Apartment September Numbers And HML #28 Pay Off Delay

September saw a continuation of the good performance of the Houston apartment complex. Rental income (which excludes utility chargeback amounts) reached its highest level to date - $170,000. Total income was just $1,000 lower than last month at $198,000. Net income (cash flow) for the month was $19,000, a bit lower than last month's record setting $25,000. I don't really have anything else to report on this other than rent concessions dropped by $1,500 and bad debit write-offs dropped by $5,000. Both of these are good things.

I reported last time that HML #28 was paid off. I was a bit premature on that one. It was supposed to be paid off on Oct. 18, but escrow did not close then. In fact, escrow still hasn't closed and we are now looking at this Friday to be the new closing date. No word on the reason for the delay, but given the unusual demands by the title company (like requiring a signature from me, a mortgage holder), I would not be surprised if they were the reason for the delay.

Update: Turns out, the delay was because the buyer had a scheduled vacation and was out of town. Escrow is closing today, although not without some additional drama. The title company was saying they would not release the funds to my partner and needed wiring instructions from me so they could wire the funds directly to my account. I was off getting that info when I got another call from my partner saying the title company changed their mind and was ok with simply cutting a check to me and letting my partner mail it to me. So that's what we are going to do.

HML #28 Paid Off And Looking Towards 2014

HML #28 was paid off on Friday. This loan was started just a few months ago in August and, at the time, we knew it was going to be a short loan. Out biggest borrower is not buying much these days because he feels people are paying too much at the foreclosure auctions. As a result, my partner has $1.2 million sitting around waiting to be re-invested and where I normally have four loans outstanding at any one time, I currently only have one.

This payoff was also strange in that this was the first time in the 7 or 8 years I have been doing this that I was required to go to the title agency and sign documents. As a mortgage holder that is being paid off, there isn't anything I normally have to sign and for those few things that do require a signature, my partner and I have a loan servicing agreement that gives him permission to act on my behalf. However, this particular title company was very picky and didn't want to accept that document, so I had to rush around a bit last week to locate a local branch of the title company, sign some documents and have them overnighted to the closing title company in California.

I've been thinking about the Houston apartment lately. The property is performing nicely now and I think management will look at putting the property up for sale near the end of the year or beginning of next year. Investors were guaranteed at least a 9% annualized return and the last time we received a profit distribution was October of 2009, so a sale would give us 4 years of accrued interest plus our share of whatever profit we make from the sale over our purchase price.

I'm trying to plan how to reinvest my money once this investment is over. (I know, I'm counting my chickens before they hatch.) I'm not sure I want to reinvest in an apartment complex right now. I do like the idea of apartment investing and plan to do it again in the future, but I'm not sure it's the next investment I want to make. For one, it's become clear that the performance of apartments is closely tied to the economic situation of the area. That's obvious and holds true for any real estate investment, but what this investment has shown me is that, because apartments have many tenants, a widespread economic downturn can result in the loss of many tenants. That can cause a cascade effect where property income drops and operating expenses don't get paid and investors can't get scheduled distributions.

Which brings me to my second point: apartments really are a business. They have operating expenses that have to be paid and maintenance and other activities to manage. As an investor, I didn't really have to deal with the day to day administration of such things because we have a management team that handles that. However, as was the case with this property, if things go downhill for a while, investors may be asked to contribute more money to help keep the business afloat. This is in contrast to investing money in a mortgage, where someone just sends you a check every month and a call for more money would be very rare. True, you may have to foreclose and then the mortgage investment can become like a business in that you'll have expenses like fix up and repair costs to sell the property. But on the whole, I think mortgage investing is a lot more hands-off than apartment investing. It also seems the cash flow is more stable, although that may just be due to the quality of the borrowers my partner deals with.

Overall, I think apartments tend to be more of an investment for those looking to get capital gains rather than monthly cashflow. I'm reasonably sure that, had I made this investment in a strong economy and did not have to suffer through 4 years of no cash flow, I would have a different opinion. In a strong economy, apartments probably do provide a robust cash flow. However, at this point in my investing career, I'm more interested in dependable cash flow than capital gains, so I'm leaning towards reinvesting these funds into hard money loans.

August 2013 Apartment Numbers

The results for August for the Houston apartment complex have just come in from the management company and things continue to go well. Occupancy stayed at 94%, the same as July, but total revenue increased to $199,600. Net operating income hit almost $94,000, which was almost $4,000 higher than July. Cash flow for August also increased just a bit over $25,000, also an increase over July. This is the highest monthly cash flow number this year.

Expenses were normal with the exception of a one time $4,000 expense for tree trimming that was required by our lender. Our losses due to bad debt, which had ballooned to over $22,000 last month, dropped back down to just under $10,000, which is still higher than average, but at least it's moving in the right direction. Rent concessions almost doubled from last month. Since occupancy stayed the same, it looks like my predictions of a stronger rental market last month might have been a bit off.

Nevertheless, the property is performing nicely now and our net income figure is about $14,000 higher than budgeted for the year. Management hasn't made any mention of it yet, but I think the property is beginning to look like it might be in shape to be put on the market towards the end of the year.