Hard Money Loan #23 Started

I started a new hard money loan this week, bringing my current outstanding loan count to 4.

This one is on a single family home in San Pablo. It is currently occupied. It's a 2 bedroom, 1 bath, 856 square foot home built in 1950. The roof and foundation look to be in good shape and, other than the garage, the paint is in good shape. We were unable to see the inside of the home, but pictures of the interior on MLS show it seems to be in good shape. The landscaping is in good shape too. It appears to have newer windows and the kitchen has been redone with granite and stainless steel appliances.

The property was listed as a short sale on the MLS at $175,000. There is another property down the street, similar in size and condition, that is also listed as a short sale for $175,000. It sold in seven days, but we don't know what the actual contract price was since it was a short sale. The neighborhood is just OK. My partner's helper rates it a "C". The property is near a large regional park, so there aren't many nearby houses for comps. The original owner bought the property in 2004 for $378,000. There was competition at the auction for this property, so other investors wanted it. Our borrower got it for $129,000. Our loan is for $105,000. We conservatively are valuing it at $160,000. That makes our LTV 65.6%. My investment in this property is smaller than normal, since it's being done with funds from my daughter's UTMA account, as I mentioned a couple weeks ago.

My other loans continue to pay on time. Ho hum.

A Handy Tool For Landlords

I came across a handy little website the other day that I though might be useful for landlords or anyone else who needs to send certified or return-receipt letters. Send-certified-mail.com provides an easy way to send out a certified letter. You can also get an electronic proof of delivery or electronic copy of the recipients signature.

If you want to use the service, you simply upload your letter as a PDF or Word file and enter the mailing address and your return address. The accept Paypal for payment. There is no monthly subscription fee to use the service. You only need to pay when you actually mail something.

I found their prices to be reasonable. It may cost a dollar or two more than if you took it to the post office yourself, but being able to send a certified letter from your computer sure beats having to trek down to the post office.

I believe the company is based on the East Coast, so that is where your letters will be mailed from. If you upload your document and pay prior to 11 AM Eastern time, it will be mailed that day. I did experience a quirk that briefly caused me some worry: When you upload your letter, it will appear for a while on their website under a section titled "My Uploaded Letters." Once, it is printed, it will disappear from there. Don't worry - the next day it will reappear in the Letter Tracking section.I've heard from their customer support that they will be revamping their website soon to make things more clear.

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.

First Update Of 2012

Wow.. I can’t believe I haven’t updated this blog since December! Truth be told, there isn’t much happening. My three outstanding hard money loans continue to pay on time. I haven’t received an update on the Houston apartment since last time, so there isn’t a whole lot to tell there. I’m assuming performance of that still sucks or we would have heard something. I did make a decision to go a bit further into hard money lending. I’ve got some money in a UTMA account for my daughter that has been languishing in the stock market for the past 5 years. I finally got fed up with seeing it sit there doing nothing and have liquidated the stocks and will be switching those funds to HMLs as soon as the trades settle and my brokerage can get me a check. I have noticed in the paperwork I get for some of my existing loans (trust deeds and recorded docs and such), other people I lend with have done the same thing.
In somewhat-related news, my self-directed IRA is getting up there in value. I think in the next couple of months, I’ll split that investment into two loans just to provide a bit of diversity. It’s not diversity in the stock market sense of the word, as both loans will be in the real estate sector and the same geographic area (probably), but the loans will be on two different properties, possibly with two different borrowers. I need a couple more months of interest payments before doing this though, in order to satisfy the minimum balance requirement for my bank account before I withdraw the funds.
The market seems to be picking up in the California Bay area. My partner says for the first time in a long time, he has more requests for loans than money to fund them.