New Loan and A Sign Of The Times

As I mentioned last week, I had two loans get paid off recently. A third loan, hard money loan #8, was just paid off yesterday. This loan was somewhat unusual in that it was actually carried to the full 1 year term. I don't have any information on if the property sold or if the borrower just refinanced to pay us off and he still is working on or trying to sell the place.

So, with the exception of one loan through my self-directed IRA, my money is all just sitting around and not earning any interest right now. Or I should say, was just sitting around. Just got details of a new offer yesterday that I will invest roughly a third of my funds in. The borrower is a referral to my partner from a mutual friend. The guy knows what he is doing and rehabs houses for a living. He is also a member of CCIM, an institute of commercial and investment real estate professionals. The property is a single family home in Oakland, California that was purchased at a foreclosure auction. The property was purchased for about $265,000 and our mortgage will be for $198,000, giving us a LTV of 75%, based on the purchase price. The current value is approximately $323,000, so the LTV with that figure is about 61%. Loan is standard terms, with a slightly lower interest rate: 9%, interest only, 1 year term. I'll call this one hard money loan #14.Here's a picture of the property:

Not too pretty, but that's what foreclosure investing is all about.


I'm starting to see many indications that the real estate market is turning around. First, obviously, are the three loans I had close in two weeks. Those were sales in California. But even closer to my home here in the Phoenix area, I am seeing signs of a turnaround - literally. I passed this sign on the way home yesterday:

Note the "We're back!" line. This particular tract has been sitting vacant for two years. This sign was taken down two years ago and has just now been put back up. (The "immediate move-in" is something of a lie as there are no houses built yet.) On other empty lots around town, I am starting to see signs advertising new stores that will be built and should be open in a year or less. Perhaps the worst of the real estate mess is behind us now.

New Year, New Opportunities

The holidays were a pretty busy time for me and I realized I neglected to write about the performance of my Houston apartment complex investment. I also just got the update for December, so I’ll write about both now.

In November, occupancy dropped to 90%, due in part to the declining Houston economy. This property still continues to outperform the other apartment complexes in the area by 3-5%. The manager expected vacancies to remain at this level though December due to the holiday season, but expressed hope that rentals will increase after the first of the year. Cash flow decreased to just under $4,000 for the month and was impacted by higher insurance costs and real estate tax escrow requirements, as mentioned in the last update.

For December, occupancy remained flat, as expected. The submarket we are in declined to an overall occupancy of 87%, so we are still ahead of the curve. Unemployment in the area has increased from 6.5% in Q1 of 2009 to 8.4% in Q4 of 2009. Obviously, that affects the availability of renters. The Managers are cautiously optimistic for 2010 because job losses have slowed and they have increased their marketing efforts to attract new tenants. Cash flow dropped to just around $350, still impacted by higher insurance and tax escrow requirements. The good news is the management has obtained new insurance that will reduce the cost by about 30%, which translates to a savings of about $35,000 per year. The decrease in cash flow means there will be no end of year distribution to investors. For 2009, investors so far have received a 6.75% annual return overall. Management fully expects investor payments to continue next quarter. The semi-yearly investor conference call will be held the first week of February and I’ll have more info then.

I continue to receive on-time payments on hard money loans #10, 8, and 4. HML #9 was paid off at the end of December and that money is sitting with my partner looking for a new investment. We had one lined up, but it was a short sale and at the last minute, the bank decided to reject the offer, so that fell through.

My move towards a self-directed IRA is making progress. I have converted my rollover IRA to a tradional IRA and then to a Roth IRA. The next step is to transfer the funds to the company the sets up the self-directed IRA. I was planning on going with the iTrust product, but after discussion with the company, have realized that the LLC product, rather than the trust, is a better fit for what I will be doing. The only thing holding this up is that I haven't had time to fill out the paperwork yet. I hope to get that done this week. I'm not in a huge rush as it seems the hard money opportunities are slowing down a bit. My partner is noticing increased competition at the foreclosure auctions.

And finally, it’s been over a year since I was laid off from my day job, but I will finally be hired as a full-time employee again come next Monday. The company I have been working as a contractor for for the last nine months or so has decided to bring me on board permanently. While my passive income is not yet high enough to cover my living expenses, it was high enough to cover the expenses of my loans and credit cards during the year I was laid off. (I normally don’t carry a balance on my credit cards, but the layoff changed that temporarily.) It was a huge relief knowing those bills were covered during the times I had no income coming in. My practice of putting 15% of my paycheck into a savings account also helped my ride out that year. This whole experience has taught me the importance of both passive income and maintaining an emergency savings account.

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.

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.

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.

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.