Received the November report for the Houston apartment complex and it was not good. Occupancy has dropped to 89% with 26 move-outs, 12 of which were without notice. So rent concession costs increased to fill the empty units. Expenses are still going lower, which is a small positive. Some exterior wood replacement needed to be done that cost $31,000 but that was paid directly from the replacement escrow account with our lender, so it did not affect cashflow. The manager's report includes this ominous phrase: "...outstanding aged accounts payable continue to place considerable strain on property operations." Total revenue for November was $175,000 and the balance sheet shows $233,000 of Accounts Payable, so yeah, I can see that would cause a strain.
Truthfully, I am getting tired of this investment. I don't think the investors have gotten a payment in over a year. I know the problem is high unemployment and the soft economy, but it gets pretty old hearing month after month that the place is just limping along. This investment was made with an eye towards capital gains, not monthly income, so I need to keep that in mind. Still, it is somewhat frustrating to know there is little that can be done to turn things around. I guess I am still used to the rehab mindset of being able to improve a property and sell it.
I'm starting to see why my hard money lending partner likes lending so much. Rentals require dealing with tenants and repairs, etc. Investing in apartment complexes does too, although a management company keeps those factors one step removed from the investor. Hard money lending on the other hand, is relatively hassle-free, once you have a set of good, regular borrowers lined up. Lending also lets me spread out my investment over several properties, reducing the risk from any single one. I think once this apartment investment ends, I'll stick to hard money lending. You do lose out on all the nice depreciation deductions and tax-deferral options though.
And Now For Something Completely Different
I wasn't going to write about this, but since it's the holiday season, I figured now would be a good time.
About a year ago, I came across Kiva.org, a microlending site. It's similar to Prosper.com in that it works by people lending money to other people. The difference is the other people are in third world countries and are taking small loans to help improve their situation by opening or expanding a business. Kiva charges no fees and 100% of the money you lend goes to the borrower. Like Prosper, you can search lists of people looking for loans and select the ones you want to lend to. But, and here's the reason I originally wasn't going to write about this, the lender (you or I) gets no interest. There is no return on investment for the lender other than the satisfaction of helping someone in another country improve their lot in life.
Kiva works by teaming with field partners in various countries who are the ones who actually fund the loans and collect payments. More information can be found here. The borrower does pay interest on the loan, but that is kept by the field partner.
As with Prosper, there are risks - namely that your loan won't be repaid. Additional risks involve currency exchange rates, political unrest, and all the other risks that come with investing in another country. But Kiva lets you start lending with as little as $25, which is what I've started with. If my loan defaults, I'm only out twenty five bucks. I can handle that. I've made one loan so far to a woman in San Salvador to expand her business of selling cosmetics and small household appliances. The loan was for 20 months and is 55% repaid. My sister-in-law has been lending through them for a couple of years and has made 3 or 4 loans so far.
If this sounds like something you are interested in, please check out Kiva.org. Have a happy holiday season!
About a year ago, I came across Kiva.org, a microlending site. It's similar to Prosper.com in that it works by people lending money to other people. The difference is the other people are in third world countries and are taking small loans to help improve their situation by opening or expanding a business. Kiva charges no fees and 100% of the money you lend goes to the borrower. Like Prosper, you can search lists of people looking for loans and select the ones you want to lend to. But, and here's the reason I originally wasn't going to write about this, the lender (you or I) gets no interest. There is no return on investment for the lender other than the satisfaction of helping someone in another country improve their lot in life.
Kiva works by teaming with field partners in various countries who are the ones who actually fund the loans and collect payments. More information can be found here. The borrower does pay interest on the loan, but that is kept by the field partner.
As with Prosper, there are risks - namely that your loan won't be repaid. Additional risks involve currency exchange rates, political unrest, and all the other risks that come with investing in another country. But Kiva lets you start lending with as little as $25, which is what I've started with. If my loan defaults, I'm only out twenty five bucks. I can handle that. I've made one loan so far to a woman in San Salvador to expand her business of selling cosmetics and small household appliances. The loan was for 20 months and is 55% repaid. My sister-in-law has been lending through them for a couple of years and has made 3 or 4 loans so far.
If this sounds like something you are interested in, please check out Kiva.org. Have a happy holiday season!
Hard Money #22 Started
It took just about a week, but my funds from HML #17, which closed on the 21st, have found a new home.
Our best borrower picked up a triplex at a foreclosure auction. The property is in San Lorenzo, California and went at auction for $331,000. Our loan is for $210,000. The property square footage is about 2,600 although the MLS listing for it does not give a square footage.
As we did with the last property, we pulled comps using both residential and income property searches on the MLS. Income property comps show up at $315,000 for a 4-plex that is smaller than the subject property and another 4-plex listed at $725,000 but that's bigger than the subject property. There is a triplex that sold recently for $329,000 that was smaller.
On the residential comp list, we had about 12 properties, all that were smaller than the subject and all on smaller lots. Highest priced one sold for $335,000.
Based on rents of single family homes in the area, my partner estimates the monthly rental income to be about $1,200 per unit. (The subject property is really a single family house with a duplex in back.)
Our borrower estimates the property to be worth $500,000. I'm not sure how he gets a figure that high, but he knows the area better than me and comps are pretty hard to come by, as usual for triplexes. The property has tenants in place and they have indicated they want to stay. We have not seen the inside, so we don't know the condition. The roof appears to need some work. Our borrower has experience in the area - he actually rehabbed the property right next door, which is a 1,000 square foot SFH that he sold for $280,000 back in August. My partner was his lender on that project too (although I wasn't).
Our LTV based on the sales price is 63%. Should we have to take over the property, we'd get an income-producing property generating about $29,000 per year for $210,000. Not bad. Our loan terms are our standard - 12% interest only loan, 1 year term. And with this deal, all my funds are fully invested again!
Our best borrower picked up a triplex at a foreclosure auction. The property is in San Lorenzo, California and went at auction for $331,000. Our loan is for $210,000. The property square footage is about 2,600 although the MLS listing for it does not give a square footage.
As we did with the last property, we pulled comps using both residential and income property searches on the MLS. Income property comps show up at $315,000 for a 4-plex that is smaller than the subject property and another 4-plex listed at $725,000 but that's bigger than the subject property. There is a triplex that sold recently for $329,000 that was smaller.
On the residential comp list, we had about 12 properties, all that were smaller than the subject and all on smaller lots. Highest priced one sold for $335,000.
Based on rents of single family homes in the area, my partner estimates the monthly rental income to be about $1,200 per unit. (The subject property is really a single family house with a duplex in back.)
Our borrower estimates the property to be worth $500,000. I'm not sure how he gets a figure that high, but he knows the area better than me and comps are pretty hard to come by, as usual for triplexes. The property has tenants in place and they have indicated they want to stay. We have not seen the inside, so we don't know the condition. The roof appears to need some work. Our borrower has experience in the area - he actually rehabbed the property right next door, which is a 1,000 square foot SFH that he sold for $280,000 back in August. My partner was his lender on that project too (although I wasn't).
Our LTV based on the sales price is 63%. Should we have to take over the property, we'd get an income-producing property generating about $29,000 per year for $210,000. Not bad. Our loan terms are our standard - 12% interest only loan, 1 year term. And with this deal, all my funds are fully invested again!
Hard Money #21 Started, #17 Closed
Well, since the last loan fell through due to the property owner filing bankruptcy prior to the foreclosure auction, I had some funds available for a loan. Luckily, my partner found a good one fairly quickly.
This is an occupied duplex in Hayward, California. As it's occupied, we don't have any indication of the state of the interior, but the exterior looks to be in good shape and looks to be well maintained. The building is about 2,100 square feet and was built in 1957. It's got a 2 bed /1 bath unit and a 1/1 unit. The property was listed for sale back in 1999 for $280,000 but it did not sell. The comments in the listing indicate there is a studio behind the main building, so this might actually be a triplex. However, as we are unable to verify that, we are evaluating it as a duplex.
Rents total approximately $2,000 a month, although this is not confirmed. (Figure is based on the old MLS listing trying to sell the property in 1999.) The sell price at the auction was $233,000 - the opening bid price. Our mortgage is for $137,000. My partner pulled comps for both residential properties and income properties. Comps are a little spotty, as there are not many similar properties nearby. The city is average, but the property itself is close to Castro Valley, which is an above average city, so that will help the property value. Comps vary from $270,000 to $600,000, but there are none that are a good match. Our conservative estimate of value is $275,000, but my partner thinks that could be off by $50,000 in either direction. The buyer, our good customer again, thinks it's worth $325,000. Overall, this actually appears to be a safer investment then the one that was canceled last week.
Pros: Borrower is our good customer who typically pays early. He's got a well-established history of success and paying on time. He is personally guaranteeing the loan. Based on the sales price, our LTV is 58%. If we had to take over this property for non-payment, we'd get an income-producing property generating about $2,000 a month on a $137,000 investment. That's a pretty good worst-case scenario.
Cons: Our borrower is personally guaranteeing over 40 loans. It's unclear what the current leases are and what the interior condition is. Comps are hard to come by. If we had to foreclose, duplexes take longer to sell.No one else at the auction bid on this. Do they know something our buyer doesn't?
After going over the 10 pages of documentation my partner sent me, I decided to go ahead and invest in this one. This one I'm labeling hard money #21.
In other news, hard money loan #17 was paid off on Friday, so those funds are now looking for a new home. Back in May, when we made the loan, we estimated the after-repaired value of the property to be $195,000. The actual sales price was $210,000, so our estimate was pretty conservative. No problem with that, but I just like looking at how our estimate compares with the actual sales price. The borrower was a new customer for us and it's good to see he seems to know his stuff.
This is an occupied duplex in Hayward, California. As it's occupied, we don't have any indication of the state of the interior, but the exterior looks to be in good shape and looks to be well maintained. The building is about 2,100 square feet and was built in 1957. It's got a 2 bed /1 bath unit and a 1/1 unit. The property was listed for sale back in 1999 for $280,000 but it did not sell. The comments in the listing indicate there is a studio behind the main building, so this might actually be a triplex. However, as we are unable to verify that, we are evaluating it as a duplex.
Rents total approximately $2,000 a month, although this is not confirmed. (Figure is based on the old MLS listing trying to sell the property in 1999.) The sell price at the auction was $233,000 - the opening bid price. Our mortgage is for $137,000. My partner pulled comps for both residential properties and income properties. Comps are a little spotty, as there are not many similar properties nearby. The city is average, but the property itself is close to Castro Valley, which is an above average city, so that will help the property value. Comps vary from $270,000 to $600,000, but there are none that are a good match. Our conservative estimate of value is $275,000, but my partner thinks that could be off by $50,000 in either direction. The buyer, our good customer again, thinks it's worth $325,000. Overall, this actually appears to be a safer investment then the one that was canceled last week.
Pros: Borrower is our good customer who typically pays early. He's got a well-established history of success and paying on time. He is personally guaranteeing the loan. Based on the sales price, our LTV is 58%. If we had to take over this property for non-payment, we'd get an income-producing property generating about $2,000 a month on a $137,000 investment. That's a pretty good worst-case scenario.
Cons: Our borrower is personally guaranteeing over 40 loans. It's unclear what the current leases are and what the interior condition is. Comps are hard to come by. If we had to foreclose, duplexes take longer to sell.No one else at the auction bid on this. Do they know something our buyer doesn't?
After going over the 10 pages of documentation my partner sent me, I decided to go ahead and invest in this one. This one I'm labeling hard money #21.
In other news, hard money loan #17 was paid off on Friday, so those funds are now looking for a new home. Back in May, when we made the loan, we estimated the after-repaired value of the property to be $195,000. The actual sales price was $210,000, so our estimate was pretty conservative. No problem with that, but I just like looking at how our estimate compares with the actual sales price. The borrower was a new customer for us and it's good to see he seems to know his stuff.
HML #20 Started - Possibly (Updated)
I've been falling a bit behind on my blogging here. A hectic pace at work and a recent battle with the flu have been sucking up all my time. But today I managed to squeeze out a few minutes so here's the latest...
Back in the first week of October, my partner found another property to lend on. This is a single family home in San Leandro, California. The exterior looks to be in good shape, but the property is occupied, so we don't know what the inside is like. The location is not that great - it's near a freeway offramp. The property was purchased at auction for $197,500. The opening bid was $170,000. The buyer is one of our best customers and is personally guaranteeing the loan. He normally pays early.
Comps are hard to come by for two reasons: First, there aren't many in this area. Second, there is some confusion about the actual square footage of the house. The MLS listing says it is 1,080 square feet, but county tax records say it is 880 square feet. Using the lower figure, we estimate the value to be between $200,000 and $225,000. There is a comp that has the same square footage (880) but has a better location that recently sold for $275,000. How much is location worth? $50,000?
Our loan is for $136,500. Using the lower comp value, this gives us a LTV of 68%.
I went ahead and invested in this one, mainly on the reputation of our borrower. Found out on Friday that the owner is claiming he filed bankruptcy before the auction. This happens with about 5% of the properties at auction and I'm surprised it hasn't happened to use before. No final resolution yet. The next step will be the trustee will have to examine the auction documents and the bankruptcy documents to see which was filed first. If indeed the bankruptcy was filed first, we get our money back, the sale will be voided, and the house still belongs to the old owner.
Update: Turns out, the bankruptcy was filed before the auction, so the sale has been voided and our money has been returned.
Back in the first week of October, my partner found another property to lend on. This is a single family home in San Leandro, California. The exterior looks to be in good shape, but the property is occupied, so we don't know what the inside is like. The location is not that great - it's near a freeway offramp. The property was purchased at auction for $197,500. The opening bid was $170,000. The buyer is one of our best customers and is personally guaranteeing the loan. He normally pays early.
Comps are hard to come by for two reasons: First, there aren't many in this area. Second, there is some confusion about the actual square footage of the house. The MLS listing says it is 1,080 square feet, but county tax records say it is 880 square feet. Using the lower figure, we estimate the value to be between $200,000 and $225,000. There is a comp that has the same square footage (880) but has a better location that recently sold for $275,000. How much is location worth? $50,000?
Our loan is for $136,500. Using the lower comp value, this gives us a LTV of 68%.
I went ahead and invested in this one, mainly on the reputation of our borrower. Found out on Friday that the owner is claiming he filed bankruptcy before the auction. This happens with about 5% of the properties at auction and I'm surprised it hasn't happened to use before. No final resolution yet. The next step will be the trustee will have to examine the auction documents and the bankruptcy documents to see which was filed first. If indeed the bankruptcy was filed first, we get our money back, the sale will be voided, and the house still belongs to the old owner.
Update: Turns out, the bankruptcy was filed before the auction, so the sale has been voided and our money has been returned.
