due to a comedy of errors. First, I filled out the wrong paperwork to get the thing started. The company I am working with created an LLC for me. They were waiting for some paperwork to be mailed to them from the Arizona Corporation Commission. But the ACC mailed the paperwork to me, because I am the manager. It wasn’t until a month went by that I found out they were waiting for paperwork I had already received. I faxed it over to them last week, and I think that is all they need now. They have to send me my LLC documents, and then I can go open a bank account.

On a personal note, my wife and I each picked up a new 2010 Prius two weeks ago. We are both loving the cars. I’m averaging 53 miles per gallon, despite having a daily 66 mile round trip commute, mostly at highway speeds. I love being able to fill the tank less often and for less than I did with my old Avalon, which took $42 to fill up. The Prius takes $21. We each got the solar package, which uses a solar panel in the roof to power a fan to exchange the air in the car with outside air while it’s parked in the sun, keeping it cooler. Here in Arizona, that’s a huge benefit, especially since we haven’t gotten the windows tinted yet. With the purchase of the cars, we went from having no car payments to two car payments, so the passive investing income I’m getting will come in handy.