Apartment Update

Last night was the first of our biannual conference calls regarding the apartment complex in Houston. The managers gave us a general overview of the Houston economy and then of the property itself.

Nationwide, occupancy rates are easing and rent growth is cooling. The Houston market is also expected to cool, although not as much as the rest of the nation. There are many new A-class (higher end) apartments just opening up and they will be the hardest hit with pressure to lower rents. B-class apartments, like the one we have, won't feel the pressure so much. There will also be some pressure from the "shadow market" - the single family home foreclosures and other houses that investors and buying and turning into rentals.

The silver lining in all of this is that apartments are still a relatively good investment. An emerging trend report released last week said apartments were the number one buy for 2009.

Another positive is that Houston led the nation in apartment absorption in 2008 and led the nation in job growth in 2008 as well, with 53,400 new jobs and continues to led in this category.

Rents per square foot are trending upward. Historical occupancy rates for Houston were about 89% for 2008. We were well above that. Here is a chart I snagged from the presentation showing occupancy rates for all of the Houston area, the Westgate area (which is a small section of Houston where our apartment is located), and the occupancy rates for our building since we took ownership. The greenish-yellow line is our building.



It looks like the selection of Houston as a place to invest in was a wise decision by the managers of this investment.

Specifically related to our apartment:

When we purchased the property, we had planned on installing a playground area. We since discovered there are not many children in the development, so we will be making seating areas for reading and picnics instead. The majority of the repair work from the hurricane damage is done. Over half of the costs will be repaid from a repair impound account our bank makes us pay into each month, so cash flow will not be affected much.

The projected cash flow when we were evaluating the property for the period of July to December 2008 was $271,000. Our actual cashflow, adjusted for the hurricane damage costs, was $298,000. Our current ROI is 9.9%. Looking forward one year, management has given us three scenarios, based on how revenue trends. If it stays flat, our ROI will be 9.6%. If it rises by a nominal 2%, it will be 9.85%. If it rises by a moderate 5%, it will be 11.1%. Management's best guess is that revenue rise will be somewhere between 2% and 5%.

We also received a one month profit distribution (instead of the normal quarterly one) to sync up the distributions to a calendar quarter basis going forward.

Keep in mind, the goal of this investment is to increase the value of the apartments by increasing occupancy, raising rates, increasing cash flow, and then sell it after a few years for a profit. We are shooting for an annualized 13% ROI when we sell. So while a 9+% ROI is decent for an operating return, we are really looking to make money in the future.

My Ebook Is Available!

I'm pleased to announce my ebook, A Flipper's Diary, is finished and now available for purchase! What does it contain? I'm glad you asked!

I've taken two of my flipping projects that I've presented here and presented them in chronological order (unlike the reverse chronological order of the blog) and added additional comments and information that I have learned since I worked on those first projects. I've also included a glossary with definitions of terms you are likely to encounter in this business. These terms are conveniently hyperlinked for quick look-ups. The book is 150 pages long and includes many full color "before and after" photos of the projects. It also contains full financial details of each project, including my costs and profits. Like this blog, the book is written with the beginning investor in mind.

You can purchase the book using a credit card or PayPal by simply clicking the Buy Now button above. After purchase, you will be immediately emailed a link to download the book. The cost is just $29.98!

Price reduction!!! I've lowered the price of this book over 50%!! Buy it now for just $12.95! Click the button above to securely purchase using a credit card or PayPal!

Lost Some Free Advertising

I lost some free advertising over the weekend. I used to have license plates frames that said "I Buy Houses" and listed my phone number. On January 1, a new law here in Arizona went into effect that says you cannot cover up the word "Arizona" on license plates. The word is printed between the two upper mounting holes on the license plate, so almost all license plate frames that have writing on the upper portion cover the state name. To comply with the new law, I took the frames off. In actuality, it wasn't that big of a loss. I think in the 4 years I had them on, they generated only 2 phone calls. Both calls were from real estate agents and neither one resulted in a deal.

General Update

Well, the holidays are over and things are settling back down to a normal routine.

I received another on-time payment on Hard Money loan #4.

I received another quarterly profit distribution for the apartment complex in Houston. Again, the distribution worked out to our preferred 9% annual ROI. After five months of rising, the occupancy rate dropped, but only by one percent back down to a more normal 96%. I knew the 97% rate from last month wouldn't last too long. (Marketing and retention expenses dropped by about 20% from last month, which may explain the drop in occupancy.) Repairs from Hurricane Ike are wrapping up. Return on equity for the property this quarter is currently at 8.7%, but excluding the cost of repairs from the hurricane, it would have been 10.9%. Next month will see a one-month profit disbursement to sync us up with a calendar-quarter payment basis in the future.There is a bi-annual investor conference call scheduled for the end of this month that will provide investors with an overview of how things are going so far and what the outlook is for the next year.

I almost got hired at a local real estate investment trust company. I made it to the final three applicants, but the company ended up choosing someone else. Too bad. This REIT specializes in commercial real estate and they have over $50 billion in properties under management. I could have learned a lot from them.

Work on my ebook has stalled. Actually, I am done with it, but my wife is working as the editor and she hasn't had time to work on it lately. Hopefully, that project can get moving again soon.

Hard Money #6 Cashflow Day

I got my first payment from Hard Money loan #6 today. I also got copies of the paperwork - mortgage, loan servicing agreement, etc. One thing that is slightly different about this loan is the payment due date and overdue dates. Normally, payments are due on the first of the month and overdue if not received by the 15th. This loan however, has payments due on the 7th of the month and overdue if not received by the 17th. No big deal. Just a bit different. Note that this setup actually gives the borrower less time before a payment is overdue - 10 days versus 15. Not that I expect any late payments.

In reviewing the paperwork, I noticed one other thing different than I mentioned before. I originally said the property was bought at auction for $272,000 and the lender was owed $488,000. Turns out, the lender was owed $524,000. That doesn't really matter, as the important figure is what the house is worth now - which still is around $300,000 to $350,000.

Full Disclosure

I have a confession to make. I have not been fully honest with you. When I said this was the reason I wanted passive income, that isn't the only reason. There is another reason: I have multiple sclerosis. The majority of the time, you would never be able to tell. I typically have no symptoms. Occasionally, however, I will have a flare-up, or "exacerbation," as they are called, where symptoms appear for a while and then eventually go away. This is known as the relapsing-remitting form of MS. The bad thing about MS, apart from the fact that there is no cure, is that it is a very unpredictable disease. I have had no flare-ups for over 2 years, but a couple weeks ago I started having some, probably brought on by the stress of being laid off. Currently, I have little fine motor skill in my left hand. Since I am left-handed, I cannot handwrite, my printing looks like my five year old daughter's printing, and typing is a bit of a chore. On the plus side, it gets me out of doing the Christmas cards his year. I am currently on a 2 week course of steroids, which should return functionality to me.

I was originally diagnosed back in 1999 or 2000. I was on a business trip and gradually started losing all vision in my right eye. When I returned home, I saw an ophthalmologist (although not in stereo vision - ha ha, a little humor for you) and was told I had optical neuritis, which is a typical symptom of MS. My vision mostly returned, although it is not 100% in that eye and probably never will be. I had some other episodes where I felt numb on parts of my body, again typical MS symptoms. After meeting with a neurologist and a battery of tests, I was diagnosed.

So why do I mention this? Because last March, Crystal left a comment on my blog saying she was in Section 8 housing because she had MS (and presumably it was affecting her ability to work). Since I saw that comment, I've been meaning to bring up my situation here, but there never seemed to be a good time. I've realized there probably never will be a good time.

Because MS is so unpredictable, I have no way of knowing how long I will be able to work. Hopefully, a very long time. However, I am attempting to plan for the possbility that someday I may be forced into not working, and to prepare for that, I want passive income.

Most people try to obtain passive income to get out of the "rat race," their nine to five job. To do so, you need your passive income to be greater than your expenses. For me, my passive income needs will be higher than most. If I did not have insurance, my medicine for controlling MS would be almost $2,400 a month. This is on top of my mortgage and other living expenses. And when my wife and I retire, assuming no cure has been found by then, I will need to buy my own medical insurance, which will probably cost more than that. So passive income is something of a necessity for me if I want to retain the standard of living I am accustomed to.

Crystal, if you still read this blog, I hope things are going well for you, both in your housing situation and with MS. You've always been on my mind these past nine months. Sorry it took so long for me to write this.

Working On A New Project

I have had some more free time since I was laid off from my day job, so I've started work on something that was suggested to me back in 2005: write an ebook. I'm taking two of the rehab projects I've detailed here (House #3 and House #11, on this blog, although they were labeled as such before I was using tags to mark the entries and before I switched to a new numbering system) and adding some additional comments to them, based on what I have learned since or from those projects. I'll be sure to let you know when the ebook is finished.