Payments Coming In

Escrow for the property securing hard money loan #7 closed on Monday. I should have my interest payment by the end of the week. My partner is looking for a new loan to invest my principle in.

I received another quarterly payment from the Houston apartment complex today. Back in March, they said they expected they would be able to increase the quarterly payouts over and above the guaranteed 9% return because the property was performing so well. Well, this quarter, the check was still for the standard 9%. To my knowledge, the property is still performing superbly. The semiannual investor conference call will be taking place on August 5 and I look forward to hearing more info about increased payouts at that time.

On another subject, I think this article from the New York Times should give all of us pause. If China stops buying our debt or decides they want to dictate how we do business to protect their assets, we are in big trouble.

More Details on Newest HML

Last week, I wrote about the latest hard money loan I made. I have some updated details now.

The original analysis was done figuring the units were bringing in a total of $3,550 in rent per month. The actual amount is almost $4,000. The borrower is a retired attorney. She plans to "season"* our note for 6 months and then refinance via a conventional bank loan. This means we will likely be out of this investment in 6 months rather than 1 year.

* To "season" a note means to hold it for a period of time, usually 6 months, before trying to refinance it. This is to create a history of (hopefully) on-time payments that the new lender can look at as a indication of the borrower's credit-worthiness. In the current economic climate, most banks are requiring a minimum of 6 months of on-time payments before they will approve a refinance.

That Was Quick

We got the payoff demand for hard money loan #7 today. That didn't even last two months. Oh well. Better than no money. And we knew going in that this would be a short one. Escrow should close in a day or two. I'll letting my partner keep my funds again for the next deal.

Another Hard Money Investment

I have entered into another hard money lending investment, which seems to be my preferred investment type lately. This is a first mortgage on a property that was bought at the courthouse steps (i.e., at a foreclosure auction). Purchase price was $181,000. The buyer put up $100,000 of his own money and we (myself and some other investors) are pooling our money to create the $81,000 difference and write a first mortgage. This is a 1 year only note, with a 12% interest rate (net 10% to investors after the processor takes 2% for his trouble) with no pre-payment penalty. I am one of three investors on this note.

The note that was foreclosed on was for $532,000, meaning the lender took a $351,000 loss when selling this property. (Of course, that loan was made during the real estate bubble and is not really a true indication of the value now.) The property is a four plex which is fully rented. Total monthly rent is $3,550 and is broken out per unit as $700, $1,250, $900, and $700. Comps are in the $150,000 range. (Technically, the property is a triplex with a 1 bed / 1 bath house in the rear of the property, but we're treating it as a four plex for analysis purposes.)

If we have to foreclose, we have a property that generates $42,600 in gross annual rent for $81,000. Not too bad.

Now this is not normally a deal we (myself and my partners) would do. The property was bought for $181,000 and comps at $150,000?? Why are we even interested? There are several reasons. First, the borrower has put up $100,000 of his own money. Second, he is a broker in the area and my partner has known him for 10 years, so we are comfortable that he knows what he is doing. Third, the total loan on the property is $81,000, so the loan to value ratio is 54% (using the $150,00 comp figure), still darn good. And lastly, if you look at the property from an income standpoint, it's a good deal. $42,600 in gross rent for $81,000 is a 53% ROI. But that's not a true number, since that is gross rent, not net rent. But even assuming 50% of the rent goes to pay maintenance, taxes, etc., we're still looking at a 26% ROI.

This illustrates a good point about rental properties. A four plex is right on the border between being considered a standard income property, like a single family home, and a commercial property. Where SFHs are typically evaluated on their property characteristics, such as loan to value, appreciation potential, etc. as well as their ROI, commercial properties are generally evaluated largely on their cash on cash return, or ROI. Being a four plex, one could look at this either way and it looks like a good deal either way.

I am labelling this investment hard money #8.