All Forum Posts by: Llewelyn A.

@Jim Growfer

I think there needs to be an explanation on what NOI is and what Cash Flow is because it seems people are confused at the standard definition.

Let's say 2 Buyers will buy a property, 100 Main Street.

The Annual Rents are $10k.

Expenses are Taxes, Insurance, Heating, Electrical, Water/Sewage and Maintenance. that adds up to $4k per year.

Everyone agrees that the income of the property is $10k minus $4k = $6k per year or $500 per month.

We call that income the NET OPERATING INCOME.

Buyer 1 buys this property all cash. His NOI = $6k per year. He makes $500 per month income which is the same as his "Cash Flow."

Buyer 2 buys this property, but with a Mortgage. Let's say his Mortgage Payment is $500 per month which is $6k per year.

NOW, Buyer 2's NOI is EXACTLY the same as Buyer 1's which is $6k per year.

BUT..... we all have to agree that Buyer 2, while receiving $500 per month in income, gets ZERO because he must then pay the $500 to the Mortgage. Buyer 2's CASH FLOW is ZERO.

This example clearly shows that:

1) the NOI for a property is always the same no matter who buys it

2) The Cash Flow differs because of the Finance of the Buyer. In this example, Buyer 1 has a cash flow of $500/month but Buyer 2 has ZERO cash flow.

This is exactly why I tell my Real Estate Investing Students that

"It's Not the Property that Cash Flows.... it's the INVESTOR that cash flows the Property."

I really don't understand how I hardly see ANY books or Real Estate literature explain this as it's very important.

BTW, the next follow up calculation would be Cap Rate which is your NOI / Purchase Price. You use Cap Rates to figure out which Investment is better than the other.

Eventually, if you go further, you wind up learning Internal Rate of Return (IRR), which really helps you completely understand your investments over the next 10 years.

Hopefully this helps.

@Jay Hinrichs

@Nick Elg

I 100% agree with Jay in regards to Investment Properties and a JOB.

What so many people are failing to understand about Investment Properties is that they are not really INVESTMENTS.... they are a Business.

What you are really buying is NOT an Investment but a Business.

You have to run your business even if you have a Property Manager. You still have to manage the Manager.

I try to stress to Investors that you are better off calling yourself a Business Entrepreneur rather than an Investor once you buy Real Estate Properties.

There are aspects where the Properties are like an Investment, such as rising in value due to appreciation, and there are aspects where it is much more of a business when you have to do extra work like evictions and re-renting.

I consider buying war-zone D properties to be strictly a business because you have to spend a lot of time in it and you generally receive very little appreciation.

I consider buying Prime Property where the management is incredibly easy as more of an Investment than a Business, especially if you can put into place things like automatic rent collection.

When people tell me they want to make a lot of cash flow by investing in Real Estate by buying war zone properties, I have to ask them are they really buying an investment or are they buying a full-time job?!

There are all shades of Gray between Real Estate as an Investment on one extreme and a pure business in the other extreme.

Something to think about. You might be replacing one job for the other. The problem with going to the extreme business end is that you may not like the job you just bought!

@Laura Williams

FIRST, it's silly to talk about these properties as either cash flow or non-cash flow properties.

Currently, they are negative cash flow because YOU have placed Mortgages on them.

HOWEVER, if YOU paid off your Mortgages, they will all cash flow.

If this is the case, WHAT actually cash flows? The Properties or YOU?!

In my opinion, it's the INVESTOR that Cash Flows the Property. There is no such thing as a Cash Flowing Property because it's all about the Investor and what they do with it.

SECOND......

I have Rules on who can give me advice.

1) If the person giving the advice is NOT Wealthier than I am (I don't think there will be more than a handful on here that might be) OR

2) If the person giving advice does not have extensive experience in Real Estate Investing (I have been investing for 21 years) OR

3) If the person giving advice do not invest in APPRECIATING MARKETS (I invest in Brooklyn, NY which will have somewhat similar returns as yours) OR

4) If the person giving advice does NOT have or Does NOT understand HOW to calculate their over all Return using an Internal Rate of Return (IRR)

NOTICE, I used OR so if ANY one of these rules answered YES, then the entire advice will NOT be worth it to me. 

In my opinion, when it comes to someone talking about a calculation of Cash Flow in the one and only FIRST year as their only metric of gauging a Return on Investment, it FAILS completely.

Take for instance, someone that decides to buy a property, invested $100k for down payment and Closing Costs and returns the first year $10k in Cash Flow.

This would be a 10% Cash on Cash Return (CoCR).

HOWEVER, because this calculation does not take into account a future SALE of the property, the overall Return can be BAD.

Consider that, in this example, you buy this property in year 1. Then in year 2, you decide to sell.

You will encounter CLOSING COSTs on the Sale.

If the Closing Costs exceeds the $10k 1st year cash flow, your Return will be NEGATIVE.

Therefore, a Cash on Cash Return is misleading.

What you need is an overall return of which the Internal Rate of Return (IRR) is the most comprehensive.

I'm not giving Advice on your current situation, but I'm trying to help you figure if a Public Forum where you have no personal knowledge of any of the advice from posters are good or relevant. You should not base a multi-million dollar decision on advice given on this board.

What you should do is seek out professional who have VERIFIABLE experience, knowledge and credentials to offer such advice.

There will be residual costs.

For instance, in certain tourist areas like DC's National Monuments and Smithsonian Museums, it probably had a significant impact on the economy in these localities.

There is NO making up for those loses, unfortunately.

The other issues may involve things like Credit Scores and qualifications for a Mortgage, if they were in contract at this time. Obviously, this would be a huge impact on a Federal Worker whose income was suddenly cut and was qualified before the shutdown.

But what do I know... it could all be fake news and really, everyone is partying!

@Christopher Lewis

I think you can turn that Lemon advice into Lemonade!

The advice to get a secure job doesn't mean you are NOT an entrepreneur if you chose to get a secured job!

Getting a Secured job increases our chance of being a Successful Entrepreneur!

That's exactly what I did 21 years ago!

I graduated College, started working in my profession, took the income and used it as seed money for Real Estate Investments.

Without the secured job, I could not have gotten loans or attracted Partners to expand as much as I have done.

After 6 years of working my secured job very hard, I eventually moved my salary up from an entry level of $32k per year to over $150k per year by 2004, investing all the time, and quit my secured job because I was financially free at that time.

HOWEVER, I have taken the skills of my profession, which is Software Development, and have been building a Software business with a Partner in the field.

Being Financially independent gives you the ability to be a better entrepreneur because you don't have to dependent on a job for our next meal! You will be amazed how great that feels and you can really build a business if you so choose.

The Advice to get a secured job is GREAT advice and I fully recommend it, especially if you already are established in your profession (for example, a Doctor). Why throw away all of that advantage of getting seed money which will eventually speed up your way to being an Entrepreneur?

LLew

@Andrew Neal

I have a contrarian point of view close to @Ali Boone fantastic insights!

I have been investing in NYC, Brooklyn, specifically, for 21 years.

If I had EXACTLY that same thought, about selling my property and moving to a lower cost of living place, I doubt I would have achieved the same level of wealth that I have now.

As an example, in the year 2000, I bought a 2 Family home for $140k with $21k down, $7k closing costs. Today, it's worth $1.1 Million. What's even worse, the rents moved up from $500 per month per unit to $1,900 per month per unit.

Is it slowing down? Maybe. In 2014, I bought a 3 Family Brownstone for $900k, renovated it for $375k. Today, it's now worth $2 Million. Rents are approximately double what they were in 2014.

I also had a friend of mine that lived in Manhattan. He rented an apt for $2k per month in 2004. He bought cash flowing properties OOS, specifically in CT. The properties cash flowed about $1k per month.

Last year, which is 14 years later from his purchases in 2004, he had to move out of his apt because his rent is now over $4k from his original $2k per month.

His CT Properties cash flowed the same for the last 14 years, about $1k per month.

BUT... if you considered that his rent moved up another $2k more in rent, the over all effect is that he was losing money.

He is also effectively priced out of NYC and moved to a lower cost area in NJ. Had he bought his property 14 years ago, he actually would have been better off.

Now, granted, this is a very specific case. But I think it has a lesson to be learned.

As an alternative, what about taking out an Equity Loan or HELOC, renting out your home, and moving to the lower cost area, and still buy a few properties with the loan?

That way, if you really don't like your new location, you can always move back.

But if you don't do that, you can possibly be priced out of the very place you live in right now.

Just something to think about!

@Jason Lee

@William Gan

Thanks Jason for the info.

I would like to add a few things.

A lot of Condos will not allow you to AirBnB your Condo. There will be rules much like a coop in some locations.

If you decided to house hack your multi-family, you can always rent out a spare room in your apt without consequences from a Condo board. It's your place, you set the rules.

A reason why I don't buy Condos is because you can always create Condos from your multi-family buildings.

Typically, I'm buying a building between $400 to $600 per sqft.

HOWEVER, in the locations that I buy my buildings, if I were to convert to Condos, I would increase the price to $1k per sqft minimally. In the bigger luxury buildings, these condos go for $1,400 or more per sqft.

There is a lot of upside potential buying a 3 or 4 family building, spending $50k on legal cost of conversion, renovating for upscale with an additionally $50k or so per unit, and reaping the rewards when you sell at the higher price per sqft.

I don't actually look at my multi-family buildings as a building. I envision it as condos.

So a 3-Unit building that I bought in 2004 for $900k, each apt is 1,400 per sqft, is really is $1,400,000 at $1k per sqft. And that's CHEAP in Clinton Hill Brooklyn, for a large 3 Bedroom apt. With 3 Apts in this building, this is a $4.2 Million Sale price once I sell all 3 Condos. NOT Bad for a $900k purchase!

There are very few Condo investments that can give us that kind of upside.

I'm am definitely for Condos, but as an exit of a purchase of a multi-family building.

@Russell Brazil

We definitely are kindred souls!

I find there is no BETTER way to Landlording than to make a positive difference in the lives of tenants who really are in your hands.

If you have happy tenants, then your Rental business runs smoothly and you sleep at night, not thinking about how the tenants are going to find some way to sue you.

I think when you put people first, the money will follow consistently.

I think that's what I do not see enough here in BP. Too many Investors place the money ahead of the Customer, but part of that is the Investment they buy.

If you buy Investments that can only attract unsavory people, then that will be your experience. If you buy GREAT investments that will attract people with high integrity, morals and ethics, then all you need to do is screen out the bad tenants and put in Great Tenants.

Doing it this way saves your sanity and your soul, it reduces headaches and you will make customers (and friends) for life.

I personally don't understand why Investors don't want to do it this way.

@MC Crosby

When I started out 21 years ago, I bought everything in my name and made sure I had good Liability insurance.

I find that the best Liability protection isn't the LLC or Liability Insurance, it's actually how you take care of your property and the tenants in them.

I know ALL of my tenants and they know me personally. While I don't do the day to day management activities for all the properties, new properties I will on board in to my management system myself and leave the older properties with my other managers.

I remember an article I read about law suits. It had two Doctors with different skills and personalities.

Doctor A is really skilled. His bed-side manner is business like and when a patient sees him, he barely speaks with them. HOWEVER, he generally gets the job done accurately.

Doctor B is skilled, but may not be on top of his game. HOWEVER, he is a people person and he knows all of his patience, always asks how their family is doing, how the holidays went, where did you travel on your vacation, etc. GREAT Bed-side manners and his patients really enjoyed being with him.

The article went on to analyze law suits in this example. While Doctor B was not as good as Doctor A, the article found that Doctor A was more likely to be sued for making a mistake and that Doctor B hardly ever go sued.

I think the conclusion is that if you treat people right, people will understand your mistake and see you as a human being, less likely to sue you.

So I followed that mentality with my property management. I treat my Tenants as customers and know them very well. Tenants who have been with me for the full duration of time, 21 years, are like family.

But I'm also like Doctor A. EVERY problem that arises I take seriously and I make sure it get fixed as soon as possible. I do that also because that's what you would do with people you like.

Combine this with my tenant screening process, tenants with 800 credit scores, good jobs, ambitious, etc. provides chemistry and make the management even easier.

The last property I bought with an LLC all cash and I will continue that trend.

As the older properties have their Mortgages mature, we will be putting them in LLCs as well.

Eventually all the properties will be in LLCs, but it's just a natural evolution and it doesn't change the way I manage.

On a tax basis, I don't think there is much of an advantage between having your property in or out of an LLC. You fill out the Schedule E anyway or in a Partnership LLC, receive a K1.

I believe if you are thinking of investing in a property, especially as a house hack where you can provide the best service and have excellent tenant screening, you should not allow risk aversion to stop you.

Just make sure you are well educated and understand how to do your property analysis. But the property and make sure you have proper Liability Insurance.

When you grow big enough, you can put it all in LLCs. 

@Rijm D.

There seems to be some confusion about your product.

If your HELOC are like several of mine, then you have the Credit Line available to use.

When you use it, then you have a choice to lock in the rate as you cannot lock in the rate until you use it!

Example: HELOC line is $100k.

You open the HELOC on 1/1/2019. You take the $100k out and the balance goes from zero to $100k.

You call in and LOCK the balance. The Bank tells you because you are locking in the rate right now, you will be paying Principal and Interest at 4.49% fixed at 120 months.

Part of the payment is Principal. The Principal becomes available as it is accumulated.

If you use the available Principal that is being paid, you will be charged a variable rate.

So let's say over several years you paid down $50k of the fixed rate loan at 4.49%

You now have $50k available in your HELOC Credit Line.

You can then LOCK in the $50k of available Principal a 2nd time, but this would be at the prevailing long term interest rate, say, 5%. However, the longest term available will depend on the maturity of the HELOC.

So you can have 2 concurrent Fixed Rate Locked Balances even though you have only one HELOC.

BTW, you an unlock these loans as well. Simply pay back the remaining Balances and then it becomes available to your HELOC credit line.

I do this all the time. Nothing new here.