Yearly Apartment Conference Call

Yesterday was the annual investor conference call for the Houston apartment complex. Management gave their views on the current performance of the property and their outlook for the future.

In short, it's looking much better. The Houston economy is improving. Unemployment there is dropping. Occupancy is up. The apartment continues to be classified as an institutional grade investment property.

Regarding the cash call the managers asked for last February - They had asked for $250,000 and they received about $140,000. Of that, they used $78,000 to pay down outstanding bills, $20,000 to pay late fees and legal fees resulting from the outstanding bills, and $12,000 to pay property taxes. Management also repaid themselves $20,000 that they had advanced the company. The rest went to operating expenses. Management notes that the mortgage was always paid on time, so we were never in danger of defaulting on the loan.

Since the property was purchased in 2008, we've seen a 36% increase in property taxes and a 44% increase in the water costs from the city. I've written before about how we had the property re-appraised, which resulted in a lower property tax bill back a few years ago. We saved about $100,000 in property taxes between 2010 and 2011. However, during that same period, our loan switched from interest only to interest and principal, so that ate up the tax savings. Management expects the 2013 property taxes to be about $100,000 less than the 2012 amount, but the government hasn't set the final rates yet, so nothing is definite. Insurance costs throughout the Houston area have risen and they expect our insurance to rise by about $50,000 in 2013.

Rents are trending upwards in our market sector. Unfortunately, there is always a lag before our property starts seeing increased rent income simply because the units are rented out on yearly leases, so the rents can't be adjusted until the leases come up for renewal.

The property is on budget through August 2012. In fact, we're within $100 of the budget, which is pretty amazing. The net operating income for the property in 2012 is projected to be $800,000, rising to $990,000 in 2013 and $1.07 million in 2014.

The tentative plan is to look at selling the property in 2014. Assuming a 6.5% CAP rate, the property should be worth about $15 million by that time. (We bought the property for $12.4 million.) This is, of course, based on management's projections of performance and the actual performance may vary. Management will take a closer look towards the end of 2013 and see how things look. These projections are based on not making any distributions to the investors during this period, although if things improve enough, management will look into resuming those payments.

HML #26 Started

My funds from HML #23 have been rolled into a new loan I am labelling HML #26.

This property is a single family townhouse in Oakland, CA. I think this is the first time I've made a loan on a townhouse. If not, it's certainly one of only a very few. I've got nothing against them. It's just our biggest borrower doesn't buy many of them.

Anyway, this is a 3 bedroom, 2 bath vacant townhouse that is about 1,300 square feet. It has an attached 1 car garage and was built in 2008. It does have a home owners association whose monthly dues are $266. The complex appears to be well maintained and the unit does not appear to need any work on the outside. There is no litigation involving the property filed by the HOA. (Usually when a property with an HOA goes to foreclosure, the HOA has filed some sort of suit against the previous owner for delinquent fees or other issues like property upkeep, yard issues, etc.) The foreclosed-on owner bought the property new in 2008 for $221,000 with only a $8,000 down payment.

The neighborhood was built by the city of Oakland as a housing project, so it's not the best area. There were income and occupancy restrictions when the place was built, but my partner spoke with a neighbor and she wasn't sure if those were still in place. However, we think they are since the agent mentioned this in the expired MLS listing.

There are few comps in the complex. There are only two other properties listed in the MLS for this complex. Both are true comps, in that they are similar is square footage and features. One sold a month ago for $135,000 and the other has been on the market since August with a listing price of $128,000. The income and occupancy limits also place restrictions on how much people can sell the properties for, so the prices in this complex are kept artificially low. If you look for comps on Zillow or Foreclosure Radar, they give values much higher as they don't take this into account.

We're are conservatively figuring this is worth $110,000 as-is or $120,000 after repair. Our borrower bought it at auction for $108,000. There were no other bidders. (I'm guess they were scared off by the fact that this is in a housing project.) Our loan amount is for $73,500, giving us a 68% LTV using the purchase price, a 67% LTV ratio using the as-is price, and a 61% LTV using the after repair price. The borrower is our best customer and is personally guaranteeing the loan. The loan is our standard: 12% interest only payments, 1 year term.

It's going to be interesting to see how long this takes to sell.

Apartment Complex August Update

The August financials for the Houston apartment complex are in. Occupancy remained at the same level as last month - 90%. Rent concessions increased and management expects occupancy to increase during the last quarter of the year. The unemployment rate in Houston remained at 7.5%, which is where it has been since June. This is slightly lower than the 7.6% it started the year at, but higher than the low of 6.5%, which was hit in April.

The increased rent concession cost was offset slightly by reduced marketing expenses, reduced apartment turnover costs, and lower maintenance costs. Overall, although the property's overall income was about the same as last month, it lost $100 this month, compared to making $900 last month.

Management will be giving the yearly conference call in two weeks to update us on the state of the investment and the projections for the future. Overall, they say they are progressing as they had planned back in February when they made the cash call.