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.