Tuesday, August 18, 2009

Hard Money Loan #9

Just got into a new hard money loan today. The borrower is the same person who was the borrower for hard money loan #7. That loan only lasted two months, but this one should be a bit longer - we're guessing 6 months. (The legal document says the loan is for a maximum of 1 year.)

The property was another one bought at a foreclosure auction in the northern California area. We have a first mortgage in the amount of $160,500. Investors are getting 10% interest-only payments paid monthly. The house is a 3/2 SFH that is about 1,250 square feet. It comps in AS-IS condition at $250,000 conservatively or $275,000 non-conservatively. After it is fixed up it, it should be worth somewhere in the $330,000 to $350,000 range. The property does back up to some train tracks, but the comps were used did as well. One comp actually was only on the market for 8 days! The borrower has $90,000 of his own money in it. Using the conservative valuation, our LTV is 64%.

The old owners, who were foreclosed on, are still occupying the property, so the borrower will need to go through the eviction process to get them out. (This is one reason why we're pretty sure this loan will last longer than 2 months.)

Thursday, August 6, 2009

Houton Apartment 6 Month Update

The second semiannual conference call for investors in the Houston apartment complex was last night. We have now owned the property for just over one year.

First, the management gave an overview of the situation in the Houston market in general, and then in our district, and then, finally, our specific property. The Houston job market actually gained 54,000 jobs in 2008. So far in 2009, it has lost about 31,000 jobs. This is in line with the top 100 major metropolitan areas all over the country, which have all seen job losses this year. Even so, Houston still ranks as the fourth best metro economy in the country.

There are some additional apartment units coming online in the area, however, they won't really affect us, as they are all more expensive units. Also, all the new units opening up within a 3 mile radius of our complex are all more expensive than ours. The "shadow market", meaning single family homes for rent, are not really an issue for us either. These properties tend to compete with the nicer A-class apartment complexes. We are a B-class.

In Houston overall, the average apartment complex occupancy rate is from 86.5% to 88%. Class B complexes overall have a rate of 88% to 89.6%. Predicted drops in rent prices have not really materialized and for the Class B market, rents have actually gone up by about 1.9% In our local submarket, occupancy rates average 89.8% to 90.7% and units have seen a tiny 0.5% decline in average rent. Our particular complex has had an average occupancy of 93% in 2008 and the first 7 months of 2009 have seen an average rate of 96%. Our rents have also seen a modest 2.9% increase. So we are doing much better than not only the overall Houston market, but also our own submarket.

There are no further capital improvements planned for the complex, although management has made some inexpensive improvements - new umbrellas and cushions for the patio furniture, for example, as well as added some additional lighting. The improved lighting has enabled the property to qualify as a Blue Star property, which is recognition from the local police department that property management has taken significant steps to reduce crime. This is obviously a good selling point for potential tenants.

There is no deferred maintenance at the property and management intends to continue to operate the property in that manner.

For the last fiscal year, the property had a $236,000 net cash flow, representing a 8.6% Cash On Cash Return (COCR). These figures include the repair costs associated with Hurricane Ike. Excluding those costs, the net cash flow was $286,000, representing a 10.4% COCR. While they have increased rents somewhat, the economy is limiting their ability to raise rents as they would like.

Investor quarterly payments will continue to be the guarranteed 9%, but management will likely be making two additional payments six months and nine months into the fiscal year to distribute additional profits. They are doing this rather than raising the standard payout because they do not want to get into a position where they raise the payout, then have to lower it again should another disaster strike. They realized their estimates for repairs costs from Hurricane Ike were about $15,000 lower than their actual costs, so they want to be a bit more conservative going forward.

All in all, I'm still very pleased with the performance of this property and the management team. I think the results are astounding, especially when you consider the economic climate they have been operating in!