All Forum Posts by: Llewelyn A.

@Andrew B.

Your description for an Investment that appreciates, giving you an UNREALIZED GAIN IS true that you don't have to pay the IRS a TAX because you have NOT sold, IS IN FACT, AN ADVANTAGE!

If you really think about it, a the loophole that you don't pay the tax on a HIGHLY Appreciating asset until you Sell, which could be FOREVER, if you don't sell until you die is INCREDIBLE!! Wow... I cannot even tell you how fantastic this is!

Here is a REAL EXAMPLE:
In the year 2000, I bought a building for $140k with 15% down and some closing costs for an out of pocket investment of $28k.

This year, comps tell me that I can sell that property for $1.1 Million here in Brooklyn, NYC.

The unrealized gain is $960k.

Just to put some calculations here, the tax to the IRS alone, not to mention the State and local tax, would be 20% x $960k = $192k. Is that INCREDIBLE that I don't have to pay that tax?!

What makes this even MORE INCREDIBLE is the fact that I can then borrow AGAINST that Equity.

Now, you can say it's dangerous, but only if you invest in Properties which do NOT hold onto it's value for the long term. NYC, LA, SF are some of those Cities.

I would say that if you really want to supercharge your investment portfolio, then buy in incredibly stable to increasing markets where your unrealized gains can help you supercharge your portfolio.

If you really cannot be open-minded to this strategy as many other can't, that's really a matter of being closed minded.

Another issue I have is that just because you may have a property that has cash flow NOW does not mean it will ALWAYS and FOREVER have cash flow.

I have know quite a bit of investors that lost their shirt once the Cash Flow dried up, especially in the financial crisis. On a personal level, one of my friends were buying in C/D neighborhoods in Sarasota, FL. He lost all of his properties mainly because rents plummeted, his houses were also older, and renters shifted in to other vacant properties that were much more updated.

Contrasting to that, my highly desirable Brooklyn, NYC properties didn't miss a beat during the crisis.

I also wanted to add that another Investor friend of mine bought a SFH Investment in East Germantown, Philly. Even though he was doing section 8 housing, over the years, he could not get decent tenants. He had to do at least 3 or 4 evictions and had months and Months of vacancies. He lost that property a few years ago to foreclosure.

Not only that, I can also do a 1031 Exchange to much bigger, better properties, if I can identify one. Without having to paying the tax on that exchange.

If the readers of this post don't at least consider taking advantage of the BEST tax loophole there is for an Investment property, they need to seriously open their minds to this concept. It is by FAR one of the best Tax Loopholes you can ever get.

@Bruno Araujo

I'm a believer in comparing various investments by using a series of Cash Flows over at least a 10 year period of time. Then you boil it all down to a IRR Calculation.

This is a GREAT approach and I believe you are on the right track in your description above.

We call these projections pro-forma and it becomes the centerpiece for a business plan.

There needs to be some analysis on the actual manager of the projects, however. There is risks associated when the numbers work out, but the management has no experience.

In other words, if you show a comparison between an Investment of a JV among Partners versus buying into a syndication, a comparison between experience and knowledge of the management of the two investments should be made.

In fact, I used to put together pro-formas that compared Real Estate Investing to blue chip stocks. These spreadsheets have proven to be highly accurate once you made good assumptions.

I will say that one of the reasons why I'm a Real Estate Investor versus a Stock Investor is because of the Amortization of a fixed rate Mortgage. The fact that a fixed rate Mortgage Balance is reduced over time is a mathematical guarantee. 

As long as the quality of the tenants are available to the location of the investment, you were certainly able to capture the profit from the Amortization of a fixed Rate Mortgage.

Over the decades, my pro-forma models have proved this to be a very compelling reason and time has proven it to be both accurate and profitable.

This Exercise will teach you a lot about Investing in General and you will have a huge advantage over someone that only knows a single way of analyzing just one specific investment or using one specific calculation.

Continue the good work!

@Cameron Price

I happen to agree a lot with @Irina Belkofer that if it's really about getting a good understanding of the rules, how they are played and even WHY it's there in the first place?

I asked that question to myself plenty of times.

So I started to really try to get a good handle and after a while, it really started to make a lot of sense.

I actually started with Investing in Stocks. To do that, I really wanted to understand all the financial statements, Income or P&L, Balance Sheet and the Cash Flow statements.

That lead me to further try to understand what the heck is Depreciation and why is it there?

Well, I tried to first imagine what would a company report if there was no such thing as depreciation so that everything was an expense.

This is what it will look like for a brand new limo company:

Year 1: purchased Limo for $50k, income generated $10k

Year 2: income generated $10k

Year 3: income generated $10k

Year 4: income generated $10k

Year 5: income generated $10k, sold the Limo for $2k

So, without depreciation using a simple layman's analysis without depreciation, it looks like this:

Chart 1

--------

Year 1: Loss of $40k ($10k income minus $50k capital expense)

Year 2: income of $10k

Year 3: income of $10k

Year 4: income of $10k

Year 5: income of $8k

Well....... that may be the income.... but is it really? It really looks all over the place.

BUT... let's say you used the IRS depreciation schedule to depreciate the asset in 5 years so that's a $10k expense for depreciation over the 5 years.

So now it looks like this:

Chart 2

---------

Year 1: Break Even ($10k income minus $10k depreciation Expense)

Year 2: Break Even ($10k income minus $10k depreciation Expense)

Year 3: Break Even ($10k income minus $10k depreciation Expense)

Year 4: Break Even ($10k income minus $10k depreciation Expense)

Year 5: Loss of $2k ($8k income minus $10k depreciation Expense)

So, if you look at the Non-Depreciation list of Income and the depreciated list of Income, which one actually makes more sense?

To me, the 2nd chart which tells me the business is making ZERO income over the 5 years seems more right than the first chart.

Just think of Year 2 to year 4.

In Chart 1, you would think this is a healthy business with $10k income for those 3 years.

BUT, in Chart 2, it tells you that the business actually made ZERO INCOME!

Which one is more accurate?!

I, for one, pretty much accepted the accounting rules and see the logic in it. It really helps me to understand the health of a business. Or at least I believe I do! haha! It's complicated but I believe in thinking things out first as if it didn't have the tax rule and then see if it makes better sense with it.

Recaptured depreciation will make sense once you realized that if you take more depreciation than you were suppose to, and you won't know that until you sell the asset, you will need to pay it back. That rule makes sense as well once you get into it. But that will be for another discussion!

@Amit M.

I have been creating my own software in order to scale each part of the Real Estate Business.

For instance, I currently purchase properties with Partners.

Partners add a huge amount of complexity to a business, especially when it comes to Transparency and necessary reports that go along with that. 

For instance, one building might have 4 partners, call them P1, P2, P3, P4.

I expose through online reports a bunch of different reports such as:

- Taxable Income for the Year which you give to your CPA

- Rents Collected including which tenants were late

- Maintenance tracking and which Contractors have completed each job and their rating

- Bank Transactions so you can see EVERY single transaction for Partners who want to perform their own Audit

etc.

NOW, the complexity happens when we mix and mingle Partners.

So, let's say we have 2 more new partners, P5 and P6. These two partners were recruited by P1 and P2 to purchase a building so that the building is owned by P1, P2, P5, and P6.

The scenario looks like this when any of the Partners log in:

P1 and P2 can log into his account and will see ONLY the reports for Building 1 & 2

P3 and P4 can log into his account and will see ONLY the reports for Building 1

P5 and P6 can log into his account and will see ONLY the reports for Building 2

It also gets more complex than this as I have teams for managing buildings. I can create Branches such as NYC Branch with a set of Managers and Contractors AND the same for say, Philly.

None of the Managers will see each others info in the same way the Partners cannot see building info except for their own buildings.

Not only that, but it is accessible on any device, including your cell phones. A Building Manager can get a service call and log it in even if he is not in the office. In fact, usually, a tenant will tell a Contractor about another problem while the Contractor is assigned and is fixing something in the apt. The Contractor can then log in the problem for us and take pictures at the same time.

Anyway... this is stuff for another topic! haha! It goes on and on... for instance, I'm now automating door locks, lights, and cameras with smart technologies. These will help with maintenance as I can watch the Contractors perform the fix remotely. I can also detect leaks, etc. So many ways you can make this stuff work for you.

BUT... by making these systems scalable, I will either sell the software to a much bigger firm OR I will scale my own Property Portfolio when I'm ready for that.

I look at my current portfolio as a stepping stone to a much LARGER business to come.

If I exit Owning Real Estate completely, I can just building Real Estate Software or own a very large Real Estate Management company.

There are so many routes to building businesses that I feel I can take any of those routes if one of them suddenly has a road block!

@Vito DiIenna

While I have not had to get a Letter of No Objection myself, if I had to do it, I would go right the the DOB, go into the Office that you can get an official Cert of Occupancy and ask them what is the procedure to get the letter.

Normally, you will need to provide evidence. IF you try to obtain it without a skilled Expediter who has experience getting one, you are certainly not putting your best into attaining it.

That being said, I have known some expediters who are supposed to be really good make mistakes or don't have the proper knowledge either. So be careful and make sure you interview the Expediter and that they have had success in obtaining the Letter of No Objection.

As far as evidence that you need to gather, look up your buildings TAX Class.

You will find it here: Building Information Search

Here you will see something that looks like this:

NOTE that while this is a Dept of Buildings Web Portal, what I have circled in RED is the Department of FINANCE Building Classification.

You may not have a CofO, but the Dept of Finance maybe taxing you as a 2 Family. That should be used as supporting evidence that your building IS a two family and that the City knew about it, etc.

A good Expediter will be able to help you give the right evidence and put together a package to submit to the DoB.

@Tanya F.

Hi Tanya! I'm glad there are others who can give a different view on RC than the majority.

I do think that in very dense Cities, like NYC, there is a fundamental problem with implementing RC.

I think there is no "if RC is done right" for large, very desirable Cities. Maybe for large Cities that may be on it's way down where there is no problem with Vacancy shortages. But if they have NO Vacancy  shortages, why would they need RC?

You are absolutely correct that we should support our Artists like your Mom, and other classes of Citizens that contribute to our great diversity pool,

HOWEVER, there are very big problems that won't happen until much later, most likely decades from now.

An example is when a family gets the benefit of a RC apt, say a 3 bedroom. Then over a few decades, the family naturally reduces their utility of that 3 bedroom apt. For instance, parents with 2 or 3 children who needed the 3 Bedroom apt, where over the decades, the children grew up, married, moved out, and then one of the spouse's passed away.

We don't see this as a problem when we first take advantage of RC, but it is a VERY big problem 2 o 3 decades later.

In NYC, you are required to downsize your 3 bedroom apt to a studio or 1 bedroom if your family has also downsized. BUT... while this is in the RC laws, it is NOT enforced because other tenants come to the rescue of the "victim being pushed out of her apt."

BUT..... in a City where the waiting list has reached decades for a family to have a decent sized apt, it is a tragedy that a family that could have an appropriate sized apt cannot because of the big shortage of large size apts. Unfortunately, if a person who lived in an over-sized apt their entire lives and have an attachment to it, it is seen as very CRUEL to ask them to move to an appropriate sized apt.

There are MANY types of these kinds of issues, human issues, that makes RC fail in the future. It's like a slowly spreading illness that you did not realize until it become too late.

There are many studies that show how problematic this is in desirable Cities. I think you may agree that vacancy rates for large cities with RC is a big problem or that it contributes to low vacancy rates which increases the rent for those who were not lucky enough to benefit by having one of these RC apts?

Here is an article on Stockholm: The city’s queue for rent-controlled housing is so long that it’s being considered by the Guinness Book of World Records. On average, it takes nine years to be granted a rent-controlled property – and that jumps to two decades in some of the most popular neighbourhoods.

I think if RC really did work in the long run, MANY of us Landlords,  would certainly be in favor of it.

I would have to say that if I were a tenant and was asked if it's ok to support a specific group, say Artists, but in about a decade there will be a shortage of apts that the Artist can help solve by downsizing to a more appropriate apt, I would be very ok with that. BUT, knowing human nature and how greedy we all are, People who are in RC do NOT downsize when appropriate. What they do is live life without much thought about the other poor family that needs that large apt regardless if that apt's only purpose is to have 2 rooms full of family heirlooms and not housing children.

BTW, I do have lots of Artists living in my apts since I own a few buildings that are very close to Pratt Institute in Brooklyn. I don't really treat them differently but if you are my tenant, you will be treated really well, no matter if you are an Artist, IT worker or Lawyer.

I don't really raise my rents up more than about 3% per year even though I can. My long term tenants are always under market rates regardless.

But I don't really know if there are any big Cities that are a success story.

Does any know of any big, highly desirable Cities that has successfully implemented RC?

Just curious.

@Amit M.

This is a general rule for Rent Regulated buildings in NYC:

1) Below 6 units

2) Have not taken advantage of tax benefits that specifically causes the building to join the Rent Stabilization pool.

In 2008, I bought a new Construction of a 3 Unit building that applied for the tax benefit that would have made it Rent Stabilized. I terminated the application despite having very favorable tax benefits. I knew that in the future that rents are more likely to be higher, probably substantially. Limiting that future income for this benefit was not a good trade off if you were thinking of long term buy and hold.

For my exit strategy, I have already laid the ground work by becoming a RE Broker and starting a Brokerage Firm.

If I suspect 4 family and under will be scrutinized for RC, I'll immediately apply to convert to Condos or sell the buildings myself through my Brokerage Firm.

I may even convert a few buildings to single family as there are so many very wealthy NYers looking for BIG homes in good Brooklyn neighborhoods. These I will wind up making up for any loss, hopefully, in the others.

@Amit M.

For my portfolio of properties, which are NOT rent regulated at all, it will remain unregulated under the new rent control laws.

These laws were made to stop the leakage of rent regulated apts from leaving that pool. Basically, there was a push to use loopholes to deregulate apts, for instance, once an apt reaches a certain monthly rent, say, $2,500 per month AND the tenant's income reaches above $250k per year, the Landlord was able to deregulate the apt. Another example would be that a Landlord would conduct Major Capital Improvements (MCIs) and just that to increase the rent, which then can be a burden on a regulated tenant. From what I understand, they can no longer raise the rents substantially with a MCI. Etc.

It does NOT add properties that were unregulated into the regulated pool in NYC. NOT YET anyway. However, as others from a different County mentioned to me in a different thread, Municipalities can opt-in to adapting the new laws if they don't have it already. I'm not sure about that, but it was mentioned to me. That's where it will be extremely bad.

@Puri Indah pointed out to me, however, that in 1994, SF pass a law to make even 2 to 4 family properties rent regulated.

Prior to 1994, Large Landlords who were affected by Cali's rent regulations started buying 2 to 4 family buildings. They probably boosted up the price of these smaller multi's until the 1994 laws took into effect. I suspect this will be the same and will give me a very good exit point if I feel that NY will regulate even the small multi's.

While NY is leaning VERY LEFT.... I'm hoping we don't get that far left otherwise I'm going to have to execute my plans of take the money and run!!!!!! Probably by converting to Condos and selling it out quickly, or just making the buildings in the very large single family homes.

If NYC does NOT pass regulation laws adding my properties into the pool of regulated apts, then my buildings become a VERY desirable building.

We already know that 4 family buildings that are unregulated will be worth even more than 10 unit buildings that ARE regulated.

Also, there were some rules that were passed overall that might affect ALL properties, including unregulated apts. For instance, I believe we can no longer use rent history in our criteria to evaluate a tenant. That means we should not be using the fact there is an eviction in a tenant's history to make a decision.

SO.... that will make Credit Reports even more important. I already have a high threshold of 720 or above to qualify. Now I might boost it up to 750. There are plenty of qualified tenants with high Credit Scored in my areas of investment.

While it's not a guarantee, a High Credit Score GENERALLY (note, not always) will generally tell you two things, that the tenant pays their bills AND that they probably have not been evicted. So this is a sort of workaround.

Either case, those with Rent Regulated apts will be much worse off. But on the other end of the token, those with market rate apts, should not only be fine, but do very well unless NY then look to regulate even these small multi's.

Again, there is an exit strategy for me if that happens.

Looking at other historic scenarios, Cambridge deregulated entirely. We know that after the deregulation, yes, apt rents went up, but that's mostly due to improvements. We also know that the area's crime rate plummeted.

I suspect this will be the same kind of situation.

In one of my areas of investments, Ditmas Park, Brooklyn, it's mostly single family homes with a few multi's. I own 2 buildings that are 3 family units here. This area will increase in price and desirability as a direct result of the new laws.

If I convert these 3 family buildings to a single family houses in my exit strategy, it fits into the characteristics of the neighborhood as these are Victorian houses. I'll still be fine in this regard.

Regardless of the outcome, I have to prepare for ALL outcomes. But for right now, not only is my portfolio safe, but is looking quite promising.

However, being prepared never hurts.

@Jay Hinrichs

I don't believe rent control laws is about "Politics" but more about democracy and that the majority dictates what really gets passed by politicians that follow the will of their constituents.

Ever since the financial crisis, there is an ever increasing population of renters.

It is inevitable that the Renters will vote for candidates who will pass laws in their interest.

I see the current trend continuing as the amount of Renters increasing over the years.

We as Landlords understand that the surest way to destroy a city is to enact Rent Control laws. I think there are too many examples to name, but some European Cities, Stockholm comes to mind, have waiting lists that are 30 years long for a rent controlled apt.

The other problem is that eventually, the apts will become underutilized and cause the market to become inefficient.

To root of inefficiency stems from a large family that moves into a very large rent controlled apt. Over time, the kids moves out, a spouse passes away, and there may be just one person in that very large apt paying very little rent and using the rooms to store items of sentimental value to them.

This then denies another large family the use of that apt because in general, no one wants to move from their home they have been living in for 30 years or more.

This problem is addressed in NYC Rent Control Laws since it was in place. We actually have laws that state that you must move to a small apt should your family members leave. HOWEVER, the tenants tend to rally around such cases to protect the person who needs to move to a more balanced apt.

This causes more than a 15% to 20% inefficiency in the housing Market here in NYC.

Either case, if Rent Control had ANY way to make life better for the tenants in general, all parts of the law, especially those that forces a tenant to downsize, would have to be enforced. BUT, it is NOT enforced because of questions on cruelty to the tenant who lived there all their life.

The way I look at it, until we take out the human factor, Housing will continue to become more inefficient. However, the industry that has the most impact to humans IS housing. So it is inevitable to play out badly.

The only way rent control can have a chance is if the tenants themselves understand that enacting these laws will only benefit the small amount of tenants that win the "Lottery" to say in their apt for a long period of time reaping the benefit and denying a more efficient usage of it to a more appropriate family.

Human greed comes in and the tenant will eventually want to have their interest first before the interest of another tenant.

The real problem is that the tenants are MUCH more numerous than the Landlord and this trend will be continuing. At the same time, if a tenant is asked "Would you like your rent to be the same or raised in a very reasonable way for the rest of your life?" There is no doubt that tenant is going to say YES and will not think about the future of other tenants.

It's a short term immediate gratification thing that all tenants believe they will get, but don't really understand enough economics to know that they will hurt all the non-regulated tenants in the future.

I play on this is that I have been buying UNREGULATED Buildings in one of the most regulated Cities in the Country, NYC. Knowing that it is inevitable that rents MUST rise over the long term under rent regulation, then I can reap the market inefficiency. For instance, my unregulated 4 Family is worth more than a 10 or 20 unit building that is under regulation.

IF the laws begin to affect my own properties, for instance, they now start looking to regulate 4 Unit buildings and under, then I will immediately convert to condos.

To the point of your topic, "Rent Control Sweeping the nation"..... makes a lot of sense as the Renter's Pool continues to increase more and more.

This is not about politics, it's about democracy where the majority of the voters do not understand the underlying issues and are shortsighted, causing long term problems. Therefore, the politicians will enact laws as according to the majority EVEN AGAINST THEIR OWN SELF-INTEREST!

@Puri Indah

I think SF has the most EXPENSIVE housing in the US.

I didn't do the research, so I'm curious.

Is every building, from 2 Units and above, is rent controlled in SF? Are there any exceptions?

What about Condos? If you invested in a Condo, are those also rent regulated if you used Condos as rentals?

If NYC starts discussions about regulating below 5 family buildings, I am going to convert all my buildings to Condos and just sell them out. But this has not been a thought, at least not yet.

I'm also curious, did you experience having a non-regulated building or apt that had to then become regulated in SF?