Self-Directed Roth IRA

Does anyone have any experience working with a self-directed IRA (Roth or otherwise)? I'm looking to head down this route and I have questions about the day-to-day operations - does it need a custodian (other than me), does the custodian write the checks and sign contracts, etc.

I've heard about using self-directed IRAs for several years, mostly about how they can be used for investing in real estate. I was always intrigued by this, but never really was in a position to set one up. A couple of changes going into effect in 2010 have made now seem like a good time to get going with this. In 2010, the income limits for who could convert a traditional IRA to a Roth IRA are going away. Additionally, if you convert in 2010, you can spread the taxes you'll need to pay over 2 years*. When I was laid off of my job over a year ago, I took my 401(k) and converted it into a rollover IRA. With the stock market down, now is good time to convert since I will have a lower amount I'll have to pay taxes on. (I should note that the current law applies to traditional IRAs converted to a Roth IRA. It's unclear if the IRS will decide that the law also applies to rollover IRAs converted to Roths. After talking to my CPA, I've decided that to be safe, I'll convert my rollover IRA to a traditional IRA and then convert it to a Roth.)

My point for doing this is to use the self-directed IRA funds to make hard money loans, which I have been doing for the last couple of years, earning between 10% and 12%. Getting that return tax free would be very nice.

* If you declare the conversion in 2010, you'll have to pay taxes on the converted amount in 2010. But if you don't, you must declare one half of the contributions in each of 2011 and 2012. What I will do in those years is calculate how much I will owe in taxes and simply adjust my W-4 withholding at my day job to spread the tax burden out over the entire year. Of course, it's likely that tax rates in 2011 and 2012 will be higher than 2010, but of course, that's anyone's guess. Lots can happen between now and then and I'm a fan of delaying paying taxes as long as you can.

Strategic Mortgage Defaults Revisited

Back at the end of September, I wrote about strategic mortgage defaults - purposefully defaulting on your mortgage on a property that has a mortgage for more than the property is worth. A story in the L.A. Times reported that these types of defaults were on the rise.

Now, University of Arizona law professor Arizona Brent T. White has published a paper (pdf) stating, contrary to news reports, not many people are doing this - but they should. He cites people's emotional fears as the driving force preventing them from acting in their own financial best interests - the fear of the shame and guilt of foreclosure and an exaggerated sense of the consequences of foreclosure. He also argues these fears are actively encouraged by the government, lenders, and other social agents to induce borrowers to ignore what might be the wisest financial decision for them.

I found this paper very interesting, mainly because it presents almost the complete opposite picture of human behavior that Freakonomics does - namely that people will NOT act in ways which benefit them financially the most. I think the difference here is due to the amounts of money involved, as well as social pressures. The actions looked at by Freakonomics dealt with relatively small amounts of money and with actions whose consequences have fewer social repercussions.

White states:

Homeowners should be walking away in droves. But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits. To be sure, foreclosure comes with costs, including a significant negative impact on one’s credit rating. But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 - within two years after a foreclosure. Additionally, in as little as three years, one can qualify for a federally-insured FHA loan to purchase another home.

While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. While a good credit score might save an average person ten of thousands of dollars over the course of a lifetime, a few years of poor credit shouldn’t cost more than few thousand dollars.

I find his arguments to be well-thought out and worth thinking about. There is a definite basis against people who walk away from their mortgages:

This is not to say that there is a grand scheme to manipulate the emotions of homeowners, or even that the government and other institutions consciously cultivate these emotional constraints on default. But, to be sure, the predominate message of political, social, and economic institutions in the United States has functioned to cultivate fear, shame, and guilt in those who might contemplate foreclosure. These emotions in turn function as a form of internalized social control – encouraging conformity to the norm of meeting one’s mortgage obligations as long as one can afford to do so

What I find particularly interesting in the concept of how the lender-borrower relationship is an example of a asymmetric relationship - one side, the lender, has all the power. The lender is free to walk away from the loan (by selling it to another company), is free to make loans based on over-inflated property values (without doing any significant research to verify those values and then expect a government bailout when their lack of due diligence catches up to them), and is free to, in effect, modify the terms of the mortgage to include more than just the property as collateral, without any legal or moral ramifications, yet the borrower has no such options. In fact, even though the mortgage document specifically states the lender's SOLE COLLATERAL for the loan is the property, the lender is able to also use the borrower's credit score and self-image as collateral as well.

One obvious response to the above discussion is that society benefits when people honor their financial obligations and behave according to social and moral norms, rather than strictly legal or market norms. This may be true if lenders behaved according to the same social and moral norms. In the case of lender-borrower behavior, however, there is a clear imbalance in placing personal responsibility on the borrower to honor their “promise to pay” in order to relieve the lender of their agreement to take back the home in lieu of payment.

Given lenders' generally superior knowledge and understanding of both mortgage instruments and valuation of real estate, it seems only fair to hold them to the benefit of their bargain. At a basic level, sound underwriting of mortgage loans requires lenders to ensure that a loan is sufficiently collateralized in the event of default... In other words, in appraising a home the lender should ensure that the loan amount, at the least, does not exceed the intrinsic market value of the home...since lenders generally arrange the appraisal (which home buyers must pay for) and home buyers rely upon the lender to ensure the home is worth the purchase price, one might argue that lender should bear much more than 50% responsibility for the bad investment of the homeowner and lender.

So what does he propose be done to help homeowners? One suggestion is to prevent lenders from reporting foreclosures to credit reporting agencies. This sounds crazy, but he makes a good case:

The suggestion that Congress should amend the Fair Credit Reporting Act to prevent lenders from reporting mortgage defaults is premised upon the underlying mortgage contract, in which lenders agree to hold the house alone as collateral. In the case of underwater mortgages, however, the portion of the mortgage above the home’s present value essentially becomes unsecured. Lenders compensate for this by holding the borrowers’ credit score, and thus their human worth, as collateral – thereby altering the underlining agreement that the home serves as the sole collateral. As a consequence, lenders are often able to reap the benefit, but escape the costs, of their bargain.

There are many more arguments he makes, which I don't have the space to go into here. I encourage people to read his paper with an open mind. Needless to say, the banking industry fiercely opposes his ideas.

Windows 7 Calculator Tip

I've just upgraded to Windows 7 and am still exploring all the new features, but one thing I noticed that could be of use to real estate investors is a new function in Calculator. Now Calculator can easily figure out any one of the following items given values for the others: Monthly Payment, Purchase Price, Down Payment, Term (Loan Length), and Interest Rate. No more messing around with spreadsheet formulas! Below is a picture of how to access this. (Click for larger size.)

Another Hard Money Loan Starting And One Wrapping Up

Got some emails yesterday for two new hard money opportunities from my partner in California. I only have the funds available for one right now, unfortunately.

The deal I chose is a first mortgage on a property in Castro Valley, CA. The property is a 1,500 square foot duet, built in 1979. (A duet is similar to a duplex in that it is two units that share a common wall. However, unlike a duplex, the units can be owned by different parties.) The property was bought at a foreclosure auction by two professional rehabbers. They already have a mortgage on another property with my partner and they are paying on time on that one.

The rehabbers bought the property for $254,000. My partner estimates it will take about $20,000 to fix up. Comps are conservatively valued in the $320,000 and up range. There is one comp that is currently on the market listed at $339,000, although it has been on the market for 2 months, so that might be a tad high. Another comp is in the sale pending status with a price of $299,000. Our property is in a better location, however. The defaulted mortgage was in the amount of $325,900, but the lender started the auction bidding at $198,900. The price was bid up to $254,000, which is the price the borrowers got it for. We are writing a mortgage for $192,600, which is a 75.8% LTV, using the conservative comp figure. Terms are the usual - 10% net to me, the investor (borrower is paying 12%, but my partner keeps 2% as a service fee), interest only payments due monthly, loan term is 1 year. There is an incentive for the borrower to pay off the loan early.

The rehabbers purchased this property on 11/16 and on 11/17, my partner visited the property. There were already workers in there rehabbing the place, so they are not wasting any time on this.

I'll refer to this investment as Hard Money #10.

In other news, hard money loan #9 may be wrapping up soon. The property is in escrow now. We estimated the property to be conservatively worth $330,000 to $350,000. It was listed at $389,000 and it quickly got an offer for $410,000. Nice! The borrower bought it for $238,000 and put about $58,000 in improvements. He'll make a bit over $100,000 on this one in 3 or 4 months time. Nice! (of course, this assumes escrow closes..)

Existing House Sales Prices for Q3 2009

The National Association of Realtors has released their list of Median Sales Prices of Existing Single Family Homes for Metropolitan Areas. (Couldn't they have come up with a better title?) Here is a link to the list (warning: it's a PDF file). Prices in some areas are still declining, while other areas are beginning to see a rebound. This list could be used two ways - if you are a bottom feeder and looking to buy in places that might be bottoming out, look for the cities that had the largest decline - Cape Coral, FL (-40%), Las Vegas, NV (-34.5%), or my area, Phoenix (-22.9%). Of course, the danger in this is that prices may not have bottomed out and may keep dropping.

Or, if you want to invest in places that may have already bottomed out and might now be on the rebound, look in areas that had the biggest increase - Cumberland, MD (+19.2%), Davenport, IA (+14.3%), or Oklahoma City, OK (+9.1%).

The NAR tried to put a positive spin on this report, saying "To be sure the numbers are mixed and some areas are experiencing reversals, but over all we are beginning to pull ourselves up out of this slump..." That seems like wishful thinking on their part as the vast majority of areas on this list have experienced pricing declines; only 28 of the 155 areas listed have positive changes.

Foreclosures Still Happening All Over

RealtyTrac has put out foreclosure statistics for September. While the number dropped 4% from August, it is 29 % over a year ago. In my state of Arizona, one out of every 53 houses is in foreclosure. The worst in the nation is Nevada, with one in every 23 houses in foreclosure. There's a big sexy graphic representation here.

Double Update

I haven’t reported on the Houston apartment complex for the last two months, so here’s a two month recap:

August occupancy was 95% and revenue was $228K or, excluding a payment from AT&T for having them become the complex’s preferred phone provider, $196K.Total cash flow was $40K.

The economic woes hitting the rest of the nation have finally started to creep into Houston, which had been somewhat spared from the slowdown before.

In September, occupancy dropped to 94%. There were 22 move-outs, about half of which were due to the slowing economy and half due to typical reasons – home purchases, job transfers, etc. These move-outs have already been filled thanks to new marketing efforts.

In September, revenue was $202K revenue with a cash flow of $14K. The large drop was due to an escrow analysis by our lender which showed our escrow account was being underfunded for insurance and tax costs. Therefore our monthly payment for our loan will increase slightly and a chunk of cash had to be deposited into the escrow account to bring it in line with estimated payments. This deposit was mostly covered by income we received from AT&T last month for referring our tenant and new tenants to them for phone service, but it does impact the figures for this month.

I also received another quarterly profit distribution.

In other news, I continue to receive on-time payments for my three outstanding hard money loans – hard money #4, #8, and #9.

Kiyosaki Joins The Crowd

My interest in real estate investing started with my discovery of Rich Dad, Poor Dad in a local bookstore. After reading that, I read the next several books by Robert Kiyosaki, went to see him speak, and even got to meet him a few times. I liked his approach - namely that wealthy people thought about money and investments differently than most people and that he would teach us how to think like they did. Whether or not he really had "two dads" or if his story was 100% true didn't, and still doesn't, matter to me. He opened my eyes to a different way of looking and evaluating investments.

When the real estate bubble started to burst, I wondered if and how Kiyosaki was going to change his message. It now seems I know the answer.

Now, to be honest, I haven't read any of his recent books. I think the last one I read was Retire Young, Retire Rich. I couldn't even tell you how many have come out after that one. Once a daily reader and poster, I haven't visited his website or discussion boards in over 3 years. This wasn't due to any change in my opinion of him or his methods. Rather, I just felt I had learned all I could from him and he was starting to repeat himself. But I am still on his mailing list and I get email about his new products occasionally.

I have recently gotten a couple of emails for his latest project, called Conspiracy Of The Rich and am dissappointed in what I see. As public opinion has turned against bankers, Wall Street, and government bailouts, it seems Robert has changed his tune to ride that wave. A perfect example is the title. Now, instead of showing the masses (us) how to become rich, he is writing about a "conspiracy" of the rich against the rest of us. Suddenly, he is no longer the nice father figure trying to educate us to join him in the easily attainable ranks of the wealthy, but the champion of the poor and middle class protecting us from the "evil" rich and their scheming ways.

This is from his latest email:

Yes, you read correctly. In his latest Conspiracy of the Rich Bulletin, Robert discusses how the government is proposing a plan to have the banks bailout the government – and how the FDIC is not the solution, but the problem.

"The conspiracy of the rich knows no boundaries. For months now, the government has bailed out the banks. Now the government is proposing that banks bail out the government, which, of course, the banks are enthusiastically supporting."

He is referring, I figure, to an option the FDIC is exploring to raise funds, which have dried up from all the bank failures of late, in which banks will loan the FDIC money. You can read about it here and here. If you read the articles, you'll find out the banks are supporting this because it means the FDIC will not have to impose new fees on banks, so this will save them some money. Yet Kiyosaki's quote above clearly implies some massive collusion between the banking industry and the government - two groups that are none too popular right now.

Now I will be the first to admit that I have not read Conspiracy of the Rich. All I am basing my view on are the marketing emails for it that I have received. And I will also admit that marketing materials are, by definition, meant to be intriguing, draw people in, and make people want to buy or at least further investigate, a product. It is entirely possible that the marketing message and the actual message of the book are completely at odds. It wouldn't be the first time the truth was stretched in advertisements.

But still, I am disappointed in what I perceive to be a shift in tone in his work. There are many people who criticize Kiyosaki for many things. Some of those criticisms are valid. Personally, I don't believe he advocated what many of his readers did - bought houses with negative cash flow, hoping for rising equity to make them money. In fact, I always found his advice to be "make sure the property will be cashflow positive from Day 1 and don't count on property values increasing." I am still glad he got me interested in real estate and I don't think the bursting of the real estate bubble invalidates his main lessons. But I am sad to see him switch to an "us versus them" position. It makes it clear to me that what he really is is a salesman interested in selling more of his products - books. And he will write whatever the public wants to hear at the moment.

Strategic Mortgage Defaults

The L.A. Times reports that a study shows borrowers with good credit are actually more likely to default on their mortgages than borrowers with lower credit scores. These "strategic defaults" appear to be done based on a simple business analysis and with full knowledge of the consequences: if the property is seriously underwater, just give it up.

When I first read this, my thought was the defaulters were mainly people who bought investment properties during the bubble and were now giving up This does not appear to be the case, however. "Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes." And, not surprisingly, the study found "Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006."

One site I was reading opined that this would make loan modifications harder to obtain. But I'm not sure that is a bad thing. A report published in April showed "Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent... [while] nearly one in four loan modifications in the fourth quarter [of 2008] actually resulted in increased monthly payments."

The Next Mortage Crisis: Option ARMS

Now that the subprime loan debacle is pretty much behind us, the next threat on the horizon for the mortgage industry are Option-ARMs and Alt-A loans. Alt-A loans are loans made to people just above the sub-prime cutoff. Option-ARMs are loans that allow the borrow to choose from a variety of different payments each months, including payments that are less than the interest that has accrued during the previous month. As the graph here shows, a large wave of these loans are getting ready to reset (have their interest rate adjusted) in the next two years.

Reuters has a story about the Option-ARMs here.

The Hard Money Blog?

It appears this blog is turning into a blog about hard money lending. This was not a conscious decision on my part, but just an evolution caused by the real estate market collapse and my relative lack of free time. When the real estate bubble burst, flipping houses because financially more dangerous. With prices dropping steadily, it was difficult to find a house at a low enough price that could be rehabbed quickly and sold at a profit some time later. It is the nature of the rehab business that delays occur. Large delays coupled with rapidly dropping prices made estimating the eventual sale price of the property difficult. An unforeseen delay could end up costing tens of thousands of dollars in lost value, thus rendering the rehab project a financial loss. So, I got out of that business until the markets stabilized.In my area, prices were dropping too rapidly and properties could not be bought cheap enough for deals to make sense. I also had some additional commitments on my time, so I was no longer able to devote as much time as I had in the past to finding deals and, should one be found, to the rehab project itself.

However, other parts of the country are seeing some stabilization. Other people have the time to find and work the deals. So I delved a bit deeper into hard money lending, and that’s the direction the blog has taken. Having the experience of rehabbing houses myself, I feel I have some additional insights into the hard money deals that come my way. Although my deals are primarily in another part of the country, I still have a general idea of the costs and effort involved. This allows me to make more informed decisions on whether or not to invest in a hard money opportunity. It also helps to have partners you trust and who have more experience than you, as I do. As I look back over the last several months of my real estate investments, I find myself moving more and more into the passive income arena. The various hard money loans I have made are passive, as is my investment in the Houston apartment complex. While the returns may not be as great as doing deals completely myself, I am getting good returns and still have my time available for other things. I recently turned 41 years old. I have a 5 year old daughter. At this point in my life, the passive investment route suits me fine.

Which is a long way of saying I received more passive income checks yesterday. I got my monthly payments for hard money loans #8 and #9, right on schedule.

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.)

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!

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.

First Payment on HML #7 Received

The first payment on Hard Money Loan #7 has been made. It was made on time too, which is a nice way to start things off. As an added bonus, Les, my partner, included an extra half month's worth of interest. This is because when HML #6 ended, I elected to just let him keep my principle while he looked for another investment, rather than mail it back to me and then have me send it back to him when he found one. At the time, he stated I would not earn interest on the money while he was looking for a new investment, but apparently he made enough on this new investment that he is sharing it with his investors. It took him 15 days to find a new investment, so he gave us an extra half month's worth of interest. Nice.

Hard Money Loan #4 continues to perform well. Yesterday I received another on time payment. This is the eleventh on time payment and I'm happy with the performance.

Another Boring Month of Profits

I remember reading somewhere (I forget where), that generating wealth through real estate investing is boring. If you've got a good investment, the checks just roll in each month. I'm starting to feel that way with my Houston apartment complex investment. It's been almost a year since I first invested in this complex and each month, report has been very similar - vacancies are down, profit is up, etc. Last month was no exception. I continue to have no complaints with the property or property managers.

The report for May was good. Revenue was up slightly over April's figure, vacancies and bad debt decreased. Cash flow for the month was just over $12,000 - lower than normal due to the final payment for painting the exterior of the property. Cash flow should return to the $20,000+ level next month. No other significant expenses are planned for the property. The planned property improvements and hurricane damage repairs are complete.

This is the kind of boredom I like!

On Being An Accidental Slumlord

Newsweek has a good article this week titled "How I Became An Accidental Slumlord." It does a good job at presenting the conflicts a landlord feels when renting to lower income families.

Things Turning Around?

I've haven't spent a great deal of time investigating, but from the signs I am seeing and the news I am hearing, I am starting to think it's getting close to time to get back into local real estate investing. Prices in my area seem to be coming back down to "normal" levels and I am seeing good deals again, especially on foreclosed properties. I am also seeing a large number of "bank owned" for sale signs around town. Of course, you can't just look at home prices to determine if the market has bottomed out. You also need to look at demand and the availability of buyers. As I said, I haven't done any detailed analysis yet, but my gut feeling is things could be turning around soon. Of course, I could be wrong...

Hard Money loan #6 was paid off a couple weeks ago and I have used the principle from that to make another hard money loan. Call this one Hard Money Loan #7. It should be a fairly short loan. This property is a 2,700 square foot house built in 2006. List price is $380,000 and it is already in escrow to be sold. The seller (my borrower) bought it for $186,000. Homes in the area typically sell for $257,000 to $320,000. The loan is for $138,000, so we are fairly well protected. ROI is 10% with monthly interest only payments.

On the landline phone elimination front, everything has been switched from the landline and I am ready to cancel it. I am pretty happy with Callwave's internet fax service. The only thing I don't like is that they have an address book on their website, but you can't use it to select a number to fax to! Seems a bit pointless to me. Other than that, I've been happy with both sending and receiving faxes through them.

And my annual trip to Las Vegas was again fruitful. Well, pretty much for everyone I went with but me. Everyone got royal flushes at video poker except your truly. My wife won $1,300 with hers. My sister-in-law won $1,500. And my brother-in-law won $1,000 with his first one. Not 10 minutes later, he got a second royal flush and won another $1,000 at the same machine! Although I didn't get a royal flush, I did get the most four of a kinds than anyone else on the trip. Those paid between $62.50 and $200 each. I was a bit disappointed though. It seems the economic downturn has hit the Wynn a bit. Last year, many of their video poker machines were set at full pay ("9/6"). This year, there wasn't a 9/6 machine to be found at either the Wynn or Encore. They were all 8/5, which has a lower total return to the player. Oh well. It didn't seem to hinder us to much!

Your Home Is A Bad Investment

Many people believe their home is a good investment. Using Robert Kiyosaki's definition of an investment as "something that puts money into your pocket," it's obvious it is not. Now the Wall Street Journal is reporting that, even by the conventional definition of investment, your home still may not be a good investment.

Using housing pricing data for the last twenty years in ten major cities, housing prices produced a real return of between 1.15% and 2.2% annually, after inflation. When you figure in maintenance costs, you could actually be losing money.

The article really only looks at property appreciation to determine the value of the investment. There is no mention of the income tax deduction for mortgage interest, which is usually quite substantial for most homeowners and probably would boost the return figure a couple of percentage points. Still, the gist of the article is correct - your primary residence is not an investment.

I subscribe to the "putting money in your pocket" definition of an investment. And while your personal residence may not be a good investment, that doesn't mean real estate isn't. As long as a property has positive cash flow, it's a decent investment. How good of an investment, of course, depends on how good the cash flow is. Then, of course, there are the other factors, such as depreciation, the ability to defer taxes through 1031 exchanges, etc.

While I am glad the WSJ article points out that people's primary residences are not generally good investments, I'm afraid some readers might come away from the article thinking all real estate is a bad investment.

Moving Forward

Things are moving forward on several fronts.

The property that I had the mortgage on for Hard Money Loan #6 has been sold. Escrow closed last week. I'll be getting my final interest payment from that this week. I've elected to let my partner hold on to my principle for reinvestment in another loan. He thinks he can find another suitable investment in two to three weeks.

The Houston apartment complex had another good month in April. Occupancy remained at 95%, well above the Houston market average of 88%. Cashflow for the month was just shy of $22,000. There were no significant expenses. No word yet on the increased investor returns that management mentioned would be coming.

I've moved forward with my plan to eliminate my landline phone service at home. As I mentioned last month, I tried using myfax.com and had some problems with them. I continued using them to send the occasional fax and their service has not gotten any better. I can count at least three times where I received confirmation from them that a fax was sent but the recipient never got it. After reviewing the companies that several commenters mentioned, I opted to go with Callwave. I had made a list of the various reasons why I rejected the other companies, but I seem to have misplaced that, so here's what I recall: Callwave was one of the few companies that allowed me to port my existing fax number. This eliminates the need for me to make new business cards. Callwave also does not require me to use any special software to send or receive faxes, as some of the other companies did. I also spoke the Callwave's technical support on the phone and, although it was obvious they were outsourcing their support to India, the people I spoke with were knowledgable and helpful and answered my questions. And finally, Callwave's pricing was competitive. I put in the request to port my existing number late last week and the process should be complete sometime this week.

One thing I forgot to include in my analysis was my satelite television receivers. I have two and each has to be connected to a phone line or I get charged $5 a month per receiver. The connection is so the machines can communicate with Dish TV and tell them if I have ordered any pay per view and, I'm sure, to send other information. Luckily, the machines are also network enabled and if they can connect to the internet, you don't need a phone line hooked up and can avoid the $5 fee. I purchased two wireless bridges to add these machines to my wireless network, so that problem is solved. I also found a legal size scanner at Costco for $60. This is cheaper than the $300 I found earlier and the savings more than pays for the two bridges I had to buy. My alarm system has been switched to using radio instead of a phone line, so as soon as my fax number gets ported over, I'm clear to cancel the landline.

I've got my new computer more or less set up now, so things are returning to normal there. It's surprising how lost I felt when I didn't have a computer. All my appointments were in there. Luckily, my iPhone was synced to it, so I still had all my calendar and contact info, but I was still feeling adrift without the computer.

And in 13 days, I take my annual trip to Las Vegas. Hopefully, it will be as profitable as last time!

Free Annual Credit Report Time!

It's that time of year again - time to get free copies of my and my wife's credit reports. Normally, I spread the requests throughout the year, getting one report from each of the three credit reporting agencies every four months, so I have fairly continuous monitoring. Last year, I was a bit lazy and did not request any reports. I had previously reviewed the reports and corrected all the errors, so I wasn't too concerned about what was on there anymore. About 1.5 years ago ago, however, my wife had her purse stolen and some checks were forged and bounced in her name. We went through the whole process of reporting the theft to the police and to the credit agencies. I also went so far as to request a credit freeze on her report from all three agencies. Although I submitted all the paperwork for that, I never got any confirmation back from any of the companies that the freeze was actually enacted. (They eventually caught the woman writing bad checks and she was charged. Unfortunately, we learned that she was released on bail and then never showed up for her court date.)

Today, I received confirmation of the freeze. I was able to get copies of my credit reports without problems, but all three companies denied my request for copies of my wife's report. I can still get copies, but I need to do it via mail and provide copies of identification documents.

My reports from TransUnion and Equifax were correct. The one from Experian only contained one error and a minor one at that - they showed one mortgage as still open (albeit with a zero balance). This mortgage was actually sold to another company, so it shoould show up as closed. I filed a dispute online and I should get notified of the results by email within a couple of weeks.

If It's Not One Thing, It's Another

After being out of work for almost 5 months, a couple weeks ago, I was able to get a job on a 4 month contract. I've another company that is interested in me for a full time position as well, but that is taking a bit longer to play out. As you might imagine, when I was not working, expenses had to be cut back and plans put off until later. I was living the classic case of "deferred maintenance" that many real estate investors know about from looking for properties to purchase form owners in similar situations - if it is still working, don't put any money into it.

So once I got a job, I went on a buying spree - both my car and my wife's car needed new tires, routine maintenance and other repairs to the tune of about $1,000 each, our dishwasher and oven got repaired, and some other general stuff was done. I was just thinking I was about caught up when... my computer died. Even worse, it died right after I bought something to fix a different problem it had.

Saturday night, I noticed my computer's event log was showing lots of disk drive-related errors. I knew the drive was going to fail soon, so on Sunday, I went out a bought a new drive. When I got home, I put the drive aside and planned to install it that evening. Two hours later, I went to check my email and the machine locked up hard. I cycled power and, in the middle of booting, everything went dead - the screen went black, the drives stopped spinning, and the only light on the machine was a blinking orange LED in the power button. It would not turn on again. After much investigation, I noticed a couple of blown capacitors on the motherboard. Crap. Dead motherboard. Well, at least I hadn't spent any time replacing the hard drive yet.

Thankfully, I have some income coming in now to pay for a new computer, in addition to the other repairs I had to pay for. And, even more thankfully, I had made a full backup of my computer about 10 hours before it failed.

Anyway, so after being unemployed for months, I was just starting to get back into the swing of things and was thinking about putting together another blog post, and now this happens. It'll be about 1-2 weeks before the new computer arrives.

One the positive side, I received another payment from one of the four flipping LLCs in California. I also received a quarterly payment from the Houston apartment investment, which, as I mentioned last month, should be increasing in the future. The same day I received those checks, I also received my huge federal income tax refund. Unfortunately, it was so huge because I had a huge loss on the sale of Rental #1. Well, the tax refund gave me back about one-third of my loss and, really, it came at an opportune time. I would like to post updated ROI numbers for these investments, but, unfortunately, all the data was on my computer.

In Escrow Again And Web Faxing

I got the word yesterday that the property I am a mortgage writer on in California has once more gone into escrow. Last time, it fell out of escrow, so maybe this time things will go better. Not that I need the loan to be paid off. I've been getting on-time payments and have no worries about the borrower.

I also started testing out web faxing options, as mentioned last month. I purchased JotNot for the iPhone. That seems to do decent job, although the resulting image can be a little blurry, despite my best efforts to hold the phone as still as possible while taking the picture. For most stuff, it should be ok, but I would not want to use this for real estate contracts or any documents that have a lot of fine print.

Based on reader's comments, I tried using the free service from MyFax.com (www.myfax.com/free) to send a fax. (The free version limits you to sending 2 faxes per 24 hours, but this is keyed off your email address, which has to be valid because you need to click a link they email you to actually send the fax. However, you can get around this limitation by using a disposable email address service such as sneakemail to generate as many email addresses as you want.) Since I still have my landline fax, I tried sending faxes to myself so I could check the quality. In short, I don't think I will use MyFax. The images taken with JotNot (JPEG files) came through so pixelated that they were unreadable. To be fair, I don't think a real fax machine would have done much better, given the blurriness of the source, although being able to set the machine to "fine" mode might produce slightly better results. MyFax also seemed to have trouble scaling. The image sizes I sent were very close to a standard piece of paper (8.33" x 11.11"), yet the resulting fax from MyFax rescaled the image so there was 4 inches of blank space at the bottom and 2.5 inches on the right side.

Click the above picture for full size. These captures were taken at 100% zoom. The top is the source JPEG file from the JotNot program and the bottom is the resulting fax image from MyFax. (The documents I was testing with contain medical information, which I why I am not posting whole page images of the scaling problem.)

Thinking this might just be a problem with the conversion of JPEG images, I used a scanner to create a PDF file as the source for MyFax. Results were a bit better, but there were still unacceptable issues. Text was legible at least but while the scaling problem went away, the last page of the two page fax had the bottom 2 inches cut off. To be sure this wasn't just a fluke, I faxed it twice and obtained the same results.

Click the above picture for full size. These captures were taken at 100% zoom. The top image is the original .PDF file from a scanner and the bottom image is the resulting fax image from MyFax.

MyFax also sends an email confirmation when a fax has been sent or failed to be sent. I found these confirmations to be unreliable. I sent 10 faxes total and received 5 confirmations that the fax was successfully sent, 2 that the fax had failed, and 3 faxes produced no email message at all.

Given that most of the paper I have to fax has small print, I think I will have to buy a scanner to get my paper documents into electronic form. I'll also try some of the other web fax services and see if they produce better results.

AT&T Discount Plans

Not real estate related, but I had to pass on this huge money-saving tip!

Last week, I purchased iPhones for my wife and I. Previously, we had cell phones on the Sprint network and were billed separately. As part of my cost-cutting hunt that led me to eliminate my landline phones, I switch our cellphones to a family plan from AT&T where we share minutes. That saved us about $30 a month. Then, I found an even better discount.

AT&T has apparently has agreements with large corporations and schools throughout the country to give employees and students discounts. I first read about this on an iPhone hacking site that I can't find again, so sorry for no linkback. But here is the link to AT&T site to check your eligibility. The iPhone site mentioned I could get a 15% discount on my current service. Since my wife works at a university, I figured I try. She was eligible and so I signed up. Within minutes I got a confirmation back that I was signed up for the discount.

Today, I got a new info packet from AT&T that shows my new costs. Instead of a 15% discount, I got a whopping 55% discount!! My cost went from $106 a month to $48! In looking at the details, my Familytalk Nation 700 plan went from $60 to $9.99. I still have the unlimited data plan for the iPhone and all the other service features.

The iPhone data plan ($30 a month) is not eligible for a discount, but even so, this is still a huge savings. If you or your spouse work for a large organization and use AT&T, it's worth the 5 minutes to check to see if you are eligible! I do not know if the amount of the discount varies depending on what company / school you are affiliated with, so your mileage may vary.

March Updates

It's been a good week!

I received another interest payment for the hard money loan I made on the property in California. I also received another on-time payment from my hard money loan to my (former) co-worker. And last, but not least, I got a great monthly update on the Houston apartment complex.

Total revenue for the month of March was $199K, the highest amount so far. Management also collected some bad debt that they had previously written off as uncollectable, so that was bonus money coming in.

Occupancy was 95% for the month of March and cash flow for the month was just over $32,000. The property is performing better than expected. Management will be revising their forward-looking projections based on the improved performance. The investor distributions for the first quarter will be mailed out this week. But the best news of all of is that management will be increasing investor distributions in future months based on the better-than-expected performance of the property!

Houston Apartment Update

The monthly report for the Houston apartment complex was positive once again. As mentioned last month, occupancy for February was at 96% (not quite the 97% they estimated, but still darn good). Income for the month equaled their highest month ever. Repair costs were higher due to the quarterly unit inspections, which resulted in more repairs than normal.

I wrote last month about the income from telephones and wondered if that was all really from people using pay phones. I never did get a response to that question (and I never really pursued it because I felt it was a minor curiosity issue and I didn't want to take up the manager's time with such things), but in this month's report, management mentioned that they have entered into an agreement with a national phone company to make that company the preferred phone provider for the residents. In exchange for this, we received a one-time payment of about $24,000 plus we will receive a monthly commission on new service in the units.

Need Faxing Solution

I'm looking to join the growing number of people who no longer have a home phone line (landline) at their house. I was looking at my bills the other day and realized I'm paying close to $50 a month for two phones lines that I almost never use - one line is my standard home line and the other is for a business fax machine. I make and receive almost all my calls on my cell phone now, so I don't see a need to continue to have and pay for a landline.

I first thought about this several months ago. At the time, I realized that my home security system uses the landline to contact the monitoring service in case the alarm goes off. So I believed I was stuck with keeping the line if I wanted my alarm system to work. While laying in bed the other night, it dawned on me that I should call the alarm company and see if they have any options that do not require a phone line - perhaps using an internet connection or something instead. It turns out, they do! The alarm system can be set up to use radio frequencies. To switch to this, there is a $125 installation fee (they have to install a new device at my home) and my monthly bill will increase by $5.

So it's looking good for the elimination of the landlines. But the remaining hurdle is my fax machine. Receiving faxes is not a problem because there are many companies that can do that for you, convert your fax to a PDF file, and email it to you. These companies also offer sending services for sending computer files as faxes via email. However, at least two times a month, I need to fax receipts - documents that are not computer files. So to use the email fax service, I would need some way to convert these documents into a computer file.

Alternately, there is a product called Magic Jack. This device plugs into a USB port on your computer and then you can plug any regular phone into it and make voice calls using your internet connection. It might be possible to get one of these devices and plug my fax machine into it and send faxes that way. Unfortunately, Magic Jack is not guaranteed to work with faxes, so it would be a hit-or-miss proposition if I went this route.

I do not have a scanner, so if I went the email fax route, I would need to buy one to convert my receipts into computer files to fax them. A scanner with an automatic document feeder (which I want because the typical real estate contract is 15 pages long and I don't want to manually feed all those pages) runs about $300. The eFax service runs $14.13 a month, which includes 130 pages of incoming faxes and 30 pages of outgoing faxes per month. I don't see myself ever going over those amounts. Magic Jack costs $40 for the first year and $20 a year after that, but there is the possibility it won't handle faxes.

If I went the eFax and scanner route, I would save $30.34 a month by eliminating my two landlines, which includes the monthly eFax fee and increased monthly alarm fee. That means the costs for the radio alarm installation and new scanner would be recovered after 14 months.

Does anyone know of any other fax sending options I might be overlooking?

Final Prosper.com Loan Paid Off

I received notification today that I have received the final payment on my last outstanding loan with Prosper.com. I'm now finally through with that experiment. I made a total of four loans and two of them defaulted. One was paid in full over the 3 year loan period and one was paid in full early - about 10 months ahead of schedule. I lost about $350 of my $500 investment.

I've said it before and I'll say it again. Lending through Prosper isn't for me. I can get higher rates of return on loans that are secured by real property. Prosper is apparently going through some sort of registration process with the SEC, so they are not currently accepting new lenders or originating new loans from existing lenders. They have been in this state for a couple of months and they give no indication of when they might start lending again. That's got to be hurting their income.

Once the last payment to my account has been finalized in about 2 to 3 days, I'll transfer my money out of Prosper and close my account.

Apartment Complexes Being Abandoned By Owners (Updated)

This article on msnbc.com today brings up an interesting subject: apartment complexes that are being abandoned by the corporate owners as they go into foreclosure. The examples in the article are all in the Phoenix area, which caught my eye since it's where I live. I've passed this info on to my friend who deals with apartment investing to see what he thinks. He already owns some apartment buildings in Phoenix and knows the area well. Could be some buying opportunities here. Phoenix doesn't have the strong economy that the Houston area does, but if the price is cheap enough, these could be worthwhile.

Update: Heard back from my friend. He and several other investors are indeed watching these properties. Unfortunately, he says the banks that are foreclosing are still looking to sell in the $70K per unit range, which is what they were valued at some time ago. Now they are valued at closer to $30K per unit. The banks will come around eventually.

Fell Out Of Escrow

The property that is the collateral for hard money loan #6 fell out of escrow and is now back on the market.

Nothing much new to report. I've been working on getting my paperwork together for my taxes. The four flipping LLCs I am invested in in California all reported losses last year. The amount ranged from 1% to 3% of my investment. I'll be taking the losses as deductions on my taxes. On the positive side, the people running those have some other LLCs they recently started that are showing profits now. Perhaps the California real estate market is starting to turn around. Either that or they are able to buy at serious discounts.

I just finished reading The Snowball: Warren Buffett and the Business of Life, a biography of Waren Buffett. I recommend it to anyone interested in business or investing. The first one-third was somewhat hard to get through for me because it dealt mainly with Buffett's ancestors and how they came to America and what they did. The latter part of the book was much more interesting, especially since, having been a Berkshire shareholder since 2000, I was reading about events I had heard about through Buffett's annual letter to shareholders.

I am also about 2 chapters into The World Is Flat 3.0: A Brief History of the Twenty-first Century and I can already tell this is another must-read book for anyone interested in business. My wife is taking classes for her MBA and this was one of her textbooks. I'm glad she convinced me to read it.


Time for another monthly report on the Houston apartment complex! In short, everything seems to be going according to plan. Income and expenses are pretty much on-budget, once the repair expenses from the hurricane are reimbursed from the renovation impound account. Also, the hurricane repairs are now complete, so there will not be any more of those expenses going forward. Management is working on upgrading the office entry and resurfacing the swimming pool deck to enhance the overall look of the property. Cash flow for January was just over $20,000. Occupancy dipped in January to 94%, which apparently is typical after the holidays. At the time the monthly report was written (last week), occupancy was back up to the phenomenal 97% again. In going over the financial reports, I see we made close to $400 in pay phone income. That surprises me. I can't believe pay phones get that much use anymore! To put that figure in perspective, the pay phone income was about $20 more than the income from the laundry machines last month and 50% than the income from the vending machines. I should find out if we are getting any sort of monthly payment from a phone company to have the telephone on the property.

As I wrote about last time, hard money loan #6 should be closing soon. I don't have a specific date for when the sale will close escrow, but I am guessing it will be the end of the month.

And finally, next month, my one remaining loan from prosper.com will be paid off. I'll be glad to be able to get rid of that thing. Three of my for loans defaulted and the final one was only bringing in about $3 a month. Hardly worth the time I had to spend keeping track of it.

On a personal note, last week, I achieved my Microsoft Certified Technology Specialist certification for SQL Server 2005. Whee.

Hard Money Loan #6 Wrapping Up

It was just a short couple of months, but Hard Money Loan #6 is closing sometime this month. No late payments and everything is in good standing. We got a call from a title company asking for a payoff amount, so the property is in escrow and will be sold. I should have my funds back by the end of the month.

There is also another apartment investment opportunity on the table right now. This is another apartment complex in the Houston area and is being offered by the same group that found Multi #1. The terms are close to the same and in other circumstances, I would invest in this property. However, this investment only distributes profits quarterly and right now I am looking for something with a monthly distribution. That likely means another mortgage on a single family home, like HML #6 was. I also like having a combination of short term and long term investments. The apartment investments are typically for 3 to 5 years while the hard money loans are 1 year or less.

Apartment Update

Last night was the first of our biannual conference calls regarding the apartment complex in Houston. The managers gave us a general overview of the Houston economy and then of the property itself.

Nationwide, occupancy rates are easing and rent growth is cooling. The Houston market is also expected to cool, although not as much as the rest of the nation. There are many new A-class (higher end) apartments just opening up and they will be the hardest hit with pressure to lower rents. B-class apartments, like the one we have, won't feel the pressure so much. There will also be some pressure from the "shadow market" - the single family home foreclosures and other houses that investors and buying and turning into rentals.

The silver lining in all of this is that apartments are still a relatively good investment. An emerging trend report released last week said apartments were the number one buy for 2009.

Another positive is that Houston led the nation in apartment absorption in 2008 and led the nation in job growth in 2008 as well, with 53,400 new jobs and continues to led in this category.

Rents per square foot are trending upward. Historical occupancy rates for Houston were about 89% for 2008. We were well above that. Here is a chart I snagged from the presentation showing occupancy rates for all of the Houston area, the Westgate area (which is a small section of Houston where our apartment is located), and the occupancy rates for our building since we took ownership. The greenish-yellow line is our building.

It looks like the selection of Houston as a place to invest in was a wise decision by the managers of this investment.

Specifically related to our apartment:

When we purchased the property, we had planned on installing a playground area. We since discovered there are not many children in the development, so we will be making seating areas for reading and picnics instead. The majority of the repair work from the hurricane damage is done. Over half of the costs will be repaid from a repair impound account our bank makes us pay into each month, so cash flow will not be affected much.

The projected cash flow when we were evaluating the property for the period of July to December 2008 was $271,000. Our actual cashflow, adjusted for the hurricane damage costs, was $298,000. Our current ROI is 9.9%. Looking forward one year, management has given us three scenarios, based on how revenue trends. If it stays flat, our ROI will be 9.6%. If it rises by a nominal 2%, it will be 9.85%. If it rises by a moderate 5%, it will be 11.1%. Management's best guess is that revenue rise will be somewhere between 2% and 5%.

We also received a one month profit distribution (instead of the normal quarterly one) to sync up the distributions to a calendar quarter basis going forward.

Keep in mind, the goal of this investment is to increase the value of the apartments by increasing occupancy, raising rates, increasing cash flow, and then sell it after a few years for a profit. We are shooting for an annualized 13% ROI when we sell. So while a 9+% ROI is decent for an operating return, we are really looking to make money in the future.

My Ebook Is Available!

I'm pleased to announce my ebook, A Flipper's Diary, is finished and now available for purchase! What does it contain? I'm glad you asked!

I've taken two of my flipping projects that I've presented here and presented them in chronological order (unlike the reverse chronological order of the blog) and added additional comments and information that I have learned since I worked on those first projects. I've also included a glossary with definitions of terms you are likely to encounter in this business. These terms are conveniently hyperlinked for quick look-ups. The book is 150 pages long and includes many full color "before and after" photos of the projects. It also contains full financial details of each project, including my costs and profits. Like this blog, the book is written with the beginning investor in mind.

You can purchase the book using a credit card or PayPal by simply clicking the Buy Now button above. After purchase, you will be immediately emailed a link to download the book. The cost is just $29.98!

Price reduction!!! I've lowered the price of this book over 50%!! Buy it now for just $12.95! Click the button above to securely purchase using a credit card or PayPal!

Lost Some Free Advertising

I lost some free advertising over the weekend. I used to have license plates frames that said "I Buy Houses" and listed my phone number. On January 1, a new law here in Arizona went into effect that says you cannot cover up the word "Arizona" on license plates. The word is printed between the two upper mounting holes on the license plate, so almost all license plate frames that have writing on the upper portion cover the state name. To comply with the new law, I took the frames off. In actuality, it wasn't that big of a loss. I think in the 4 years I had them on, they generated only 2 phone calls. Both calls were from real estate agents and neither one resulted in a deal.

General Update

Well, the holidays are over and things are settling back down to a normal routine.

I received another on-time payment on Hard Money loan #4.

I received another quarterly profit distribution for the apartment complex in Houston. Again, the distribution worked out to our preferred 9% annual ROI. After five months of rising, the occupancy rate dropped, but only by one percent back down to a more normal 96%. I knew the 97% rate from last month wouldn't last too long. (Marketing and retention expenses dropped by about 20% from last month, which may explain the drop in occupancy.) Repairs from Hurricane Ike are wrapping up. Return on equity for the property this quarter is currently at 8.7%, but excluding the cost of repairs from the hurricane, it would have been 10.9%. Next month will see a one-month profit disbursement to sync us up with a calendar-quarter payment basis in the future.There is a bi-annual investor conference call scheduled for the end of this month that will provide investors with an overview of how things are going so far and what the outlook is for the next year.

I almost got hired at a local real estate investment trust company. I made it to the final three applicants, but the company ended up choosing someone else. Too bad. This REIT specializes in commercial real estate and they have over $50 billion in properties under management. I could have learned a lot from them.

Work on my ebook has stalled. Actually, I am done with it, but my wife is working as the editor and she hasn't had time to work on it lately. Hopefully, that project can get moving again soon.