All Forum Posts by: Llewelyn A.

@EJ K.

Hi Edward.

I'm a financial independent Real Estate Investor in Brooklyn, NYC with a portfolio of 10 small multi-families (with partners). I have been doing this for 21 years.

I also have several Doctor friends, one that invested with me early on and one that missed the boat, and now my 2nd Doctor friend, as much as he makes, cannot afford to buy a Property here in Brooklyn anymore. He has become priced out of this market.

Both Doctor friends started to look at the way I was buying my properties with very little Cash Flow.

The 1st Doctor who became a Partner earlier on, became a millionaire.

The 2nd Doctor, completely missed the boat. He couldn't get past the lack of cash flow. He's in his 50s and wants to retire from Medicine because he is burnt out. Unfortunately, he can't but my 1st Doctor friend can.

The one thing about Cash Flowing properties I like to point out is that to me, in my humble opinion, THERE IS NO SUCH THING AS A CASH FLOWING PROPERTY..... it's the INVESTOR that cash flows the property.

Your example is actually GREAT!

You put ZERO down, and you just barely get a cash flow.

BUT... of you bought the property ALL CASH without a Mortgage... you would be CASH FLOWing that property nicely, I bet.

If you decide to self-manage it, then the cash flow would probably be awesome!

There are 2 hypothetical scenarios of your property which explains why I believe you chose NOT to Cash Flow it:

1) You put zero down and barely cash flow

2) If you paid all cash for it, it would certainly cash flow well

So, what is it? A cash flowing property or NOT?

To me, the answer is NEITHER..... it was YOU who decided NOT to cash flow the property.

HOWEVER, that's only temporary.

Like you, in my first property, I really broke even. BUT, my salary for my first property 21 years ago, was high (above $100k back in the late 90s).

I bought my property with 15% down and broke even with the cash flow. It didn't make me nervous because I could pay off the Mortgage and solve my cash flow problem.

Over time, I actually paid off the Mortgage to increase my Cash Flow so I can become financially independent.

Paying off the Mortgage to increase the Cash Flow was not a characteristic of the Property, it was a choice that I made.

From the day I paid off my Mortgage and cash flowed that property, I was financially independent.

Do I think that the property I bought with ZERO cash flow was because of the Property? NO... it was because of ME, the Investor.

If it was because of the Property, then I wouldn't be able to change the Property's cash flow.

Characteristics of a property are normally beyond something you can change. Since you can change the Cash Flow on a Property by either putting a Mortgage on it or not, we (meaning those of us that look at the financial statements very hard), realize that the Cash Flow is caused by the amount of Debt Service which is NOT part of the Operating Expenses. That's the reason why it's not, because Debt Service is a characteristic of the INVESTOR, not the Operating Expense.

Another way to think about it is that the Property Tax is an Operating Expense because if Investor A buys the property, the property tax will be exactly the same as if Investor B buys it.

BUT, if Investor A completely Mortgages the property while Investor B pays all cash, the Debt Service is dramatically changed and so does the Cash Flow of both Investors. Therefore, the Debt Service is a NON-Operating Expense which then is reflected in the cash flow.

Anyway, I think I beat this horse to death.

It's not the Property that Cash Flows, it's the Investor that Makes the property cash flow.

Something to think about.

@Kimberly Kesterke

Congrats on transitioning into a Financially independent Real Estate Investor!

My own experience 21 years ago is very similar, except I invested in my local neighborhoods, within 30 minutes drive to each property in Brooklyn.

I also was a W2 Employee (a highly paid one though), and considered that to be my safety net while Investing was all about giving me the option NOT to work if I choose NOT to work in the future when my cash flow exceeded my expenses.

That's what Financial independence do... it completely lowers your stress level as you don't really need to depend on a job.

That being said, having the W2 job made the transition incredibly straightforward with minimal risk.

You basically are able to qualify for the best Mortgages, at least in the beginning, and having that advantage helps to lower the risk of that Investment.

Just like you, I almost ALWAYs advertise the apts before purchasing it, even though I did not own it at the time. It's really pre-marketing analysis.

If I find a great tenant, I let them know that I will be purchasing the building and that I have NEVER failed in buying the building since investing.

In the beginning, you also learn to be a Landlord over time. I absolutely believe that you need to have experience, which could take years, to really put together the right systems to make rental real estate work.

Once you understand how to be a good Real Estate Investor and Landlord, the next property gets easier, then the next, etc.

Eventually, you build up your portfolio. If you invested in the right locality, just like you did (and I also), tenants will be very qualified. In my areas in Brooklyn, tenants MUST have a 700 FICO score or better, and 3.5 times the Annual Rent (so a $2k monthly rental apt needs to have tenants with Annual Salaries about $100k or better). It is almost normal for me to have tenants that have above a 750 FICO AND above $200k annual combined income.

I actually don't subscribe to having goals of purchasing multiple properties per year. I actually think people should slowly transition by starting out housing hacking, continuing with their Careers, and then moving on to the next house when the opportunity is right which could be a few years to several years from their first purchase.

It's so easy, anyone can do it! I just don't understand why so many people do it the hard way, purchase way too many properties in the beginning when they haven't had enough experience, and when they are not prepared to be good Landlords from the beginning.

Taking your time to invest while keeping your job until financial independence is a strategy that doesn't seem to get much attention.

Congrats again!

@Lance G.

Hi Lance, I have done what you are planning on doing 21 years ago.

However, you did not mention this would be a Single Family, 2 Unit building or multi-family.

The first property I bought with my Business Partner was a 2 family. We house hacked it and rented out an apt.

That taught us how to become good Landlords through experience.

From then on, we expanded our Portfolio to 10 buildings, 30 apts, 65 tenants in Brooklyn, NYC with an Asset value of about $20 Million.

We could not have built the Portfolio without Partners.

In regards to Liability, since you are House Hacking, research Home Insurance that includes Landlord Liability in addition to the normal insurance.

As long as you get the appropriate Insurance, you'll be fine.

I would advise you take your first House Hack to learn how to become a good Landlord, don't be negligent so you can avoid being sued (or at least minimize the chance of being sued), learn tenant screening REALLY, REALLY well (this is where beginners tend to fail and put in a terrible tenant), establish a separate Bank Account solely for the rental and build it up as a business.

If you find yourself still motivated by next year, buy a 2nd one but this time, you will be much more experienced and knowledgeable.

@Account Closed

Hi Eric.

In regards to moving up the Security Deposit to match the Rent, I have been doing this for 21 Years.

I have a tenant that has been with me for 21 years. Rents have moved up about 4 times her original rent here in NYC.

If I never raised her security deposit, it would be ridiculous to have only 1/4 of the Rent for a Security Deposit in case of property damage should she leave. That wouldn't even pay for a replacement of a damaged appliance!

I guess in localities where the rent barely changes this seems like an acceptable Idea NOT to raise security deposits to match the rents.

Currently, I have 30 apts, 65 tenants in 10 buildings. I have had ZERO complaints on renewal to pay an increase in the security deposit to match the rent.

From the previous comments, it almost seems that this is a rare request.

I'll be curious why other Landlords don't do it? The Security Deposit equals the Rent.

Maybe the previous Landlord just wasn't experience, didn't raise the rent and the tenants would be upset.

If that's the case, then you may need to accommodate the current tenants and start this policy of raising Security Deposits to match rent when you replace each tenant.

@Marcel Itzik

Ah! What confused me in the beginning was that you mentioned you had 10 units.

Now that you said the property is actually a 2 family, this is different!

You can access a free Attorney for BOTH Landlord-Tenant AND Small Claims at the Help Center in NYC.

Here is their website: NYC Litigation Help Center

I had used them more than 15 years ago to do an Eviction with out hiring an Attorney and it worked out really well. You just have to bring everything with you, the lease, Deed, etc.

Go in the Morning before it opens and wait on line. There are plenty of people, mostly tenants, trying to get online to use the free pro-bono Attorneys.

They will walk you through the entire process.

Thanks for the shoutout @Darren Sager

@Marcel Itzik

Are any of the apts rent-regulated and specifically, is the subject unit a rent-regulated unit?

This is a Commercial Building as it's over 4 units. Is the Building in an Entity like an LLC?

I would also recommend using an Attorney. In fact, you may not have a Choice but to use an Attorney.

If the Building is owned by an Entity, the Entity might have to be represented by an Attorney versus a "Member" of an LLC or an Executive of a Corp.

Also, there are new rules in regards to returning Security Deposits, especially for Rent Regulated Buildings.

Unfortunately, I can't advice at all since I don't own Commercial Residential Buildings.

If you do wind up looking for an Attorney, I would also be knowledgeable in the return of the Deposit as well, since the New State Laws may have made it more strict, like returning it within 30 days, etc. and what the penalty would be (like triple damage if you did not return the security deposit on time without a legitimate claim).

I can't really recommend a Landlord-Tenant Attorney myself since it's been 17 years since my last Eviction.

Do keep us informed, however, as this is a curious topic for others as you progress with trying to apply the Security Deposit to the damages.

I am assuming that you, or an Attorney, can seek monetary compensation if the Security Deposit did not fully pay for the damage.

I wish I could be better help or even recommend an Attorney!

@Scott Passman

Hi Scott,

I have been doing some digging in regards to why there is so much homeless, or so it seems.

Here is one Study:https://www.innovations.harvard.edu/sites/default/files/hpd_0203_wright.pdf

It's an interesting Read.

It points out that there is a history of declining affordable housing areas that used to be there, called "Skid Row."

In "Skid Row", there were usually several kinds of apts for the homeless or very low wage persons including "SROs (Single Room Occupancy)" and Flop Houses.

Back then, you could have lived in one of these "SROs" by working in some menial task that didn't require any skills such as loading and unloading trucks, etc.

They didn't care if you were mentally ill or physically disabled or need medical attention. You could still work as an independent and get some work for your flop house bed.

Today, a lot of the jobs that the non-skilled workers are doing have been already automated or equipment that one person can use is doing the work of many workers (think Forklift here).

In the future, this will accelerate. For instance, we have people who drive for a living. BUT... in 10 years, we may see a complete disruption in this kind of work as cars and trucks become self-autonomous.

HOWEVER, today, this is a totally different story.

Here in NYC, 42nd Street, Manhattan used to be a Skid Row with lots of Video Porn shops, maybe even low income housing, etc.

Same with a lot of other neighborhoods everywhere in NYC, especially in Bed-Stuy.

What was even worse was that there was a Purge in Mental Institutions back in the 60s or earlier, I believe. They basically let all the mental patients out with plans to have created these kinds of affordable housing in a large amount of locations throughout the Nation, but that latter part never happened. So the Mentally Ill were just left to fend for themselves.

Take away most of the "Skid Rows" and the Mental Institutions.... well... you get what we have today.

I have been thinking about it for a while, but Supply and Demand is working here, except that the supply of Affordable housing in respect to "Skid Row" type areas have virtually disappeared.

So you have a lot of people who need this kind of affordable housing, but not much of that kind of housing is to be found.

In fact, you have an increase in demand because of the recent drug epidemic involving Oxy, Meth, Fentinol and Synthetic Marajuana.

I don't lean left but more towards Center, but I am trying to become more informed.

I think there is merit in studies like these that describe the issue by looking at the history of homelessness.

It's almost as if we have to have apts and homes that match the population segmentation as the POPULATION changes.

In other words, are we just ignoring very low income people just because they cannot afford anything but a "Skid Row" type area?

And if so, maybe there needs to be an incentive for Government to create these Skid Rows.

Funny, but I think that is exactly what Vancouver has done with their East Hastings Street area.

If you have ever been there, and if it's your first time, you will be SHOCKED at how much this is a Skid Row while Vancouver is a very EXPENSIVE City.

They maybe have it the right way.... ensure there is a Skid Row area for the completely destitute who needs it.

I am only suggesting that all major Cities, or even minor Cities, should ensure there is a "Skid Row" which can grow with the population that needs it.

The other way around this is to ensure that the destitute can be lifted out of poverty. I think a Political Candidate, Andrew Yang, has proposed doing that with something he calls the Freedom Dividend, which is an unconditional $1k per person per month divident to all Citizens.

Maybe it's time to think out side the box of thinking for a solution. Supply and Demand really isn't working for the Mentally ill or Poverty stricken. They may have a demand for housing, but because they have no money, they don't have buying power.

BTW, this posting is just my thinking out loud. I haven't formulated a concrete opinion yet. Just spending time doing research.

@Quentin Mitchell

Quentin,

I'm a Brooklyn, NYC Investor that has been buying holding properties here for over 2 Decades.

You may be looking at Appreciation as the "Gravy" or "Icing" on the cake..... BUT.... let's take another point of view.

Suppose you live in a highly appreciating neighborhood in ... welll... CHICAGO... where you are from.

Let's say you thought Appreciation was only the Gravy and that you will only qualify a property based on Cash Flow and NOT future appreciation.

Imagine this was 10 years ago.

You would be at the point where almost ALL of my friends and family in NYC are at this very moment.... completely priced out of ANY real estate in Brooklyn (and in your case decent neighborhoods in Chicago).

In reality there are 4 different ways to Analyze Real Estate:
1) Cash Flow
2) Mortgage Balance Reduction (think about a 30 year mortgage disappearing at the end of the 30 years)
3) Tax Savings and
4) Appreciation

If you Master analyzing Real Estate for all of these components and treat them not as GRAVY but as actual components, then you would begin to build and expertise on how to do Analysis on NOT JUST CASH FLOW.

You will develop your expertise on calculating Appreciation as well.

If you ZERO out 4) Appreciation, BTW, you still have the other 3 components.

If you ZERO out 4) Apprecation AND 1) CASH FLOW you still have 2) Mortgage Balance Reduction and 3) Tax Savings.

Let's say you ZERO out 1) Cash Flow (because your Tenants will pay all of your expenses including your Mortgage payment but you get no cash flow), 3) tax Savings and 4) Apprecation.

That leaves you with only 2) Mortgage Balance Reduction.

Why did I isolate this? Because it can make you RICH.

Imagine you buy a property with a 30 year fixed rate, $1 Million Mortgage and all your tenants pay all the bills including the Mortgage but you get ZERO Cash Flow.

In 30 years, you have averaged $1 Million / 30 years = $33,333 PER YEAR.

Imagine you did this scenario to 10 properties. You are now making $333,333 PER YEAR in the Mortgage Balance Reduction which you can realize by selling the properties.

In 3 years you are a Millionaire.

Did you take Cash Flow into Consideration? NO.. Apprecation? NO.... Tax Savings? NO

ONLY Mortgage Balance Reduction.

To me, the Cash Flow IS THE GRAVY.

The Others are actually where I make the money.

If my friends and family understood this, they would NOT have become Priced out of Brooklyn. I suspect it could be the same for people you know in Chicago as well.

Ironic, isn't it?

@My Nguyen

Hi My Nguyen.

My portfolio of buildings has probably appreciated an average of at least 10% per year for the last 21 years.

BUT, not all buildings in my portfolio would have appreciated at the same rate. Some would have appreciated around 12%, others 7% and a lot inbetween. The blended appreciation rate is somewhat around 10%.

Because the buildings in my portfolio have been purchased approximately one every 2 or so years, since 1997, each range will have a different appreciation.

For instance, the building I bought in 1997 appreciated an average of about 8%. The one I bought in 2000 aroun 12%, etc.

Also, I am generally investing around Prospect Park, but each of those neighborhoods have different appreciation rates as well. Again, as an example, the Building that I mentioned at a 8% apprecation rate was bought in 1997 in Ditmas Park. The 12% building in 2000 was bought in Windsor Terrace.

In regards to predicting apprecation, I really like to tell people that you have to be LUCKY.

BUT.. not in the way that if you buy a lottery ticket and hit the jackpot. That's DUMB luck.

You have to be lucky by the definition that includes using our human intelligence. That's Intelligent Luck.

There are actually two requirements to be lucky:
1) You MUST recognize the Opportunity AND
2) You MUST be prepared to buy that Opportunity.

Example:
1) Recognizing the Opportunity
Properties in the Flatbush area are now much higher than they were 5 years ago. Imagine that you find a property, say, a 3 family Market Rate Flatbush property near Prospect Park that was selling for $1 Million.

There are two ways you can think about the last 5 years. You can either say "Real Estate Prices are way too expensive!" (You don't recognize this as an opportunity) or you can say "It will only get more expensive in the future." (You DO recognize this as an opportunity).

2) Prepared to Buy
If you don't have the money, you are not prepared. Therefore, the Luck ends here.

If you do have the money, you have a choice to buy this opportunity or not.

Essentially, all Investments are a risk.

HOWEVER, the more research you do, the more you can reduce that risk.

If you do your research and you find out that the adjecent neighborhoods have Gentrified and that they are NOW spilling into the Flatbush area AND you have noticed that the City has invested in public transportation (they opened up a new subway station in the Flatbush area), you can make a fairly intelligent guess that the high price will only get higher, recognizing it as an opportunity.

However, if your research does NOT indicate that this property will be at a higher price in the future, and you do not buy this property, you can't get lucky here and have to look elsewhere.

Now, let's say you recognized the opportunity AND you were prepared and you BOUGHT this 3 family investment in Flatbush.

10 years later, that $1 Million purchase you made in the year 2020 is now worth $2 Million in 2030.

What do you think your friends and family would say when you tell them that you bought your 3 Family Flatbush property for $1 Million 10 years ago and you made $1 Million in unrealized profits today in 2030?

WOW... you got lucky!

If you calculate the appreciation rate from the purchase at the beginning of 2020 of $1 Million where you sell the property with a million profit at the end of 2030.. it's only a 6.5% apprecation rate.

For those who can't really conceive of appreciation rates as high as 6.5%, let's just say you only had $750k of appreciation. That reduces the apprecation rate to only a 5.22%.

Your friends and relatives would still say you got Lucky! But really, a 5.22% apprecation rate is about average in the US. For NYC, that's considered low.

Now, let's see if you can get even luckier with just doing a few things and keeping that small 5.22% apprecation rate.

Let's say you used a 20% down, 80% Mortgage.

That means you would have bought your $1 Million 3 Family Flatbush property with only $200k down and some closing costs. Let's just call the closing costs $50k so you are in it for $250k and your Mortgage is $800k.

10 years later, the property appreciated only 5.22% per year so that you can sell it for only $1.75 Million.

When you sell, you pay your Mortgage balance of around $700k, some seller's closing costs, let's say $50k and a commission of 5% = to $87,500.

Your proceeds would be $1.75 Million minus $700k mortgage balance, $50k seller's closing and $87,500 Commission = $912,500 IN YOUR POCKETs.

Now let's see how much you actually made with the appreciation of only 5.22% but this time you used leverage.

In year 2020, you invested $250k
In year 2030, You sell and receive $912,500.
Your profit is $912,500 minus $250k = $662,500.
The overall ROI = profit / investment = $662,500 / 250k = 265%! in 10 years!
The simple Annual ROI is 265% / 10 years = 26.5%
Howevever, we really shouldn't use simple annual ROI but rather Internal Rate of Return (IRR).

If you were to calculate the IRR = 12.5% IRR!

We haven't even added any cash flow into this scenario and you are still doing quite well.

AGAIN, this is with a 5.22% Appreciation Rate.

If you used a 10% apprecation rate,the building would be worth closer to $2.8 Million at the end of the year 2030.
Your profit will be $2.8 Million minus $700k Mortgage Balance, $50k seller's closing and 5% commission of $140k ($2.8 Million x 5%) = $1,910,000 minus $250k = $1,660,000 PROFIT.
The overall ROI = $1.66 Million / $250k invested = 664% over the 10 years
The simple Annual ROI = 764% / 10 years = 66.4% per year!
The IRR for those 10 years is approx 20% IRR!

Imagine making almost a $1.66 Million profit in 10 years on an investment of $250k. Again, that doesn't even include having ANY cash flow in the calculations.

WOW... if you had a 10% appreciation rate.... that is beyond LUCK!!!

Yet... I have done this for 20 years in a portfolio with 10 buildings purchased once every 2 or so years.

AND yes......... EVERYONE I know thinks Wow...... did I get lucky.

A lot of times instead of going through the math with them, I just point out that if I never looked at appreciation rates and took those into account, I would never have gotten lucky.

I also point out that you can get really UNLUCKY if you don't take appreciation rates into consideration.

The prime example are my friends and family who live here in NYC rentals that never bought Real Estate in NYC. They are now forever priced out while I have a 10 building portfolio.

BTW, just to contrast my Luck with another investor I know who invested in 2 Condos in Manhattan, he got UNLUCKY with those Investments. He bought at the height of 2008.... that was already bad. What was worse was that he bought the condos with tax abatements. Now that it's 2020, his 15 year tax abatements ended, and the supply of Manhattan condos skyrocketed also with tax abatements, the taxes alone increased from ZERO to $2k per MONTH. His 2 condos cannot sell for more than what he paid for it and he did not make cash flow on his rentals.

I had to throw this in because I don't want the readers of this post to think that you can buy any asset class anywhere in NYC and make money. You still have to be intelligent.

The Condo investor should have sold several years before his Tax Abatement wore off AND before the Condo boom. His timing was terrible.

So, keep in mind that you can make a LOT of money here in NYC, but you still need to know what you are doing in order to get Lucky!

@Mo Farraj

Hi Mo.

It's a little counter-intuitive, but what I do is become an expert in only one locality.

One would think that if you have a sufficiently large enough Portfolio, in my case the Assets would be worth around $20 Million, then you would diversify to reduce risk.

BUT...

It's already so difficult to follow all the different changes in neighborhoods, like new developments, Gentrification, zone laws, building codes, etc.

Then Changes to Tax Laws. Think SALT Taxes and also the 199A Business Income deduction.

Then changes to Tenant-Landlord laws.

Then Economics of your locality and State, which is probably the one area that will really impact your profits. Think Detroit here. If you really followed the Economics and dependency of Detroit on Domestic Automotive, you would have sold your Property Portfolio and go to a different town before it went Bankrupt. It was easy to see once you see the decline of the Big Three Automakers over the decades.

The fact is that NYC is diverse in virtually all Verticals, making it actually a safer bet than a one trick pony town like Detroit was back then.

So, as long as I am investing in a City and Neighborhood that is Diverse Economically, then I only need to worry about the the rest of the areas which could impact my portfolio.

I'm an Expert in my very specific locality. I can only conjecture about other areas that are not my own because I am not an expert in the other areas such as Tenant-Landlord Laws.

In General, NJ/CT/PA is part of the NYC MSA. While this isn't directly in the 5 boroughs of NYC, as housing continue to increase in Demand, that particular Economics is like a rising tide where all boats will float.

What I believe will be an issue in the future of all localities is whether or not there is a push to support low income residents and the homeless.

There is a cost to bear for it. Those specific areas that have been largely affected by homeless, will wind up needing to increase their City and local revenue.

In many of these localities, that mean higher property taxes in the future.

NYC would be one of those that would raise Property Taxes, but there is a law that protects homeowners of 3 family an under from increasing more than 8% per year. Again, knowledge is power.

I have a Brother that lives in Long Island in a property worth around $1.2 Million paying over $30k per year in Property Taxes. In contrast, I have a $2 Million NYC Brownstone that pays $5k per year. My Brother's locality does not protect the homeowner from large increases in Property Taxes. Add the SALT taxes and the impact in Long Island is astronomically worse that it was before SALT.

For other localities, you need to be the expert and to understand exactly what is happening and what can happen in the future.

Again, once you can predict what can happen, you can profit from it. You just need to buy the right asset class. In my case, 2 to 4 Family buildings makes a LOT of sense in NYC until recently due to uncertainty in the Tenant-Landlord laws in the future.

Once you can understand the possible future outcome of these areas (Gentrification, Jobs, Economics, Tenant-Landlord, Property Taxes, etc.), then you just have to pick the Asset Class (SFH, multi-family residential, Commercial RE, Medical Offices, Hotels, AirBnB, etc.) that will win in the future.

I personally believe that once you can become an expert in ANY locality, you will be able to figure out what Asset Class is best for the set of areas that will affect profitability in the future.

To answer your question, I'm an expert in NYC and NY in general. I'm not an expert in other specific localities.

The greater MSA is NOT NYC's specific locality. I'm not even sure why they are both included together other than for general economic reasons, but it shouldn't be for Real Estate. For instance, NYC has a lot of Coops (maybe 65% of SFR apts) versus Condos (maybe 35% of SFR apts). But when you talk about the general MSA, Coops economic data are not included. This makes general MSA related data and predictions to be less accurate for NYC. But it might be good for other areas.

What I would suggest is that once you pick a locality, find the best Market Analysis available, usually from a Real Estate Trade News Website. Study it and know as much as you can. If you can get form a Vision of the future given the Analysis, then you can look for an appropriate Asset class that would be able to take advantage of it.

If you can't find a specific Asset Class to take advantage of the Market Analysis, then move to a different locality that may seem easier to determine a winning Asset Class.

Sorry if this wasn't as much help, but I can only advise in NYC.