All Forum Posts by: Llewelyn A.

@Alejandro Lee

I have bought 10 multi-family buildings with about 7 different Partnerships, 10 total different Partners.

As long as the deal is fair to ALL Partners, the MOST important thing about the deal is the Partners.

A Good deal with bad partners is a VERY bad deal. So you can imagine what a Bad Deal with Bad Partners would be like!

In order for me to go into Partnership with ANYONE, whether or not I know them personally, I do what the Bank does to Borrowers.

The reason why this is important NOT only for knowing the quality of the Partnership, but it also improves your chances of getting Loans as one or all of the Partners may need to personally Guarantee the Loan, and that implies Credit Worthiness.

So what does the Bank do?

1) Know the Income History, verify it through Tax Returns and Pay Stubs

2) Know the Credit Score and Reports. I don't go into Partnerships with people who don't consider financial responsibility a priority.

3) Criminal Background check. Don't be surprised when your Partner runs with the money and then later on you discovered he has a criminal background.

4) Make sure your Partners are not just borrowing the money to get into the Investment. If your Partners haven't saved their money, I would want to know WHY after all these years have you not been able to save enough to get into a deal?!

All of these things the Bank does.

Another reason to consider doing this, if your partners refuse, would you still be a partner with them? I won't.

After all of those checks..... good or bad, at least you got the story on your Partners.

Then, if you choose to go ahead with the partnership, that is when the fairness of the Agreement will come into play.

Just my opinion and how I do things.

The RAREST Skill is the one that separates the Average Investor with an Average Return from the Investors with the BEST Returns.

It's the Skill on how to recognize an Opportunity that will give you YUGE Returns far into the future!

I can tell you that those who missed (Friends and Family in particular) the same opportunities that I have bought for the last 21 years, are not only regretting that they did not join me, but are now also priced out of the market.

@Mike H.

I completely understand what you are saying about those that don't use an over all 10 year pro-forma business Plan with an IRR project need to be consistent in their strategy mainly because there isn't much else calculations like Cash on Cash Return calcs will let you do, then you can ignore the fact that it's the INVESTOR that cash flows the Investment.

BUT, when you use a comprehensive 10 year pro-forma IRR Projection business plan, there is NO set Strategy other that what IRR number will you pull the trigger because EVERY strategy can be modeled.

That's the whole Beauty of the IRR! You model everything strategy and you pick the BEST one! You can do it even on a per Investment and a per time frame as well! So you may change your mind in a boom market and do one strategy, or move on to a more cash flow strategy if you feel you need that safety, it doesn't matter, it can all be modeled.

You put EVERY single variable into it, from Appreciation, all the Cash flows over 10 years, your Renovations, the Mortgage payments and reductions, you can even put in buying another investment with your growing equity!

The world of financial modeling is at your fingertips.

BUT, if you are very restricted to a certain strategy, then when someone like me comes in and makes a killing on an investment using such a calculation, what I'm saying is that don't call it lucky, especially since ALL my investments are returning such huge returns.

For an example on what I tend to make, take a property I bought in Brooklyn, NYC in the year 2000.

The purchase price as $140k, I put down $21k, closed with $6k, so out of my pocket was $27k. I rehabbed it during the years for a total of $35k.

Today, I can sell that property for $1.1 Million.

It also cash flows more than $2k per month..... PER MONTH.

What is the return like in the kind of simple CoCR type calculation, what we call simple interest calculations?

To do simple math, it looks like this:

Investment = $21k down + $6k closing + $35k rehab = $62k invested.

Sales Proceed = $1.1 Million Sale - $75k Mortgage remaining balance, $40k closing + 3% Commision (I am a Broker so I keep the listing commission) = 

1.1 Million - $75k - $40k - $33k commission to buyer broker = $952k PROFIT.

When I calculate the simple ROI from this investment, it is profit / Investment = $952k profit / $62k invested = 1,535% ROI over 18 years. On a per year basis, it is an 85% annualized ROI......

And this is without including huge cash flow!

Now, just about everyone will think this is lucky. But there are 2 requirements for luck:

1) You have to be prepared to be lucky.... in this case, have the money for the investment

2) You have to recognize the opportunity. There were MANY economic reasons why this particular property was going to do well in the future including one of the factors that Brooklyn was Gentrifying Rapidly!

Most people will be prepared, but not recognize the opportunity, therefore, cannot get lucky in this way.

I have done this 9 times already in 21 years. Each property has made over $1 Million and some are profiting over $2 Million.

I just closed on a $1.5 Million purchase on Friday. Most will not recognize it as an opportunity from what I have been reading on this forum. YET, I'm very certainly I will make at least a Million in 10 years CONSERVATIVELY.

So I perfectly understand the restrictions in your calculations. I, on the other hand, am perfectly ok with using my more comprehensive calculations to handle a LOT of variables, because it helps me recognize the kinds of ROIs I have been returning for the last 21 years.

There is nothing wrong with your way of investing.

I just don't want people to suggest that taking into account all the future cash flows is somehow WRONG. It is NOT wrong. In fact, it is very RIGHT.

That's the whole beef about this thread. I ask people to be open minded not because of only the Math which should not be disputed, but also because I put my money where my Math is and it paid me back phenomenally.

I will probably inspire only a few of the readers because the work is hard. But that's also ok. I leave it up to the readers to see if they wish to at least consider it.

@Jeff Schechter

Just making sure we understand each other, I'm neither preaching cash flow NOR Appreciation, it all depends on your strategy.

BUT, saying "No other Investments but Positive Cash Flow Properties will make a significant profit" is just wrong and I and others have proven it mathematically in this thread.

If you wanted to make a comparison on the return of our two different strategies, we couldn't do it on a Cash Flow ROI basis alone.

Over the several decades I have been investing in Brooklyn, NYC, each of my properties have tremendous cash flow after all these years.

For example, I bought a building where the average rent was $500 per unit in the year 2000.

Now, that same building rents each unit for $1,900 per unit.

You can imagine the the increase in cash flow if ALL of your properties Quadrupled in rental price.

Adding to this, the value increase was from $140k in the year 2000 to what it is worth today at $1.1 Million.

If we were to do a comparison, and I am not proposing we do so, we cannot use a Cash on Cash Analysis. It would be inadequate to do the analysis.

HOWEVER, you can absolutely use an IRR calculation and compare the two strategies over the same time frames.

The point is that if you do the IRR for targeted properties with all kinds of variables, you will be able to take into account any kind of strategy, regardless if it is high cash flow and zero appreciation, medium cash flow and medium appreciation, or zero cash flow and high appreciation.

My posts are not about which is better. It's about how to do a comprehensive calculation and if it isn't done, then you cannot come up with a conclusion which one would have been better.

@Jeremiah Mon

Rich Dad may have changed his mind in May 2018. Here is what Kim Kiyosaki wrote:

"

1. Appreciation. If you buy a property at the right time (when prices are low), and the value increases, and you sell at the right time, then you will make a profit. Sure, that may seem like a lot of “ifs,” but I assure you it’s far from a rare occurrence. If you’re in it for the long haul, you’ll often be rewarded—savvy investors will tell you that the longer you keep an investment property, the greater its value will grow. Real estate almost always appreciates in the long run. When searching for properties to invest in, I’d suggest researching the appreciation potential."

Here is the link:

3 ways to make money from real estate investing

I'm not really sure he is thinking about Appreciation as "icing on the cake" if Kim says "I assure you it's far from a rare occurrence."

@Michaela G.

Whatever I have said to cause you such animosity towards me, my apologies! Honestly! That was not the intention.

Let's just say that all of the Universities that have financial degrees, other professional degrees such as CCIM, CFAs, etc. all need to understand these calculations.

It's a requirement for these degrees and designations.

What I am saying is that learning the IRR is really NOT hard at all, whether or not you believe it will help you, the evidence does point to the ability to have this particular calculation as one of the best tools in your financial tool box.

The problem here is that if those of us who really understand the calculation of IRR can clearly show that Positive, Negative, Neutral cash flows, Zero, Negative or Positive Appreciation, etc. can all be taken into account with one calculation and regardless, it can be proven mathematically that there are enough scenarios to dispute the theory that only Positive Cash Flow Properties are the safest and highest returns for an Investment.

I'm hoping that there are at least a few people reading this thread will want to investigate it, but having people say that HEY... I didn't need it and I'm successful, while it may be true, sort of deflects from the other truth, which is that the IRR will help the vast majority of people if they only had a Cash on Cash Return as their only calculation in their financial toolbox.

It is sort of like when someone says, HEY.... I'm going to ignore the recommendation to stop smoking because I know a relative that has been smoking for 80 years and he's the healthiest person I know!

If we go around telling everyone that "fact", then you wind up with a lot of people who could have benefited from NOT smoking. BUT, they ignored the advice because of an anomaly.

That being said, even the 80 year old chain smoker could have benefited by NOT smoking, despite being healthy. If that 80 year old smoker understood that he himself is an anomaly, and just said, HEY... I'm an anomaly so don't ignore the statistics, maybe there would be others that would have said, you know what, I shouldn't use that 80 year old as my excuse not to do it.

Does that make sense at all?

@Mike H.

Hi Mike,

Thank you for letting understand your business scenario and I of course agree that you can and should continue with a sound business plan the way you have done it and have proven to be successful.

In my past postings, I have explained MANY times that Cash Flow is not a characteristics of the Investment. If you were to buy all your properties ALL cash, it would cash flow MUCH MORE.

I won't get into details, but, if you take Property A which you can buy 100% Cash, it will cash flow, say $500 per month. Now, if you can buy Property A with a Mortgage and ZERO cash in it to you, It may be NEGATIVE cash flow by $500.

SO wait.... is this a Cash FLowing property or a Negative Cash Flowing property? It's NOT the Investment that Cash Flows... it's the INVESTOR.

It's really difficult for me to break the psychology that people seem to place Cash Flow on the Investment. But that's what it is and I know I cannot ask people, especially on this forum, to open their minds a bit and think of it a bit differently. Maybe a few people will understand and maybe you do as I explained it.

All I'm asking is to being try to think that if it is the INVESTOR that Cash Flows the property, then the Negative Cash Flow is a CHOICE that the Investor makes.

If an Investor choices to have a negative cash flow.... say buying LAND that has no building on it but he will build one some day, having the initial negative cash flow is OK. But there has to be a reason.

The other issue I see that is completely set in your mind is this unchangable cash flow projection.

You have made an assumption that I have NEVER experienced but maybe it's normal for you to experience within your properties?

I have NEVER experienced an Investment where the Cash Flow from the very first calculation of Cash Flow remained EXACTLY the same throughout my entire holding period, even if it's short or long as some of my properties have been held for over 21 years.

I cannot imagine that all your properties are EXACTLY the same Cash Flow since the first day you calculated it.

Because mine are NEVER the same cash flow, I use the IRR to calculate the FUTURE CHANGING Cash flows as best as I can so that I can get a really accurate picture. All of us using IRR do the same.

But for some reason, the majority of people on this forum seem to think that the calculation of Cash flow on Day one will be the exact same for the next 10 or 20 years.

Either that, or they are really WAY too lazy or just not interested in understanding how to do calcuations where the Cash Flow changes. I'm not sure what the issue is to understand how to do this. It will definitely make you understand not only your investment much better, but other Investors like myself.

If you are not open minded to a negative cash flow for any reason, then we will have to agree to disagree.

@Jim Costa

I want to really thank you for getting into the details!

I do want to point out that there are reasons why I want to keep the discussion simple and not go into a Monthly IRR which will wind up becoming a much larger Math discussion.

I know from teaching classes for the around 10 years to Educated Adults, when it comes to Math, especially complicated financial math, despite the fact that it will make them millions, their eyes glaze over and fall asleep. That's why books on IRR such as "What Every Real Estate Investor Needs to Know about Cash Flow..." will NEVER be a #1 on the best seller.

People want to hear about what their lives could be like. The want to dream about being a successful Real Estate Tycoon. But when it comes to the hard work, that becomes a road block for them. I would rather EASE their way into the Math since most people have been out of school for many years if not decades.

There is another reason why using a 15 year IRR formula should be considered over a 180 month formula has to do with the fact that we are talking about PROJECTIONS, not past performances.

When we start to develop our business plans, we start talking about things like what are the Annual property tax, Insurance and Annual Appreciation of the property. We don't bring things into a Monthly increase such as with an Amortized fixed rate Mortgage.

While it won't necessarily be overwhelming complicated to do everything as a monthly projection, there is a point in time when you just need something that is both sophisticated and simple. Therefore, most of us choose to use Annual projections and not monthly projections even though we all know doing things on a monthly basis would be much more accurate.

@Mary M.

Thanks Mary for pointing out that the challenge was working out a scenario where there was NO appreciation and we can still make approximately a 9% IRR. I think all of this math makes people's eyes glaze over and they fail to actually read everything... missing the entire point of the conversation.

Another great perception was that YES, the usage of a NEGATIVE Cash Flow in my example was to compound the fact that NOT ONLY was it a NEGATIVE Cash Flow BUT it was ZERO Appreciation and you can STILL make over 9%!!

Part of me wants to yell at those that refuse to understand that this is not only Possible, but it's a foundation on how I built my portfolio of properties. That porfolio is over $20 Million today and cash flows like crazy as compared to when I each property was put into the portfolio.

So you it was really great for me to know you Excelled at understanding all of these calculations! You definitely deserve accolades for sticking it out!

@Bill F.

Bill and I are in total Agreement! There are a few others that understand IRR. I am hoping that people who read this thread will somehow stay on it and put in the hard work to really understand it just like Mary, whether or not you are Successful or NOT.

The point is that it is a GREAT tool. In some calculations, there is no better tool, especially when you are going to compare things like an location that may have ZERO Appreciation but Consistent and Stable Cash flow to an area with ZERO Cash Flow but stable appreciation. Without IRR, you can't really make a really comprehensive decision. Using the Cash on Cash Return will only give you one answer all the time, which is to choose the Cash Flow property. But that may NOT be the BEST opportunity and maybe completely sub-par to what others who use IRR are returning.

ALL:

I think this thread can be a supplement to any book on IRR. If you read "What Every Investor Needs to Know about Cash Flow..." by Frank Galinelli and along with this thread, you will be able to really understand why you should be using IRR.

Hi @Jim Costa !

Thank you for trying the problem as I described a few postings ABOVE!

It really would have been nice if @Mike H. would have tried it because I really believe he needs to understand it. Maybe it will make Mike think a bit more about Cash Flow and that Negative or Positive Cash Flow is JUST a component to be used in an overall calculation.

There were several that tried as well an most were very close! No one gave the EXACT Answer but that's ok. It really made people think and this forum really needs to do that.

Here is a snapshot of the Answer:

You were really close!! That is definitely commendable to recognize that you can buy buildings, get a negative cash flow for 15 years which is really paying off your 15 year mortgage, and you still make 9.29% IRR!

There is only one issue that I know people will have trouble.... so, now that we know it's a 9.29% IRR.... what the heck does that means?!

Here is another chart:

The first Table is a Model of a Savings Account. You put in $1k in year 0. Luckily, for the next 10 years, you will get an average of 10% Interest Rate for each of every year!

If that had happened, your $1k grows to $2,594.

So.... given this Savings Account Model, can we model it as an IRR? YES WE CAN!

The 2nd Chart shows how to put together the IRR and what it gives us.

In year 0 in the IRR chart, we put a NEGATIVE $1,000. For any Calculation involving Cash Flow, you need to pick the right reference.

It would seem that if you are putting $1k into a Savings account, then it would be a positive $1k. BUT that would be the WRONG reference.

The RIGHT reference is your POCKETs!

So, what happens to your pockets? $1k leaves your pockets. That's a Negative $1k!

So that's why Year 0 is NEGATIVE $1k.

Next, you kept the money in the Savings Account for each of 10 years except for the last year.

That's why Year 1 to 9 is ZERO... because nothing came in and out of your pockets.

BUT, in year 10, you closed your Savings Account and put your money Back into your Pockets, which is why it's a POSITIVE $2,594.

When you then do your IRR, the answer becomes 10% EXACTLY as the Savings Account with a fixed Interest at 10% per year!

AMAZING!! Who would not want an interest rate of 10% per year for 10 straight years?

Anyway, I think the readers of this post will understand 2 things, 1) How to calculate the IRR and 2) How to interpret the IRR.

Once you get the Math, you start to understand that Cash Flow is just a component of a overall math problem.

Don't be AFRAID of a Negative Cash Flow. You will miss the BEST opportunities! REALLY YOU WILL.

Most people who really don't understand IRR seek the crumbs when if they understood it, they can get the whole slice of the pie!

If I tell people I have made millions based on 10 year business plans with IRR projections, they think I'm either super lucky or I was born as some kind of rich person.

NO.... It's really about learning the right calculations and understanding the Math. Without a full understanding of the Math, if all you do is one initial Year 0 calculation for your Cash Flow and then you say, hey, I am going to buy based on this one initial cash flow, WOW....... I find this to be incredibly lacking of any kind of business modeling.

So please people, if you read and understood my post, PLEASE do something better than your Cash on Cash Return. I'm begging you so you can be a much better Investor.

@Kevin Christensen

I have to say a lot of people can't really envision themselves as millionaires.

That was also my wife and she complained about all of the time I spent on building up our wealth.

For every dollar I invested, she complained..... until she realized we became millionaires!

Honestly.... she never thought it was possible!

I have learned 3 important lessons:

1) Don't ignore your wife and

2) Don't ignore your dreams and motivations either

3) Once you made the wealth and she realizes it, that will fix everything! :)

@Amber K.

I am exactly in the same frame of mind when it comes to what seems to be a play on words in many of these instances where it may seem to be legal because EVERYONE does it and it may be taught by some guru and yet seems very cold hearted and in fact, IS ILLEGAL.

I'll give an example from the pre-Crisis days that really upset me, but was very common practice.

I had joined a Real Estate Club, formerly called Cash Flow NYC, where the members were presenting deals.

The way the deals worked was that someone had to be a "Credit Partner" who would be paid $10k to basically put their name on the loan as an owner occupant.

Once the property was acquired and rehabbed by the Investor Partners who set up the "Credit Partner," the deed would then be transferred from the "Credit Partner" to the LLC of the ACTUAL Partners, $10k would be given to the "Credit Partner" and that Credit Partner's role was ended.

This was FAIRLY common and all kinds of people, from Mom and Pop to experienced Real Estate Investors had conducted this.

Most people believed that Credit Partners was a win-win for everyone.

The problem here was that the "Credit Partner" is an illegal STRAW Man, who pretended to have the intent to own a property for his own use only to defraud a Mortgage Company.

But this was fairly common practice and was done ALL THE TIME.

When the financial crisis hit, the major players who ran this scheme was put in to jail as the Investors lost money from their properties. Those Investors were silent partners and did not really understand what they were doing.

Most of those Investors were also guilty of signing a waiver as an Accredited Partner, which is needed to buy shares in a Private Corp.

The list of fraud went on and on.

I quit attending REIAs and other organizations which preached these kinds of "alternative" ways of funding your real estate investments.

These things go on day after day, year after year, and while it's illegal, people get away with it as long as everyone is making money.

Anyway, that's what I was seeing when I started reaching out to these Real Estate Network meetings. So I stopped going and started my own Group of Students, teaching them the RIGHT way to make money without losing your Ethics and Integrity.

SO... what is the right way?

Be as educated as possible to take advantage of a situation that arises legally.

For instance, in 2008, I saw a building 2 doors down from one of my 4 Family Investment buildings for sale.

The only problem was while this building had the same number of floors, it was selling as a 3 Family because the 1st and 2nd floors were combined into 1 unit.

The first thing I do when I asked for an appointment is go directly into the basement and look at the meters.

What I observed was 4 Gas Meters and 5 Electric Meters.

I didn't bother looking at any of the other floors because I knew the entire building would need to be gut renovated.

I immediately put in an offer AT ASK and was accept immediately.

So... what did I know that the seller and his Real Estate Firm didn't know?

In NYC, you cannot have any more Gas Meters than the number of legal occupancy. There is one RARE exception, and that is when there may be a Gas Meter solely for the building heating unit.

Since there were 4 Gas Meters, I knew it could either be a legal 3 Family but most probable it is a 4 Family.

To confirm it was a 4 Family, I looked at the number of electric meters, which were 5 meters. In NYC, you can have only 1 extra Electric Meter for the common electric in the Hallway, basement, front and back yards. You are allowed 1 meter per legal unit as well. SO..... it was DEFINITELY a 4 Family Building.

The building was selling as a 3 Family. The Comps on 3 Family was lower than Comps for a 4 Family like my own building 2 doors down.

The Seller didn't know it was a 4 Family because they also Bought it from a previous owner while it was in the 3 Family configuration because it was the previous owner than the current Seller that had already made the conversion.

The Seller was represented by the biggest and most prestigious Brokerage Firm in the area and yet the Broker/Agent did not know.

The Appraisal was conducted, but it appraised as a 3 Family as the Appraiser only saw 3 Kitchens.

The appraiser gave the building the value of the asking price which was $1.2 Million.

By the time I closed on the Contract, I immediately pulled out the circular staircase from the combined two floors and put in the kitchen that was missing since there were only 3 kitchens in the building prior to my purchase. Now it has 4.

I then went to take out a 2nd Loan which made me do another appraisal.

I went to the buildings department and pulled the Certificate of Occupancy, which showed the building as a 4 Family, not a 3 family.

I handed that Certificate of Occupancy to the new Appraiser.

The Appraisal came back $350k more than my purchase price even though it was only 2 months ago I closed on the sale.

I could have immediately flipped it and pocketed that money, free and clear of anything that could have been thought was wrong.

This was a GREAT deal but ONLY if you were to recognize the opportunity.

Now, for the real reward.

After doing about half a million of a gut renovation back then, which was pretty much paid for because I bought it much cheaper than it was and getting the money from the 2nd Lien bank, today, in the year 2018, it is worth $3 Million... roughly $1.5 Million more than I had paid for it with renovations.

This is JUST 1 of 8 deals that I bought.

But being more educated than the other side can definitely give you the BIGGEST reward.

It's funny how the majority of people on here say you can't make money in NYC... and yet I find it to be the easiest and most rewarding way to make money without sacrificing any of my Integrity.