2011 Management Discussion

2011 Management Review and Discussion

I write a short letter that you should read along with your K1s.  2011 was a year of growth - I'm happy to report that we more than doubled the size of the Partnership.  From two houses in Oakland, CA we added another three in Las Vegas, NV.  We added two new Partners and I'm most proud that existing investors continue to put more money into the Partnership.  That is the best affirmation of your confidence and support.  We've continued our record into 2012 as we've already added 1 more property and admitted two more Partners - both from referrals from existing Partners - again my many thanks!  

Highlights:

The Partnership reported Net Income of $49 on Revenues of $34,837.  The Partnership distributed Preferred Returns to Partners in the total amount of $14,765.  How did we accomplish this?  Depreciation adds back $8,863, and where possible we expensed items that were part of our Capital budget - namely the up-front repair/rehab budget.  We also acquired our new properties late in the year, which had the effect of dampening income as we received little revenue and pre-paid for items up-front (new tenant fee, insurance, etc...).

Mitt Romney's tax returns received much attention when it was revealed that he only paid 15% of his earnings in taxes.  One of the ways Mitt and others accomplish this is through real estate investments - as you can see, your share of the $49 Net Income is a small fraction of the Distributions returned to you in 2011 - welcome to the 1% club.  

Operating Issues:

There were a few issues this past year which led to lower results than I would have hoped for.  The first is the eviction at 2534 74th Avenue.  In addition to the four months of lost rent we incurred legal expenses, and expenses relating to cleaning up the place and getting it rent ready again.  Once again the lesson learned of getting the right tenant.  

The next unfortunate event was a burglary again at 2534 74th against the new tenant - oops...  Our property suffered about $800 worth of damage during the break-in.  It was worse for the tenant as one can imagine - We tried to do our best to reinforce the door and also bought her an alarm system from Amazon.  Thankfully no more issues like that as I write this.  

The other issue was the increased regulatory burden in Oakland regarding Lead paint.  Of course, some of this was deferred maintenance and needed to be done anyway, both properties exteriors were painted and sealed to ensure no peeling paint was exposed.   Repairs on both properties were therefore higher than usual due to accelerating the painting of the outside.  

I'm happy to report that we have had no MAJOR issues in Las Vegas properties so far (knock on wood).  Just some late notices, appliance failures, etc...  I am very happy with the team we have in place and our ability to turn properties, get them rented, and properly managed.  

Summary

This past year reinforces the rationale for growing the Partnership.  With only two properties, a series of unfortunate events (eviction/burglary) has the ability to throw results way off kilter.  When you hear of rental horror stories- it typically is from people who own one property and then are surprised by events.  

Unfortunately bad tenants, crime, etc. are a part of the business - when you have a portfolio you are able to absorb these items, get them properly fixed and move on quickly.  As we grow the number of properties in our portfolio we move ever closer to a more steady and predictable stream of income.  

Let's continue to grow while we have the opportunity - based on my last trip to Vegas we are not alone and prices are being pushed up.  Thanks again for your support, additional investments and referrals.

Cheers!

Biren Talati

Managing Member

Sandalstone Group, LLC