March Update

I've been away for a couple weeks on a cruise to Hawaii. Got back and found out my hard money loan #22 finally got paid off. This was 5 months overdue, but since the borrower is one of our biggest clients and he was still making payments on time, we didn't call the note and opted to let him pay it off at his leisure. The property was under contract for sale two or three times, but fell out of escrow each time, I believe because the buyer's lender would not consider this a valid property for a conforming loan. The unit was a triplex and those are normally considered conforming (i.e. non-commercial), but apparently in this post-real estate bubble world, lenders are being more strict in what they define as conforming. Our client ended up keeping the property himself and renting it out. He did a re-fi to pay us off. I'll be adding some money to the principle return from this loan and am looking for a new property to loan on.

My other three hard money loans continue to pay on time.

The financial results for January for the Houston apartment complex came in. The property showed a loss of about $6,500 for the month. This is very disappointing, considering how things appeared to be turning around in December. The silver lining is that the loses in January were due to one-time expenses. We had to pay a vendor almost $4,000 for work done 4 to 5 months ago (we had been delaying paying the vendor until the property's cashflow improved), there was a bed bug infestation that required pest control treatment costing close to $1,000, and several fees related to health and fire permits and loan reserves processing by our lender were paid. We had to replace a hot water boiler that failed, although this $14,000 cost will be reimbursed from our capital improvements escrow account with the lender. If you exclude the boiler and one-time items, cashflow would have been a positive $11,000 for the month.

February's figures should be coming in soon. I'm looking forward to seeing how things went that month.

2012 Year End Apartment Update

I'm getting a bit behind the times here, but here's the 2012 year end results for the Houston Apartment complex.

December was another good month for the property as things continued to improve. The property had the highest total income amount for the year at just over $186,000. Operating expenses were a bit on the high end, due to some legal bills over the delayed payments we had over the past year. Even with that, they did not reach the highest monthly expense amount of 2012. These two things resulted in the highest monthly net income for the year. Actually, this is really the highest because we had one month where the figure was artificially inflated due to an insurance reimbursement of $30,000. We had a net income of almost $16,000. This was enough to push the property into the black for the whole year to the tune of about $29,000! This is almost $44,000 ahead of the budget that was given to investors during the cash call at the beginning of the year.

Rents are trending upwards at about 2% annually and our rent concession figure rose only marginally from last month. Losses due to bad debt dropped 40% from last month.

With the improvement in the property's finances and assuming we continue to stay on budget for 2013, management believes we can begin to look at selling the property sometime in early 2014. We're looking to sell in the $15 million range (we bought the property at around $12 million). If this can be done, the annualized return on investment to investors would exceed the 9% we were guaranteed.Looking back, it appears management has a fairly good handle on budgeting and any surprises tend to be on the good side. At the start of the year, their budget called for the property to lose money each month through June and finishing the year with a small loss. In reality, the property ended up losing money each month through May and finished the year with a slight gain.

In other news, my four hard money loans continue to pay on time. One property was up for sale, but that fell though and it looks like now the borrower is going to keep this for himself and convert it to a rental. That loan is close to coming due, so it should be paid off soon.

November Update

I've got two updates today. First, the sale of HML #22 has fallen through. Our borrower is looking for a new buyer. I don't have any info as to why the deal didn't happen.

I also received the October update for the Houston apartment complex. Things have gone wee bit south since the last yearly conference call several weeks ago, although some offsetting factors have prevented that from being reflected in the bottom line. Occupancy decreased to 89%. Management says this is due to a combination of factors, including some crime issues that have affected not just our property, but other apartment complexes in the area as well. In addition, we have seen some increased competition from nearby properties in the form of increased rent concessions. There was also some management turnover in the front office and the interim property manager was not up to the task of running the property. Management has addressed these issues by bringing in a more experienced manager from another property to run ours. Perhaps a more seasoned manager would not have allowed the competitor's rent concessions to have had such an impact on our occupancy.

Management says they have also worked with the Houston police department to increase patrols at our property. I'm not sure how effective this will be. If crime is an issue at other properties as well, I imagine the police may be stretched a bit thin trying to increase patrols at all properties. We may end up seeing a return to the use of a private security company for patrols.

Expenses declined due to seasonal decreases in utility usage, as well as the previously mentioned staffing decreases. Overall, we saw a reduction of $10,000 in expenses for October, bring our net operating income to a positive $4,200, the second highest monthly total of the year. Given that this increase is based mostly on one-time events, I would not expect this type of performance to continue.

Or should I? We also received the 2012 real estate tax bill, which features the new property assessment value. As a result of the lower assessment, the amount our lender is collecting for the property tax escrow account is decreasing by about $8,300 per month, beginning in December. That is a huge savings that will go straight to the bottom line.

Hard Money Loan #22 Getting Paid Off

I received word yesterday that Hard Money Loan #22 is scheduled to be paid off the first week of December. No details on the sale. In fact, it's been 1 year since the loan was made, so it's possible this is a refi and not a sale at all. The property was a triplex with renters in place who wanted to stay, so it's possible the buyer is going to keep it himself.

I'll also take this opportunity to take the interest I received from this loan and add it to the principal for my next one. Manual compounding, if you will..

July Update

The July figures from the apartment complex look good. Overall, they've dropped a bit from June, but not significantly. June was the sixth consecutive month of increasing total income, so I expected that to end sooner or later. Total income for July dropped by $4,000 and occupancy dipped to 90%. Offsetting the lower income were lower payroll and utility payments, so we had a net gain in monthly profit. However, the property overall was above break-even, which is a first for this year and, if I recall, the first for maybe 1 or 2 years. Good news indeed.

My four hard money loans continue to pay on time. Several other loans my partner has have closed recently and I expect some, if not all, of my loans to be closed soon. Three of them aren't approaching their 1 year due date, but based on past experience with the borrower, the properties are probably up for sale or in escrow right now. One of my loans has actually gone the full 1 year term - something that rarely happens. This note was due this month. Haven't heard any word on a payoff yet though.

Hard Money #22 Started

It took just about a week, but my funds from HML #17, which closed on the 21st, have found a new home.

Our best borrower picked up a triplex at a foreclosure auction. The property is in San Lorenzo, California and went at auction for $331,000. Our loan is for $210,000. The property square footage is about 2,600 although the MLS listing for it does not give a square footage.

As we did with the last property, we pulled comps using both residential and income property searches on the MLS. Income property comps show up at $315,000 for a 4-plex that is smaller than the subject property and another 4-plex listed at $725,000 but that's bigger than the subject property. There is a triplex that sold recently for $329,000 that was smaller.

On the residential comp list, we had about 12 properties, all that were smaller than the subject and all on smaller lots. Highest priced one sold for $335,000.

Based on rents of single family homes in the area, my partner estimates the monthly rental income to be about $1,200 per unit. (The subject property is really a single family house with a duplex in back.)

Our borrower estimates the property to be worth $500,000. I'm not sure how he gets a figure that high, but he knows the area better than me and comps are pretty hard to come by, as usual for triplexes. The property has tenants in place and they have indicated they want to stay. We have not seen the inside, so we don't know the condition. The roof appears to need some work. Our borrower has experience in the area - he actually rehabbed the property right next door, which is a 1,000 square foot SFH that he sold for $280,000 back in August. My partner was his lender on that project too (although I wasn't).

Our LTV based on the sales price is 63%. Should we have to take over the property, we'd get an income-producing property generating about $29,000 per year for $210,000. Not bad. Our loan terms are our standard - 12% interest only loan, 1 year term. And with this deal, all my funds are fully invested again!