New Investor in Brooklyn, NY - curious of people's views on units

[William Gan]

Hi all,

My name is William and I currently live/work in Brooklyn, NY. I moved to NYC about 4 years ago, and have been renting so far, but realized financials are much better on the owner-operator side. 

My goal for my first property is solely to decrease my net "rent" (i.e. off-set my rent burn via equity build-up). I think I would then either 1) continue buying more units in NYC (breakeven cash flow, but high rate of mortgage pay-down) or 2) try my hand at out-of-state investing with a turnkey operator (much higher CoCR, but different risks). 

My long-term goal is to make real estate a passive source of income to my full-time work, so I am ok with trading off better returns for lower complexity on my end. Would greatly appreciate any general advice experienced folks have for starting off, as well as any specific thoughts on the topics below. 

@Russell Brazil and @Llewelyn A - would especially appreciate your thoughts, as your philosophy of wealth creation via mortgage paydown gave me some social proof / confidence in this approach. 

• 1) A key assumption of the mortgage-paydown philosophy is that real estate and rent will hold its value over time (if not grow). How do other NYC investors think about hedging against a market / rent crash? 
• 2) What are the downsides to consider when starting off with a unit as opposed to a multi-family? As a first-time landlord, owning a condo unit appears to have several advantages over owning a building - e.g. major CapEx projects undertaken by the building instead of you, less tenants to manage, and an easier time getting a conventional loan.
• 3) How are people's views on Flatbush/Sunnyside/Jackson Heights? Sunnyside Yards seems like major upside potential, but curious if people think property values already reflect that. Flatbush seemed like it would be a logical extension of the Prospect Lefferts Garden boom, but for some reason people flocked to Bushwick / Bed-Stuy instead. 

Thanks a lot! And looking forward to connecting with you all :) 

William

[Russell Brazil]

Llewellyn really gets into the IRR, internal rate of return, of an asset when he is choosing what to buy.

For me, I look at a few things, but while the numbers are a guide, I dont rely on them as much. Joe Villanueva on here always says the numbers dont lie (and thats true in one sense) and I always say the numbers always lie. 

When I say that, I mean almost no property performs to expectations. Some come close, some do a lot worse, some do a lot better. People put these numbers into spreadsheets, but real life isnt a spreadsheet.

I am a firm believer though that Yield is a measure of the markets view of the risk in an asset and or market. This is a fundamental to investing...whether in stocks, bonds, real estate. So the market views places like NY, DC, San Francisco, Boston as being lower risk than say Baltimore, Detroit, etc.

Now low risk and high risk, are not good or bad. I believe, and as does Llewellyn, that your total actual return tends to be higher in the low risk markets. 

Because 2 things happen in the lower risk markets. The assets value gets pushed up more, and my favorite, the rents get pushed up more. Now, this doesnt happen to every property in these markets. I have some properties where the rent is what it was a decade ago and where the price hasnt gone up a ton. 

And thats where you need to analyze the supply and demand in the market you choose. Where demand is high, prices and rents will rise. For NY Brooklyn is an obvious example. In DC, Petworth, Rockville, Trinidad are good examples. In fact, I believe Brooklyn, and here in DC I know Petworth actually continued to rise during the housing collapse, because demand was a greater factor than the national economy.

In DC in the outer areas, prices stagnate and rents stagnate and that is because in the outer areas there is tons of land for new construction. So a continual increase in supply weakens the demand further out and we get very little or no appreciation or rent growth.

So I focus on nicer class assets, in nicer areas where demand is high, so my rents increase a lot. I have 1 property I bought in 2009 for $260k. It initially rented for $1900 and I think my mortgage payment was $1700 at the time. Well now a decade later my rent is $2900, my payment after a refinance a few years in is $1300, my value is sitting around $435kish (after declining the first 2 years of owning)

How many cash flow investors have $1600 a month in free cash flow on one door? Not very many. This property now pays me back my original down payment every 2.7 years in free cash flow.

I know everyone wants instant gratification. They want to buy where the yield on purchase is high. But they ignore the fact that the yield is high because the risk is higher. When the risk is higher you have a higher probability that the actual returns have a larger delta from pro forma returns. Just look at @James Wise youtube videos on tenants from hell. Thats why the returns in the higher risk markets or submarkets are harder to get as they seem on paper. I lost money in a few such investments, and made a ton of money on the high demand stuff in DC and Boston. 

I ultimately think people should invest locally or in markets they know extremely well. Knowledge is the greatest mitigator of risk in real estate investment, and that knowledge typically means local.  I think those that promote oit of state investing for the masses are promoting a higher risk form of investing that is not appropriate for the masses. I have a couple out of the area investments, but Im also at a point where I could lose 100% of those and its not that big of a deal. 

I also think people need to learn to properly asses risk.

Yield measures risk. Higher yield, higher risk.

Leverage increases risk. (Yeah you BRRRR guys pulling 100% out have increased your risk, you need to sell and you might owe money to sell because of your capital gain and less equity in the property)

Higher Asset Class is Lower Risk. Lower asset class is higher risk.

Investing out of the area increases risk

People think that having the extra cash flow is helping mitigate their risk, and they have it so backwards. That higher cash flow is the compensation you get for taking on more risk.

Theres nothing wrong with high risk or low risk. But you need to understand it and deploy capital based on your risk tolerance. People here have convinced themselves that the lower risk assets are gambling, and the higher risk assets are safer. They lack a fundamental understanding of investing basics.