I am Andy. 2022 has been an exciting year at Ark7. Since launching new rental homes in Tennessee and Arizona before closing 2021, we have expanded our footprint further into Pennsylvania and penetrated deeper into hot spots in Texas. In Philadelphia, we acquired our first short-term rental property in Q4 2021, and closed 2 off-market deals right after that. Both properties are very stable high-yield Student Housing rentals near University City, the bustling heart of West Philadelphia and academic epicenter of the entire region.
All 13 properties including the newest launched ones start to generate positive cash flow for you. In Q1 2022, we paid out $114,858.64 in cash distribution, and in Q2 this number increased to $122,441.18. First half of 2022 combined, we achieved a 26% year-over-year growth compared to the same time in 2021. The amount of cash distribution is a straightforward calculation by subtracting expenses from rental revenues, like how you would prepare income statements for your own business or family bookkeeping. Our operation team may reserve a small percentage from the net income before issuing cash distribution should a big ticket operation expense occur.
We intend to share the operating details with you on a quarterly basis moving forward to make sure you understand the performance of each property in their ability to generate rental income, and answer questions on your cash distribution compared to the estimated cash distribution rate. The estimated rate presented on the property page is an annualized number over a minimum 2 years of operating period. It takes into account the seasonality of rental occupancy and year-over-year rent increase potential, 2 typical factors to blend in when predicting returns. Other inputs such as value-add renovation could be an expense in the beginning but generating higher rental income for investors in the long run. That is why you might find in some newer listed properties, the cash distribution in the initial months is lower than the annualized rate.
Our operation team has also provided insights into future outlook. As we moved into Q3 of the year, we were able to backfill most of our vacancy with only 1 exception. This will help greatly in generating stable monthly rental income for the next 12 months. In addition, our acquisition team has been putting even higher priority to stable rental income when sourcing new properties in the midst of market fluctuation. Currently we are evaluating Single Family Homes with 3%+ annualized cash distribution potential in Atlanta(GA), Dallas(TX) and continue to watch the Raleigh(NC), Tampa(FL), and Austin/Taylor(TX) markets. We will continue to seek high return Multi Family Homes like our Philly Student Housing rentals targeting 6%+ annualized cash distribution potential. On average, the acquisition team screens over 1000 properties on a monthly basis.
I also have the biggest news to share with you! Ark7 is officially qualified for Reg A – what that means is we finally can move one big step closer to our commitment to making real estate investment accessible to everyone – yes, no more accreditation – and we are building an even bigger community that helps us push modern fractional real estate investing to the next level, truly efficient and transparent.
The first offering, Arizona City-S6, was launched in August to all US residents. It is a beautiful single family home perfect for young families moving into the future industry hub at Casa Grande. Again we’ve secured a 1-year Long-term Family Rental before the initial listing. Investors can enjoy stable monthly cash distribution forward.
As I always said, the history of real estate investing in a black box is gone. We aim to share product details with improved clarity and take your feedback with courage. The Ark7 team believes confident financial decisions stem from information democracy, and is working diligently to update our property page in addition to the quarterly report, to give you the control and information needed as a confident investor. It will be available both on the website and in your Ark7 mobile app.
From the day I started Ark7, I have been trying to solve the dilemma for people just like me, those who wanted to invest in real estate, but found it required a great deal of time and money to purchase and manage a rental property. Today Ark7 has grown to 30 talented members, serving over 9000 investors and funded 13MM in property value across 6 states and expanding. We stay very focused on using technology and local expertise to ease the “heaviness” of real estate investing.
We build Ark7 each day like we are in Day One.
Co-founder & CEO
Net Operating Income
Net Operating Income (NOI) indicates the overall health of our property operations. It is the difference between how much we earn from rental revenue and how much we pay to keep the property well maintained and fully occupied by tenants.
In Q1, our aggregated NOI for the mature property operations was $35,763.19 in Q1 and $28,121.52 in Q2. This group includes all 5 Single Family Homes (SFH) S1-S5 and 2 Multi Family Homes (MFH) D1 and M4 that had full operation in the first half of 2022. Our newest Philadelphia Student Housing rentals (T2 and D2) were launched in May and July 2022, therefore are excluded from this reporting period. In addition, our short-term rental (T1) is also excluded since it isn’t in operation till the end of March. A major renovation was completed to prepare it for future visitors.
We were able to EXCEED estimated Net Operating Income both quarters for our Single Family Homes, by +9.66% in Q1 and +5.27% in Q2 respectively.
3 SFHs: Austin-S2, Austin-S3 and Chandler-S4 were fully occupied during this period and expenses were nicely kept within budget. As a result, net operating income significantly exceeded our estimates. The estimates are income figures we used to calculate the estimated annualized cash distribution.
2 SFHs: Austin-S1 and Chandler-S5 were below estimates.
S1 was vacant in March and partial April, but has been occupied again since late April expecting stable income forward. The team did a few minor repairs and paid utilities during vacancy, we do not anticipate any new repairs at this point in the coming months.
S5 was fully occupied during this period, however expenses went over budget due to big ticket repair and maintenance in January before tenants moved in. The repairs made sure our new tenants have a cozy place to call home. We do not anticipate any new coming repairs. Overall S5 is expected to deliver stable income forward as well.
Net Operating Income for Multi Family Homes were below estimates for both quarters.
D1 had a lengthy vacancy for one of the two units due to both seasonality and the high rent price target. Our operation team was able to find the matching tenants and put it back on track in June. It has been occupied now and expects stable incomes forward. Similar to S1 and S5, maintenance and repair contributed to D1’s NOI below estimates. We had a few standard maintenance procedures but did not anticipate any new repairs in Q3. Overall D1 is expected to deliver stable income forward.
M4’s vacancy rate is 14 percentage points over estimation in Q2. In July we still anticipate 1 out of the 14 units with temporary vacancy, while all other units are fully occupied. Our operation team is working diligently to backfill that unit and push the occupancy rate up in Q3 onward.
Please note we didn’t include our Berkeley MFHs in the deep dive analysis. They were the first batch of properties introduced to the Ark7 investor community and had a special program with guaranteed return rate. To avoid confusion when comparing cash distribution with other properties, we try to save the discussion of the Berkeley properties to a different occasion.
Financing costs are mainly interests paid to the property mortgage lenders. Our finance team evaluates various financing options to get the best rates possible at the time of acquisition or refinance when appropriate. Our estimated loan expenses are $59,045.63 for the mature property operations. We are a bit behind schedule but will plan to catch up in Q3.
Cash returns were distributed to investors after subtracting financing costs from the net operating income, the Net Income (NI). Cash distribution to the mature property operations discussed in this report is $50,575.96 in the first half of 2022. SFHs had a 14.6% increase in Q2 while MFHs saw a slight drop.
Austin-S2 was able to deliver above- estimated distribution in the first half of 2022. It is a result of exceptional stable rental revenue and low financing expenses.
Though Austin-S3 and Chandler-S4 were also generating above-estimated NOI, financing costs are relatively high causing below-estimated cash flow. S3 is now sold out and we will be able to reduce the financing costs entirely in the coming quarter. S4 though is pending on progress. We will inform investors of S4 when new updates are available.
Other properties including S1, S5 and both MFHs D1 and M4 were below estimates due to reasons discussed in the Net Operating Income session above. The good news is that all properties are now back on track with full occupancy and low maintenance, projecting a significant improvement in the 2nd half of 2022.
2022 1H Financial Summary
2022 2H Performance Outlook
As mentioned earlier, the estimated return rate is an annualized rate and should be looked at over the span of multiple years to benefit from potential rent increases (we cannot increase rent in the middle of the leases, which are typically on 1-year term), and iron out losses due to seasonality, or renovations etc.
Many of the listings analyzed in the report have not passed their first anniversary and just went through a slow season of rental activities and a peak period of repairs and maintenance in the initial months, therefore expecting fluctuations in returns. As we continue the operation, we are optimistic that the annualized return will be catching up to the estimation.
Kudos to the property management team, we were able to backfill most vacant units, with only 1 out of the 14 units of Memphis-M4 expecting tenants moving out in Q3. The team has been doing pre-planning work to backfill that unit and we target to close the book with 100% occupancy as soon as possible. With an excellent occupancy rate across, we expect very stable income for the rest of the year and into 2023.
Please note vacancy rate does not reflect 1:1 to rental revenue as in some cases tenants move out before lease ends but still paid full rent in full. Chandler-S4 for example fits into this scenario in Q2 and it didn’t impact investors’ cash return for the vacant days.
Cash reserves are pre-held money for the management team to take care of maintenance, planned upgrade or in some cases expenses during vacancy. For example, among all expenses that occurred in the first half of 2022, it is worth mentioning that $46,650.00 went towards foundation repair work for Memphis-M4. It is essential that we have done this for our tenants at this location.
Healthy cash reserves planning ensures the ability to keep the property in good condition and avoid potential rent losses. As we close the book for the first half of 2022, we were able to retain good cash reserves for 6 out of the 7 properties analyzed in this report. Austin-S3 is the only one that saw a negative reserve and we expect to hold additional cash reserves from future months’ operating income. We will disclose more details to investors of S3 when the budget planning is finalized.