All Forum Posts by: Llewelyn A.

@Account Closed

Hi Sarah!

I wanted to give you some food for thought, especially since you are an Accountant and you have probably done a lot of tax returns (assuming you do personal tax returns!) where you may see what price people are buying their properties for over the years.

Let's talk about Tops on a Wave Chart. It looks like THIS:

Notice that when the peak happens, it falls, then the peak happens again, but does not exceed the previous peak.

If you have this in mind, that's not the right picture. Most people, including about 90% of Real Estate Investors, have this picture when it comes to home prices.

They think that if they buy at the top, then it will not exceed the peak, EVER. But we know that is not the true story.

Here is the Case-Shiller National Home Price Index:

Notice that for the most part, the peaks will exceed the previous peaks VERY soon. In the 2008 Financial Crash, this chart indicates that the current peak is around the same as the 2008 peak.

So it took about 10 years from the previous peak to reach the same peak.

NOW... take a look at NYC's Chart:

NYC peaked in 2008 as well.... BUT, by 2011, the previous peak was already reached.

This chart only goes to 2014, but I will tell you that NYC FAR EXCEEDED the previous peek today.

ALL of my properties have at least DOUBLED in price since 2008. ALL.

What I try to tell people on this forum is that if you buy properties in certain Cities/Localities, you can literally protect yourself from a downturn as the recovery from the previous peak is shortened compared to other cities.

This is a chart that includes the WORST financial crisis since Great Depression.

WE are not going to have that this time, I believe.

Buying in NYC protects me against holding a property that will NEVER reach the previous peak and will most likely exceed the previous peak in a VERY short time.

I'm actually like you, I'm risk adverse. So I buy where I know if my timing is not good, it will only be a short time before my timing looks GREAT! haha!

Every one of my properties that I had bought in the 90s and early 2000s look GREAT.... but there are always peaks and throughs.

I buy in Localities where the peaks always exceed the previous peak in with shorter time frames.

I also use my intellect to tell me what deals are good for the future... for instance, buying a property where there will be a train station that will open and take people into the City for work in a short period of time.

I fully believe if you dig deep into education in all ways, you will notice the above and other reasons to follow particular strategies which will offer your protection against market timing as well as a hedge against a bad deal.

Maybe Phoenix is more like NYC? You should investigate by looking as these charts but for your target investment localities.

Something to think about!

@Account Closed

Hi Sarah,

Not sure what your life situation is or where you live, etc.

I think that for those that are completely risk adverse or are the perpetual student, you have to do it in the safest and easiest way possible.

So if it means buying a 2 Family House, renting just one apt and living in the other, it will help.

Getting your Significant Other involved, what ever you need to do to make it easier the better.

I did it this way in my first Investment 21 years ago.

It forced me to buy in a neighborhood that I want to live in for a long time. That means that the neighborhood had to be safe, have some amenities such as a few decent restaurants, reasonable transportation options to work, etc.

It forced me to be a Landlord.

I actually didn't buy my 1st home/investment until I set up the rental as easy as I can get it. My Brother wanted to sell the building and asked the tenant to leave. This particular tenant stayed with my Brother for about 4 years and always paid her rent on time and was a good tenant over all. I knew her history and it was good.

I asked that tenant to be my new tenant for my new building before I bought the home. She agreed and we struck a deal.

That was 21 years ago and I was breaking even on Cash Flow back then.

Today, she is still my tenant which makes it 25 years total that I have known her and her family. I don't think there are many on this forum who were even born then! haha

Rents trippled over the 21 years, we are making quite a bit of cash flow on that property now. The Value of the property moved up from $340k (plus $50k in renovations) to about $2 Million today. The Mortgage is so minute in comparison to it's original amount and it will literally disappear in several years, increasing my cash flow a lot more.

Everything went well for my first investment.

Now, 9 other buildings later, new systems in place, I am a professional. I expanded business in other ways, etc. You will need to become skilled at a lot of things, especially Tenant Screening, Fixing Maintenance Issues, Managing Contractors, communicating with all the parties, etc.

From my experience, if you are generally risk adverse, but you MAY want to get into the game.... make it easy... AND make it good, even if you just break even on a place where you know the location is solid, safe and you love living there.

The worse that can happen even when if you make no cash flow is that in 30 years, you won't have a Mortgage and you are doing GREAT at that time.

Hard to beat, really.

That gets you in the game. You will learn the rules really well over time.

That's when you become a more experienced player and you will get better at this game as time goes on.

That's the way I started out and I really recommend it.

@Mo Farraj

In my opinion, you have to have a lot of GENERAL Business Knowledge. In other words, how to run a business successfully.

Despite the fact that mostly everyone calls these properties INVESTMENT properties, THEY ARE NOT.

What you are buying is a BUSINESS. How do I know it's a Business? Because you normally perform the daily operations of the business and you get BUSINESS deductions such as Depreciation.

Investments like Shares of Stocks do not give you business deductions and you certainly cannot take depreciation on it.

Therefore, the two are different despite the fact these Properties are called Investment Properties!

2nd, you have to know the Market you are investing in VERY intimately.

I know the Brooklyn Market VERY well. So well, that I can go into a property and know that is is advertised incorrectly just by walking around the building.

I also know the rental market extremely well. I know how much each apt can rent and I know each expense.

Not only do I know that, I also can very much PREDICT the rental increases and the Expense increases.

I have a saying, if you can PREDICT it, you can PROFIT from it.

But if you can't predict it, you are shooting blindly in the dark.

One of the things about NYC that I absolutely do is examine the major Real Estate Projects in a target area.

If there are not at least 3 positive developments, for instance, in the Clinton Hill area where I invested in the above example, there were: 

1) Barclay's Stadium and a LOT of other planned buildings called Atlantic Yards

2) The rebuilding of the World Trade centers which would have thousands of high paid employees within reach of Clinton Hill

3) The Navy Yard, which expanded with billions of investments, including Steiner Movie Studios and a whole bunch of other businesses

PLUS A LOT MORE.

Then there were the replacement of "poor" stores, like Dollar Stores and others of that nature with Artistic Coffee shops, eventually Starbucks opened.

There are so many clues that help you that it is soooooo surprising how I keep hearing from people that you can't predict the future... and yet it slaps you in the face and they still think you can't predict it.

I try to tell people that even a squirrel understands how to predict the future otherwise he would starve to death by the time the winter comes and he never buried his nuts where he can get to it!

So, be an EXPERT at Business.... after all, you are buying a business.

Know your location of investment to that expert level as well.

Don't keep your eyes closed because you don't want to do the research that will help you predict the future because you feel it's unpredictable.

Imagine you lived in Detroit 20 years ago. You watched the Domestic Automobiles decline for the next 10 years, but you closed your eyes to the fact that Detroit was 90% dependent on Auto.

How could you say that it was unpredictable?!

Remember that Billy Joel song, "Allentown?" That song was written WELL before Detroit went bankrupt but yet it was the same scenario...... the one industry, in this case, the Steel Mill, went away. And so did the value of properties.

So if you are investing in Upstate.... be a Business Expert and know the Industry incredibly well, because there will only be a few industries that upstate will have.

At least that's my opinion!

There are a lot more DREAMERs than there are DOers.

A lot of people DREAM of being a successful Real Estate Investor.

They claim to be very motivated. BUT, when it actually comes to DOING.... they never pull the trigger.

Even making a small mistake and learning from it is still better than never having done anything at all.

I remember reading about the psychology of happiness when it comes to vacations.

If you break down the vacation into two phases, the Planning Phase and the actual Vacation Phase, the majority of people are happier in the PLANNING phase.

That's because they day dream of a PERFECT vacation where it never rains, the hotel doesn't have bugs or the AC is never broken, etc.

To me, that's like a lot of beginner Real Estate Investors. They are so happy dreaming about being a Successful Real Estate Investor that when it comes to actually doing the HARD work of making it happen they fail to LIVE the Dream. They are most happy in their fantasy of what it's like to be a successful Real Estate Investor.

It's the same for those that want to be a highly skilled professional. For instance, many may dream of being a Medical Doctor.

So they may even enroll in College but when they hit the Organic Chemistry course, it weeds them right out. They don't have the true motivation, determination or discipline to live their dreams.

I have come to accept that fact among my friends, family and students.

@Mo Farraj

Hi Mo!

We are in the same market if it's in Brooklyn and I have 21 years of experience here, especially with 3 to 4 Unit buildings, particularly Brownstones.

Days on Market is just one Metric of a bunch of others that you SHOULD be paying attention to.

What a lot of people in our market don't really understand is that you really need to look deep into a target property and then you might discover the true value.

As an example, in 2008, I identified a 3 family in Clinton Hill which needed a gut renovation and was selling with an asking price of $1.25 Million.

I can't really remember the DOM, but I believe it hit the market about a week or two before I put in an offer.

What the owner and the Listing Agent DIDN'T know was that they were selling a 4 FAMILY brownstone, not a 3 FAMILY.

The Owner didn't realize it or didn't remember had she known that it was converted from a 4 Family to a 3 Family a LONG time ago. It was still legally a 4 Family but was configured as a 3 Family.

It still had 4 Gas Meters which would be used for 4 legal kitchens and 5 electric meters, one per legal unit and one for the common electricity.

The conversion wasn't filed and therefore none of the meters were reduced in number. They just duplexed the Garden floor with the Parlor Floor and kept 2 rentals.

I immediately put in an Offer, $50k for a seller's concession, and had an accepted offer in a day.

When I bought the building as a 3 Family, it appraised for $1.2 Million, which was the listing price and my Contract price.

Right after I got the keys to the building, I added a kitchen to floor that was missing. The kitchen wasn't working because I did not hook up the plumbing.

I went to a bank to re-appraise. I pulled the Certificate of Occupancy, had it certified by the Dept of Buildings, and handed to the appraiser. He appraised it at $350k above my purchase. The appraiser never checked if that particular kitchen had running water, not that it would probably matter.

I then took the $350k out as an Equity Loan and gut renovated the building.

Not a bad return for 2 months listed on the MLS by a prominent Brokerage firm.

DOM is a consideration, but is one of slew of different variables that you should be researching and analyzing, especially in our market.

BTW, I don't flip in Brooklyn either. This property is now worth close to $3 Million today. The total profit is over $1.5 Million in the 11 years I held it, not including the cash flow of over $4k per month today.

Funny how so many Investors think you can't make money in Brooklyn. It's not easy, but if you know what you are doing, there is a ton of money to be made.

In my mind, Real Estate Agents are like the people trying to be Sports stars.

In a VERY crowded field, only about 1% will be extremely successful.

50% will not be in the business in a few years and 49% will wind up making a living but not being that "Superstar".

One BIG obstacle is that Agents/Brokers work on commission. That's really detrimental to getting loans since it's much harder to qualify as a self-employed commission based worker.

It was so much better for me as a previous w2 employee making 6 figures to qualify when I started my RE Portfolio 21 years ago.

Today, prices are MUCH higher and the bifurcation between those who are successful as an Agent is much bigger.

Part of the problem is the higher standard for qualification for Loans after the Financial Crisis of 2008.

Since I am in NYC, I cannot imagine a mediocre Agent being able to invest and the Superstars are way to busy to be Landlords.

If you contrast what prices were 21 years ago to today, the entry to Real Estate investing is WAY different.

For instance, I bought a 2 family property for $140k but it is worth $1.1 million in today's Market.

How can the average RE Agent afford to buy in NYC?!

Even the Superstars will have difficulty here! You will have to be in the top 1% of RE Agents here despite the increase in commissions on a sale due to higher Prices.

Just curious if this is true in other markets? 

This is NYC... the jobs that would have been added would only represent a very TINY percentage of overall jobs.

If Amazon went to say, Buffalo, that would have a HUGE impact.

Given that though, I would hate to be the person that had bought a Long Island City Condo because of the HQ2 win only to find out today that it was rescinded!

That also reminded me of the L-Train Shut down announcement. That too was rescinded!

Really, for any major metro like NYC, you should probably wait until the ground breaks before you buy in anticipation of future economic rewards from a project that is still in it's planning stage.

You may not get the lowest price if the plan actually gets built, but you certainly avoid a possible delay or canceling of these projects.

Better to be safe than sorry!

Maybe I can make you feel better.

NYC ALONE has over 1 Million Rent Controlled/Stabilized apts.

The population of Oregon is 4.1 Million. So we have 1 apt that is rent controlled for every 4 residents in Oregon!

YET.... I've made millions.

What matters isn't necessarily the politics..... it is how flexible your strategy is to change when the politics changes as well.

I like to tell Investment Students, you are buying an Investment Vehicle. You must steer it away from danger.

Either steer it away, or build it so that it can withstand the hurricane that's coming.

@Justin S.

@Dave Foster

Hi Justin,

First, CONGRATs on having a Successful person's problem! haha!

I think the argument would be whether or not the profits for your portion of the Sale meets $500k. That might be determined by what percentage of the building you occupied. I'm not that familiar with that calculation.

There are a bit of questions that are not addressed to know if you would qualify for the full $500k Home Exclusion on Capital Gains, which is why I mentioned Dave Foster on here. He can address them for you.

If you can qualify for the $500k exclusion, it sounds like a good strategy which you can continue to do every time you qualify for it.

You may have inadvertently stumbled on a really good strategy!

I used to know an Architect that bought several properties. He lived in them while renovating them at different times. He was able to take the Capital Gains Exclusion several times and I think that's a really good way to do it!

I'm going to do something a bit similar as I would actually convert my buildings into Condos and sell them at the right time.

For higher scale renovated apts, especially in the new developments  along Atlantic Ave and Vanderbuilt Ave, these apts have been listed around $1,400 per sqft.

There are so many ways to make money in your situation, you will just have to pick one.

Either case, that's a problem for the Successful person!

@Jim Growfer

I don't see anywhere where you mention the Purchase Price, so we cannot calculate your Cap Rate.

HOWEVER, we can guess at it since you think your Cap Rate is 15% and you mentioned that the NOI which is BEFORE we include Debt Service is $75k, therefore, the purchase price would be $500,000.

15% Cap Rate = $75,000 NOI / $500,000 Purchase Price

Is this a good Cap Rate? It depends. If similar properties in the same locality which are experiencing the same risks (quality of the tenants, crime in the neighborhood, condition of the property, etc.) are selling for a higher Cap Rate, then you are over paying.

If others are going for a lower Cap Rate that is similar to yours, then you have a deal!

If you find that your Target Property is selling at a purchase price that is too low a Cap Rate compared to other similar properties, then you need to negotiate a drop in purchase price which then raises the Cap Rate. Find out what the Purchase Price for your target property will have to be to match the Cap Rate for similar properties and you can make the argument for a reduced price.

Does that make sense?

Nevermind... I see you are using $500k as your purchase price since I just looked at your other postings.

So yes, figure out the Cap Rates on the other comparable properties, particularly the ones that already sold versus the ones that are listed.

Do your homework so that you get a good deal!

BTW, I'm not a Commercial Real Estate Broker, so I'm just giving you suggestions from what I know I would do. There are a few Brokers on this Forum that you can try to bring into the conversation.