Hard Money Loan #11

My partner finally found another property to invest my principle from hard money loan #9, which was paid off a little over a month ago. Hard money loan #11 is on a property picked up for one cent over opening bid at a foreclosure auction in San Ramon, California. I normally don't post photos of the properties I am lending on here, but this one is just beautiful, so I have to. For a foreclosure, this is in excellent shape.




This was a rental property and my partner spoke with the owner (who was being foreclosed on). He said he has two tenants living in the property who are paying him $1,600 a month in rent. The lender sent the tenants a letter stating they can live in the property for up to 60 days after the sale. Not sure what authority they have to make that promise since after the sale, it is no longer the lender's property and they should have no say in what is done with it. But anyway, when my partner was there, the tenants were loading a U-Haul, so they don't seem to be planning on staying.

The house was purchased at auction for $577,000 cash and the first mortgage I am a part of will be for $400,000. This gives a LTV of 69% based on the purchase price. The property was purchased in 2004 for $860,000. Current estimate of worth is between $650,000 and $700,000. Buyer is my partner's wife, who has a credit score in the 800s. The interest rate is 9%, which is one percent less than what I normally get. I consider it an employee discount :-) Mortgage is for one year, but we expect it to be paid off in 6 months.

New Year, New Opportunities

The holidays were a pretty busy time for me and I realized I neglected to write about the performance of my Houston apartment complex investment. I also just got the update for December, so I’ll write about both now.

In November, occupancy dropped to 90%, due in part to the declining Houston economy. This property still continues to outperform the other apartment complexes in the area by 3-5%. The manager expected vacancies to remain at this level though December due to the holiday season, but expressed hope that rentals will increase after the first of the year. Cash flow decreased to just under $4,000 for the month and was impacted by higher insurance costs and real estate tax escrow requirements, as mentioned in the last update.

For December, occupancy remained flat, as expected. The submarket we are in declined to an overall occupancy of 87%, so we are still ahead of the curve. Unemployment in the area has increased from 6.5% in Q1 of 2009 to 8.4% in Q4 of 2009. Obviously, that affects the availability of renters. The Managers are cautiously optimistic for 2010 because job losses have slowed and they have increased their marketing efforts to attract new tenants. Cash flow dropped to just around $350, still impacted by higher insurance and tax escrow requirements. The good news is the management has obtained new insurance that will reduce the cost by about 30%, which translates to a savings of about $35,000 per year. The decrease in cash flow means there will be no end of year distribution to investors. For 2009, investors so far have received a 6.75% annual return overall. Management fully expects investor payments to continue next quarter. The semi-yearly investor conference call will be held the first week of February and I’ll have more info then.

I continue to receive on-time payments on hard money loans #10, 8, and 4. HML #9 was paid off at the end of December and that money is sitting with my partner looking for a new investment. We had one lined up, but it was a short sale and at the last minute, the bank decided to reject the offer, so that fell through.

My move towards a self-directed IRA is making progress. I have converted my rollover IRA to a tradional IRA and then to a Roth IRA. The next step is to transfer the funds to the company the sets up the self-directed IRA. I was planning on going with the iTrust product, but after discussion with the company, have realized that the LLC product, rather than the trust, is a better fit for what I will be doing. The only thing holding this up is that I haven't had time to fill out the paperwork yet. I hope to get that done this week. I'm not in a huge rush as it seems the hard money opportunities are slowing down a bit. My partner is noticing increased competition at the foreclosure auctions.

And finally, it’s been over a year since I was laid off from my day job, but I will finally be hired as a full-time employee again come next Monday. The company I have been working as a contractor for for the last nine months or so has decided to bring me on board permanently. While my passive income is not yet high enough to cover my living expenses, it was high enough to cover the expenses of my loans and credit cards during the year I was laid off. (I normally don’t carry a balance on my credit cards, but the layoff changed that temporarily.) It was a huge relief knowing those bills were covered during the times I had no income coming in. My practice of putting 15% of my paycheck into a savings account also helped my ride out that year. This whole experience has taught me the importance of both passive income and maintaining an emergency savings account.

HML #9 paid off

Between Christmas and New Years, hard money loan #9 was paid off. I made a couple thousand dollars on it. I'm leaving my principle with my partner for investing in another loan when he finds a good one.

Over Christmas, we had some out-of-town relatives staying with us and one night, my brother-in-law handed me a real estate listing for a property that was literally down the street from my house. It was listed for $90,000! Being that I live in the neighborhood, I know that property was worth at least $250,000. So we walked down the street to look at the house. It was night, so we couldn't see much, but we could tell it was still occupied. It looked to be in good condition on the outside. The listing said it had a pool. Back at home, I did some more research. Obviously, this was a foreclosure or pre-foreclosure, but I couldn't find anything in my search of public records. No notice of foreclosure auction, no judgments against the owner, nothing. If I had to go based on my research, I'd say the owner was not in any sort of financial difficulty at all.

The following day, I called the listing agent and asked if the $90,000 price was correct. He said it was, although he had received offers so far up to $150,000. He confirmed it was heading to auction. The agent's cell phone cut out, so I didn't get more info, but it sounded good.

The average selling time for properties in the neighborhood is 6 months. I ran some numbers on the conservative side - using an 8 month holding time, below market selling price, etc. and the results looked pretty good. For an all cash deal at $160,000, they could get about a 42% annualized return in that 8 months. Unfortunately, they had no funds available, so they had to pass. I passed as well, since most of my funds are tied up in hard money loans right now. Too bad.

One interesting thing is that I found the original note for the loan on the property and it was for more than $90,000. More than the current high offer of $150,000. That must mean they are trying a short sale, which means the lender would need to approve the final sales price. I would have thought the listing agent, who was a Realtor, would have mentioned this. I also suspect the $90,000 listing price was deliberately set low to attract potential buyers. I'm not sure about the ethics of this and I'm not sure what requirements Realtors have in setting the initial asking price, but it seems like a used-car salesman trick to me.

In other news, my progress towards rolling my IRA into a self-directed Roth IRA is slowly moving forward. For tax reasons, I had to wait until 2010 before I could do the actual conversion. I'm going about this in a couple steps. First, I am converting my Rollover IRA to a Contributory (Traditional) IRA. They are basically the same thing, but my CPA tells me the law that allows me to spread out taxes on the Roth conversion for two years only specifies conversions from a Contributory IRA to a Roth, not a Rollover. The law will probably be changed to fix this, but just to be on the safe side, I'm taking this extra step. The second step will be to convert the Contributory IRA to a Roth IRA. I will do this at the brokerage the IRA is currently at. The third and final step will be to transfer that Roth IRA to a company to who will set up the self-directed IRA. I am currently leaning towards the iTrust offered by NAFEP.

I am currently at the first step in this process and imagine it will take a couple of months to get everything all set up.