I finally got a few minutes to call my management company yesterday to see what the status of Rental #1 is. As I mentioned before, I noticed that they had raised the asking rent from $775 to $800. The $775 figure was itself a raise from the $750 it was rented at previously. So the place was empty during November and December when I was asking $775 and I was wondering why they raised the rent again, if it could rent at $775.
Turns out, they were meaning to contact me about this. They wanted to know if I was okay with renting to a Section 8 tenant. They think they can get $800 a month from Section 8 for this property, so that's why they raised the rent. If I was managing the property myself, I don't think I would do it. There is just too much work involved in getting the property qualified for Section 8, as Trisha found out. But since I've got a management company to handle all the work, I figured I might as well give it a shot. The only downside is I expect to get some more repair bills once the Section 8 inspectors check out the property.
Oh, and the woman I was speaking to at the property management company said she had been by the house a couple of times and it seems the neighbors like to sit outside and drink. Not a problem. Except they also like to throw their empty bottles into my yard! She talked with them about it and told them if they kept doing it, she'd call the police.
I know the previous tenants left the property right before the holiday season, so I expected some vacancy time, but I can't help but wonder if this has something to do with the property still remaining vacant. I know the previous tenants were Hispanic. Trisha has also noted how the new law has affected the companies she deals with in the area.
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My First Investment In Multi-unit Properties
It's looking like I will be making my first foray into the world of multi-unit properties (aka apartments) this month. There is still a possibility other investors might fill up the available slots before I can get in, but I think I've got a decent chance right now.
Kenric alerted me to a deal that a local apartment investor was putting together for an apartment complex in Houston. I've met this investor a couple times, the first being at a get-together of people from the richdad.com message boards in 2006, where he gave a presentation on the benefits of apartment investing. As I wrote back then, I saw the potential of apartment investing and have been looking to get into the field ever since. Of course, there are any number of differences between investing in single family homes and apartments, not the least of which is the amount of money needed to get into the game. So it was obvious I would need to partner with someone in order to get my feet wet and learn the ropes. And now it appears that opportunity has presented itself to me.
The Private Offering Memorandum for this deal is almost 100 pages long, so it will be tough to condense everything to a short entry here, but I'll try to hit the highlights.
The deal is for a 342 unit apartment complex in Houston, Texas. Investors get a 9% preferred return and anything over that is split 50/50 between the investors and the people offering the deal. The management team includes Steve, the guy I've meet. He's got over 9 years experience investing in apartments, has a current portfolio of properties worth over $29 million, and has bought and sold over $20 million worth of apartment communities. The rest of the team consists of a lawyer with extensive experience in real estate transactions, and a property management team that has been managing properties for more than 27 years. They specialize in improving the financial returns of apartment complexes and every property they have managed has increased in value.
The apartment complex itself is a B+ institutional grade property. It's about a full city block long, which means there is lots of drive-by traffic (which translates to free advertising for potential tenants). The complex has 2 pools, a fitness center, and gated access. The property, which was built in 1977, underwent a $2.9 million renovation about 4 years ago, so there is little deferred maintenance. The individual units have new appliances, two tone paint, crown molding, and some have wood floors. The complex is about 2/3 single bedroom units and 1/3 two bedroom units and has a 95% occupancy rate.
It is located in a nice district of Houston. In 2006, Forbes magazine rated Houston #1 in Texas and #3 in the entire U.S. as the "Best Place For Business And Careers." The area is seeing job growth across all sectors of the economy and there is a highly skilled, well educated labor pool there. The forecast is for continued job growth for many years.
The plan is to buy the property for $12.4 million (the property is already under contract) and invest about $100,000 in improvements. There is some maintenance to be done, such as repainting the carports, resurfacing the entry drive, and putting new carpet in some units. However, much of the improvement money will go to providing additional amenities, such as a nice water feature in the front (which helps attract potential tenants, as well as improves the overall look of the property) and a playground, to help attract tenants with children (who tend to be more stable renters).
Rents are currently at the low end of the market range and, as the improvements are made, they will be raised to the higher end of the market range, although not to the absolute top. Rent increases will be capped at $50 per month per year so as not to lose existing tenants.
As an added bonus, the recent Fed rate cut has helped. The financial analysis was done assuming a 6% loan and the managers are currently being quoted rates around 5.4%.
The investors receive a 9% preferred return, paid quarterly. What this means is profits are first distributed to investors until they receive their 9% ROI. After that, profits are split 50/50 with investors and the management team. After the second year, and each year thereafter, an analysis will be done to determine if it makes financial sense to sell the property. In the event of a sale or refinance, proceeds will be distributed as follows: all investors will be paid their 9% return, then the investors' original investment will be repaid, and then any remaining monies will be split 50/50 between investors and management. Investors purchase "units" of the investment. One unit costs $50,000 and there is a minimum of 55 units and a maximum of 60 units to be sold.
If you recall, I have said before I wasn't too interested in a 9% return because I felt could do better. I still believe that. I like this deal because it is really more about capital gains. Yes, I will get a 9% cashflow, but the real money will come from the improvements to the property and when the place is sold. At that point, the ROI should be in the 13% to 13.5% range. Additionally, I'll get some experience in seeing how investing in multi-unit properties works.
Correction: I was looking at the wrong set of numbers when I wrote the above. The annualized ROI after the sale of the property should be in the 30% - 35% range.
For future reference, I am labeling this project Multi #1.
Kenric alerted me to a deal that a local apartment investor was putting together for an apartment complex in Houston. I've met this investor a couple times, the first being at a get-together of people from the richdad.com message boards in 2006, where he gave a presentation on the benefits of apartment investing. As I wrote back then, I saw the potential of apartment investing and have been looking to get into the field ever since. Of course, there are any number of differences between investing in single family homes and apartments, not the least of which is the amount of money needed to get into the game. So it was obvious I would need to partner with someone in order to get my feet wet and learn the ropes. And now it appears that opportunity has presented itself to me.
The Private Offering Memorandum for this deal is almost 100 pages long, so it will be tough to condense everything to a short entry here, but I'll try to hit the highlights.
The deal is for a 342 unit apartment complex in Houston, Texas. Investors get a 9% preferred return and anything over that is split 50/50 between the investors and the people offering the deal. The management team includes Steve, the guy I've meet. He's got over 9 years experience investing in apartments, has a current portfolio of properties worth over $29 million, and has bought and sold over $20 million worth of apartment communities. The rest of the team consists of a lawyer with extensive experience in real estate transactions, and a property management team that has been managing properties for more than 27 years. They specialize in improving the financial returns of apartment complexes and every property they have managed has increased in value.
The apartment complex itself is a B+ institutional grade property. It's about a full city block long, which means there is lots of drive-by traffic (which translates to free advertising for potential tenants). The complex has 2 pools, a fitness center, and gated access. The property, which was built in 1977, underwent a $2.9 million renovation about 4 years ago, so there is little deferred maintenance. The individual units have new appliances, two tone paint, crown molding, and some have wood floors. The complex is about 2/3 single bedroom units and 1/3 two bedroom units and has a 95% occupancy rate.
It is located in a nice district of Houston. In 2006, Forbes magazine rated Houston #1 in Texas and #3 in the entire U.S. as the "Best Place For Business And Careers." The area is seeing job growth across all sectors of the economy and there is a highly skilled, well educated labor pool there. The forecast is for continued job growth for many years.
The plan is to buy the property for $12.4 million (the property is already under contract) and invest about $100,000 in improvements. There is some maintenance to be done, such as repainting the carports, resurfacing the entry drive, and putting new carpet in some units. However, much of the improvement money will go to providing additional amenities, such as a nice water feature in the front (which helps attract potential tenants, as well as improves the overall look of the property) and a playground, to help attract tenants with children (who tend to be more stable renters).
Rents are currently at the low end of the market range and, as the improvements are made, they will be raised to the higher end of the market range, although not to the absolute top. Rent increases will be capped at $50 per month per year so as not to lose existing tenants.
As an added bonus, the recent Fed rate cut has helped. The financial analysis was done assuming a 6% loan and the managers are currently being quoted rates around 5.4%.
The investors receive a 9% preferred return, paid quarterly. What this means is profits are first distributed to investors until they receive their 9% ROI. After that, profits are split 50/50 with investors and the management team. After the second year, and each year thereafter, an analysis will be done to determine if it makes financial sense to sell the property. In the event of a sale or refinance, proceeds will be distributed as follows: all investors will be paid their 9% return, then the investors' original investment will be repaid, and then any remaining monies will be split 50/50 between investors and management. Investors purchase "units" of the investment. One unit costs $50,000 and there is a minimum of 55 units and a maximum of 60 units to be sold.
If you recall, I have said before I wasn't too interested in a 9% return because I felt could do better. I still believe that. I like this deal because it is really more about capital gains. Yes, I will get a 9% cashflow, but the real money will come from the improvements to the property and when the place is sold. At that point, the ROI should be in the 13% to 13.5% range. Additionally, I'll get some experience in seeing how investing in multi-unit properties works.
Correction: I was looking at the wrong set of numbers when I wrote the above. The annualized ROI after the sale of the property should be in the 30% - 35% range.
For future reference, I am labeling this project Multi #1.
Vegas, Baby!
Just got back from a quick trip to Las Vegas, where my wife and I stayed at The Wynn. We got an offer in the mail for a discounted room rate plus $100 in money to gamble with. In order to maximize the value of the free $100, we decided to play the dollar video poker machines, rather than the quarter machines we normally play. Good thing we did! From the $100 they gave us, we won $80. As my wife was playing through that, she hit a royal flush! That's a $4,000 payout! And it came within the first hour of us being there!
We spent the rest of the day and all of the next day playing dollar video poker, with some blackjack thrown in to break up the monotony. On our last day there, we played more dollar video poker, but were losing big time, so we switched to quarter video poker machines with a progressive jackpot. Believe it or not, my wife got ANOTHER royal flush! This one netted us $1066!
We didn't get a picture of the first royal, unfortunately. At the other casinos we've played at, they take a picture of the jackpot for you. They apparently don't do that at the Wynn and by the time I thought to take a picture, the jackpot had been paid and the screen cleared. However, I did remember to get one of the second jackpot.
So after years of going to Las Vegas and never hitting a royal flush, but seeing every other person she went with get one, my wife finally got not one, but two in the same trip! Awesome! And we also ended up getting one of our nights comped because we played so much, so between the $100 they gave us to gamble with and the one free night, our room for the trip was free!
Because her first jackpot was over $1,100 dollars, the casino must report the winnings to the IRS and give us a W2-G form, Certain Gambling Winnings, for us to report the income on our 2008 tax return. Luckily, the IRS allows you to deduct gambling losses against gambling winnings (only up to the amount of your winnings), so after a quick phone call to my CPA to find out the documentation requirements, I spent the rest of the trip keeping track of all our losses to help offset her winnings. Luckily, her second jackpot was under $1,100, so there was no W2-G generated for that.
I'm attending a presentation today on a potential multi-unit property investment. I should have more info to post about that tomorrow.
We spent the rest of the day and all of the next day playing dollar video poker, with some blackjack thrown in to break up the monotony. On our last day there, we played more dollar video poker, but were losing big time, so we switched to quarter video poker machines with a progressive jackpot. Believe it or not, my wife got ANOTHER royal flush! This one netted us $1066!
We didn't get a picture of the first royal, unfortunately. At the other casinos we've played at, they take a picture of the jackpot for you. They apparently don't do that at the Wynn and by the time I thought to take a picture, the jackpot had been paid and the screen cleared. However, I did remember to get one of the second jackpot.
So after years of going to Las Vegas and never hitting a royal flush, but seeing every other person she went with get one, my wife finally got not one, but two in the same trip! Awesome! And we also ended up getting one of our nights comped because we played so much, so between the $100 they gave us to gamble with and the one free night, our room for the trip was free!
Because her first jackpot was over $1,100 dollars, the casino must report the winnings to the IRS and give us a W2-G form, Certain Gambling Winnings, for us to report the income on our 2008 tax return. Luckily, the IRS allows you to deduct gambling losses against gambling winnings (only up to the amount of your winnings), so after a quick phone call to my CPA to find out the documentation requirements, I spent the rest of the trip keeping track of all our losses to help offset her winnings. Luckily, her second jackpot was under $1,100, so there was no W2-G generated for that.
I'm attending a presentation today on a potential multi-unit property investment. I should have more info to post about that tomorrow.
The IRS Will Get You Every Time
Last year, I wrote about a tax credit that you could claim for the telephone excise tax that has been collected on phone bills for years. If you took the credit, the IRS also paid you interest on the amount you claimed. No good deed goes unpunished and this year, I received a form 1099 from the IRS reporting that interest ($34 in my case) as income which must be claimed on this year income tax. *sigh*
There's an article about this here.
There's an article about this here.
Tulsa Rental Still Empty
The tenants in my Tulsa rental property moved out on November 1. While I was glad to see them go, I was not particularly thrilled about the timing of their notice. I didn't really expect to get new tenants around the holidays and, sure enough, I didn't. The good news is that now when new tenants finally do move in, their lease will not expire during the holidays.
Back when the tenants moved out, I opted to raise the rent from $750 a month to $775 a month. I've been monitoring my property manager's website to see if the property has been rented yet and also to verify they listed it at the correct rent. I was surprised yesterday when I checked their site and saw, after being listed for two months at $775, the rent was now listed at $800!
Now I'm no property manager, but it seems to me that if a house wasn't renting at $775, it's not going to rent at $800. But, to be fair, it was the holiday season and even I didn't really expect to fill the property then. Anyway, I called the management company because I was curious as to the reason behind their change. (And why didn't they tell me they thought it could rent for more when I suggested the $775 rent two months ago?) It turns out the person I need to talk to was out of the office and might be out the rest of the week due to some medical emergencies in her family. But I did speak to the bookkeeper and he said he would investigate for me and send me an email when he discovers something. I won't turn down the higher rent, but I also would rather have the property rented at $775 than have it sit empty another couple of months waiting for $800. I was also told that rental activity should be picking up a bit now that some storms have passed, so hopefully it will be rented soon.
On a related note, I finally got a bill for the repairs after the last tenants moved out. I had a $85 bill for a leak under a vanity, a $165 bill for carpet cleaning, and a $180 bill for cleaning and trash removal inside and outside the house. The tenant had a $200 security deposit, which was not returned to them, so I have to pay the additional $230.
Back when the tenants moved out, I opted to raise the rent from $750 a month to $775 a month. I've been monitoring my property manager's website to see if the property has been rented yet and also to verify they listed it at the correct rent. I was surprised yesterday when I checked their site and saw, after being listed for two months at $775, the rent was now listed at $800!
Now I'm no property manager, but it seems to me that if a house wasn't renting at $775, it's not going to rent at $800. But, to be fair, it was the holiday season and even I didn't really expect to fill the property then. Anyway, I called the management company because I was curious as to the reason behind their change. (And why didn't they tell me they thought it could rent for more when I suggested the $775 rent two months ago?) It turns out the person I need to talk to was out of the office and might be out the rest of the week due to some medical emergencies in her family. But I did speak to the bookkeeper and he said he would investigate for me and send me an email when he discovers something. I won't turn down the higher rent, but I also would rather have the property rented at $775 than have it sit empty another couple of months waiting for $800. I was also told that rental activity should be picking up a bit now that some storms have passed, so hopefully it will be rented soon.
On a related note, I finally got a bill for the repairs after the last tenants moved out. I had a $85 bill for a leak under a vanity, a $165 bill for carpet cleaning, and a $180 bill for cleaning and trash removal inside and outside the house. The tenant had a $200 security deposit, which was not returned to them, so I have to pay the additional $230.
My 2007 REI Year In Review
Now that the holiday madness is dying down, I've got some time to look back over what I did in real estate last year and see if I achieved the goals I set out last year.
Goal 1: Rehab two properties. I did not achieve this goal, although I can't really say it was through any fault of my own. The investors I was working on behalf of got scared with the current real estate downturn and decided they no longer wanted to flip properties. Even though I never lost them any money, I can understand their feelings on this, especially given all the media attention the real estate market has received.
Goal 2: Buy another rental property or invest in more real estate-backed paper investments like the Louisiana deal. I achieved this goal when I bought a rental property in Oklahoma (Rental #1).
It feels like those goals weren't all that difficult, but that is only because Goal #1 didn't get done. If I was rehabbing properties, my year would have been much busier.
For 2008, I think my goals will be:
Goal #1: Invest in a multi-unit property. I may already be close to achieving this goal. Ideally, I'd like to own a multi-unit property all on my own, but right now, while I'm still in the learning stage, I'll be happy to go in with some other investors and learn the ropes by being a passive investor and watching how things work.
Goal #2: Invest in more real estate-backed paper assets. This should be fairly easy, now that I have some contacts. Unlike my Louisiana deal though, I plan on splitting up my funds into at least two different investments so that if one stops paying, I should still get some income from the other. Different partners and different geographic areas would maximize my diversification.
Goal #3: Buy another rental property. If the first two goals work out, I should have enough cashflow to make obtaining this goal fairly easy. If they don't, well, it could be tough...
Goal 1: Rehab two properties. I did not achieve this goal, although I can't really say it was through any fault of my own. The investors I was working on behalf of got scared with the current real estate downturn and decided they no longer wanted to flip properties. Even though I never lost them any money, I can understand their feelings on this, especially given all the media attention the real estate market has received.
Goal 2: Buy another rental property or invest in more real estate-backed paper investments like the Louisiana deal. I achieved this goal when I bought a rental property in Oklahoma (Rental #1).
It feels like those goals weren't all that difficult, but that is only because Goal #1 didn't get done. If I was rehabbing properties, my year would have been much busier.
For 2008, I think my goals will be:
Goal #1: Invest in a multi-unit property. I may already be close to achieving this goal. Ideally, I'd like to own a multi-unit property all on my own, but right now, while I'm still in the learning stage, I'll be happy to go in with some other investors and learn the ropes by being a passive investor and watching how things work.
Goal #2: Invest in more real estate-backed paper assets. This should be fairly easy, now that I have some contacts. Unlike my Louisiana deal though, I plan on splitting up my funds into at least two different investments so that if one stops paying, I should still get some income from the other. Different partners and different geographic areas would maximize my diversification.
Goal #3: Buy another rental property. If the first two goals work out, I should have enough cashflow to make obtaining this goal fairly easy. If they don't, well, it could be tough...
