All Forum Posts by: Llewelyn A.

@Mike H.

In your scenario, you mention nothing about the Mortgages and how they are financed.

Let's throw that in and see if you would change your mind.

Let's way those 10 properties are financed with an average of $150k Mortgages per property with a 15 year fixed Mortgage. Given that, you are buying $1.65 Million in Properties, using $1.5 Million in Mortgages and putting down $150k total.

You are "Losing" IN THE FIRST YEAR, $2k to $4k per month. BUT, your $1.5 Million Mortgage is being paid for by the tenants.

In 15 years, those mortgages disappear.

Let's do a calculation without a Spreadsheet.

1) You are NEGATIVE Cash flow by $300 per month on average or $3k per month for 10 properties. You held the properties and there is no change over the 15 years in your rents and expenses. You lose in Cash Flow $3k x 15 years x 12 month = $540k

2) Let's assume you put down an average of 10% down or $150k for all the properties.

3) Let's also ASSUME NO APPRECIATION. Once you Sell in 15 years, you get back  $1.65 Million, the Value of the properties as it was 15 years when you first bought it.

Therefore, you invested $150k initially, $540k in negative cash flow, and you returned what the sales proceeds would be, which in this case would be  $1.65 Million.

YOU ARE A MILLIONAIRE in this scenario after 15 years.

What would you say would be the return on this scenario? Do you think it will be a BAD return? A Good Return?

Here is the challenge for you everyone, not just Mike. I really want to see if you can do a calculation and see what is the return given the above.

It took me about 5 minutes to get the final ROI.

If you get that answer, tell it to me and then we can have a real honest discussion. On Monday NIGHT, I will post the answer.

But please, do try it! It's a really good analysis to show how you actually think about Investing in General, not just real estate.

Think of it this way, would you spend money on a monthly basis to invest in your own education? Is that worth it to you? It's a Negative cash flow.... does  that mean spending money on your education is bad?

We need to break out of the thought that Cash Flow means only a positive cash flow and therefore it is only good if is good.

People have forgotten what Cash Flow really means. It's just the flow of Cash from a direction. Once you understand that, then all you do is use the Cash Flow Numbers and do a calculation to see if it is good or bad OVER ALL.

It's the calculated RESULTs that will tell you an answer, despite some of those cash flows are negative. Don't be afraid of a negative cash flow, just use it in your formula. Add them all up over time and apply the formula and BINGO......

You will recognize the opportunity.

That's the part that most investors don't get. They can't see the opportunity because in their minds there is a barrier put up when they see the cash flow is negative. It's like an OCD...... negative... turn the other way!

Negative or Positive, it's just a number. Do a calculation and get the results. That's the only way to figure out if it's good or bad, regardless if part of the numbers are negative.

Come back to this thread by Tuesday Morning and you will know the answer to the above question unless someone posts it ahead of me.

And yes, I know that there are a large amount of people who invest and do well without understanding future value calculations.

I have an Aunt that sold her property to me in 2003 for $230k, which was double what she paid for it in 1992.

FANTASTIC Investment! But, because she wasn't paying attention to what was going on, the property moved up from $500 rents per apt to almost $2k in rents now, giving me a very large POSITIVE cash flow.

The Value of the building went up from $230k to now over $1 Million.

ONE building can make you a millionaire. And there is no need to guess at it or pretend that Cash Flow has to be completely positive all the time.

What I'm trying to do is to bring this horse (the Cash Flow Only crowd) to the water, but I cannot make them drink (educate yourself in the calculations so you don't have to be afraid of a negative cash flow).

To me, if you buy based on either positive or negative current cash flow, then you are just not taking into account the true worth of your potential investment. Therefore, you will not recognize the real opportunities.

And that's fine with me. It reduces the competition.

@Alyssa K.

Hi Alyssa. In NYC, where things are really crazy, we call it CYOF - Collect Your own Fee.

Typically, a Landlord or Property Manager will list a "No-Fee" Apt. If an Agent brings a client to see your "No-Fee" apt, it is assumed it is "CYOF", which means that the Agent must collect his own fee from his client, who is the prospective Tenant.

Here is an example from one of our most popular listing sites, from the prospective of advising a Prospective Tenant who doesn't understand the rules of CYOF:

"Broker showing you a no-fee listing: Another thing to be aware of is the broker who will show you a no-fee listing. Yes — this does happen! They will not distinguish which apartment is fee or no-fee. Their only job is to find you a place and at the end of the hunt, they will be expected to be paid. So, you need to be on your toes and ask/do research on apartments that are fee and no-fee. There’s nothing worse than unwittingly being shown a no-fee listing via the broker, and then be expected to pay a fee!

Collect Your Own Fee (COYF): This means the landlord or property manager of a no-fee property will allow outside brokers to bring prospective tenants to see the apartment (see listing below). Even though it might be listed as no-fee, you could still get stuck paying a fee. Again, this is the research and sleuthing you need to do to make sure you are not being shown no-fee listings by a broker."

Here is the link in case you are wondering: What is a No-Fee Listing?

My suspicions is that other places like Texas follows this same concept, but you would have to research it. 

Since I'm a NY Real Estate Broker, when I list my Broker Owned Apts, they are always listed as CYOF. It's actually a selection on the MLS listings as well as other popular websites. Not sure if you have that kind of option on your listing services. If there wasn't any in there, I would put in "Agents: Please note this is a CYOF" that way there should be NO Confusion to the Agent how he is to get paid.

I get a LOT of calls from Agents and Brokers who try to sneakily list my apts with claims that they have clients who want to see my apts. the demand is extremely high here and I have found that some agents will create an ad for my apt listing and try to get clients to bring over.

I tell the Agents to make sure their clients know this is a NO FEE apt. After that, I never seem to hear back from the Agent!

@Mary M.

Hi Mary, I know it's going to take a bit of work to really grasp the IRR concept.

There is a really great book out there: What Every Real Estate Investor Needs to Know About Cash Flow

You can buy it for under $5!

You will never find this kind of book on the best seller's list because the majority of people have not been in school for years if not decades, therefore, the math is going to be challenging even though it doesn't go beyond 7th Grade Math.

I also gave examples of how to work out the IRR in this Posting: Understanding IRR Calculations in Frank Gallinelli's book

If you can get past the first 3 chapters, you will get a great understanding of the IRR.

There continues to be others that are posting in this very thread that really need to read that book and try to work out the example that was given in the Posting Thread I linked.

When someone starts talking to me about Investing, I usually ask them a question to see if I should walk away from the conversation.

It normally goes like this:

Hey, a friend of mine put in $1k into an Investment 10 years ago. He recently cashed out on it and collected $11k! WOW! What do you think is the ROI per year on that Investment?

Most people would say well......

Profits = $11k minus $1k = $10k.

ROI = profits divided by the Investment = $10k / $1k = 1,000%!

ROI / Year = $1,000% / 10 years = 100%!!!!! AMAZING!

Except.............

100% per year when you invested $1k initially doesn't amount to $11k in 10 years.

It amounts to $1,024,000!

People don't understand this problem unless you understand Compounded Rates of Return.

The real answer is 27.1% per YEAR!

With a simple Cash on Cash Return, you would get a incorrect answer.

With the IRR, you would get the correct answer. Here is the Spreadsheet snapshot:

Notice that the first table shows what happens if you use 100% for $1k over 10 years. You basically double your money every year and in the 10th Year, you would receive $1,024,000

Obviously, if you calculated that $1k turning into $11k is a 100% per year return, THAT IS THE WRONG ANSWER.

You need the IRR to calculate it for you correctly at 27.1%

This is why EVERY REAL ESTATE INVESTOR NEEDS TO KNOW ABOUT CASH FLOW... and I will throw in the IRR at this point.

Hopefully the readers of this post will understand that by understanding more sophisticated calculations, you can answer these seemingly easy problems.

When I get someone, which is very often, that tells me WOW.. that's a 100% per year return!!!!

I just don't walk away from the conversation.... I RUN AWAY. There is nothing more I need to talk to that person about when it comes to Investing.

The above example is something that I use to demonstrate why compounded and future calculations are very important for ALL of us Investors.

If we all understood the calculations, then I wouldn't continue to hear problematic postings indicating how cash flow is better than this or that when the only calculation one does is a Cash Flow NOW (meaning the calculation of a cash flow based on today's rents and expenses).

Hopefully I have answered your questions and not just beating a dead turkey... I mean horse! haha! 

@Phil Sharp

What I like to tell people when they ask me if a Property is a Cash Flowing Property, I want them to FULLY understand what they are saying, and then ask me the question again.

To fully understand, here is an Example:

Investor 1 is thinking of buying 100 Main Street all cash and it will cash flow $1,200 per year or $100 per month.

IS THIS A CASH FLOWING PROPERTY?

Now, Investor 2 is thinking of buying the SAME EXACT Property, 100 Main Street, with a Mortgage at 100% LTV, fully financed.... and the Monthly P&I will be $200 per month. This property will have a NEGATIVE Cash Flow of -$200 per month.

IS THIS A CASH FLOWING PROPERTY OR NOT?!

It's the same property..... but the difference is how Investor 1 and 2 bought it!

You cannot really answer the question if an Investment is Cash flowing or NOT because it's not up to the INVESTMENT to cash flow.... it is the INVESTOR that cash flows the Property OR NOT.

I see it time and time again, in every single book, guru or not.... the CHARACTERISTIC of Cash Flowing is NOT about the INVESTMENT... it's about the INVESTOR.

This is why we need to focus on other things like Cap Rate and especially IRR.

Here is another example with a Spreadsheet:

You are thinking of buying 1 of 2 properties. They both require the same investment, $10k.

Conservatively, you anticipate in 10 years that the property will not receive ANY appreciation. Therefore, you anticipate it will be sold and you will get back your $10k.

You can do several analysis with this NO APPRECIATION assumption.

The normal way people do their Cash Flow Analysis is that they make the assumption that the Cash Flow NEVER changes.... by the way, this is a TERRIBLE assumption because it ALWAYS changes.

The reason why they make that assumption is because they just don't know how to calculate with ease how to take into account fluctuating Cash Flows.

In this snapshot, I have 2 Scenarios. Both are based on investing $10k and selling to get back your $10k. Then, Scenario 1 you get your consistent cash flow.... WHICH IS A WRONG assumption, but I did it to show that you can perform the same analysis with an IRR.

The 2nd Assumption has a start of a negative cash flow but will wind up increasing over time. That's a very typical scenario in NYC, for instance. NOTE, there is no ASSUMPTION of Appreciation because the column after the years uses $10k to investment and $10k as the sales proceeds.

Here is what the two scenarios look like side by side:

So it is as easy to do this kind of Analysis.

The typical Investor on here will just take $1k on the very first year and divide it by the Investment of $10k = 10%. They understand that.

But what they are failing to understand is that what you have done is assume that the future cash flows will ALWAYS be the same. So that means that the IRR over the 10 years will be 10% as the 1st Scenario demonstrates.

In the 2nd Scenario, I start of negative $50 per month. BUT.... as I know there is a very large development of a Train Station HUB just a few blocks away, I am using my intellect and know that it will eventually increase my rents as the demand for the area increases.

Eventually, 10 years from now, and that Train station hub is opened, I will reap the reward of approximately $4k per year or $383 per month increase in cash flow.

You cannot do this kind of analysis with a Cash on Cash Return.

You need the Internal Rate of Return.

When you want to talk to the big boys, the Investment Bankers, the Commercial Lenders, your own Partners, sophisticated investors, etc., you need to understand IRR, how it works and why the one shot CoCR is just not correct.

When you really understand these calculations.... the all kinds of scenarios can be modeled.

When you understand all kinds of scenarios, you can begin to predict the future with accuracy as you use your God Given Intellect. After all, we are thinking beings.... so let's put on our IRR thinking hats!

The reality is that if you analyze an Investment for it's Long Term ROI, you won't be using simple formulas based on Cash Flow Now.

Those that are arguing Cash Flow versus Appreciation need to add at LEAST the Mortgage Balance Reduction and the Tax Savings.

The problem is Education, therefore, there will always be a discussion which pits Cash Flow versus Appreciation when the real conversation should be:

Given the over all 10 year holding period, what would be the overall return, taken into account:

1) Cash Flow

2) Appreciation

3) Mortgage Balance Reduction and

4) Tax Savings

5) Repairs and Renovations

6) Expense and Revenue increases

etc.

A typical Chart in my spreadsheet looks like this:

The BIG GREEN Number is an Internal Rate of Return and it shows that, according to my CONSERVATIVE Assumptions that has been built into this spreadsheet, it will give me a 15.34% IRR over 10 years.

What I see from other postings is no mention of the overall Return. Therefore, it's somewhat muted to give an answer to the effect Cash Flow is Better than Appreciation.

The Reality is that you should be saying that this Strategy has a better IRR than that Strategy given these Investments.

The Issue I see is not whether Cash Flow is Better than Appreciation, it's what is your understanding of the Financial Calculations and Returns of an Investment.

If we all understood these financial calculations, believe me, we wouldn't have these discussions. It would just be, oh, yes, I understand why you paid $X for that property!

BUT, when people don't understand what 15.34% IRR means, NOR do they understand how the Chart was created and what it means, nor do they do any assumptions or projections...... you might as well throw darts at a board of Investments for sale. Hopefully that dart picks the right one!

In my case, I'm on my 9th Multi-Family Purchase in Brooklyn, NYC. ALL my properties have been INCREDIBLE Returns.

BTW, don't believe anyone who tells you if you haven't sold you don't get the rewards.

All the Rents for all the properties have been increasing tremendously over years. I reap the cash flows on those. I borrow against the Equity on my properties and then reinvest them.

Furthermore, when you do it this way, you don't pay the large tax obligation that is due on other strategies.

If you only believe in cash flow and basically IGNORE all other profits, you will miss the opportunity, which I fully see many of my colleagues do.

@Barbra B.

@Mitch Messer

I concur with Mitch!

I'm actually not only a Real Estate Investor and Broker, I am a Salesforce Developer and have customized Salesforce for the specific way I do business.

It is extremely customize-able, expandable and has a lot to offer if you were to develop your expertise in the platform.

It's really not just a CRM. There are so many things you can do with it.

There is a reason why Salesforce is the Leading CRM in the industry. It's incredible once you know how to use it.

There are certain very large Brokerage firms that also are using Salesforce. It's certainly working for them.

The one thing I will say is that its a platform that will be incredibly good for your company if you have an Enterprise wide company, with multiple clients, multiple branches, even multiple Countries.

The downfall is that while you can use Salesforce out of the box, it will take quite a bit of time to become an expert and to customize it to your business. HOWEVER, that can be solved by hiring the right Salesforce Admin and train one of your employees if you only need one temporarily.

I'm curious, Mitch, did your company hire Salesforce Consultants initially or did your company learn to use it and developed the expertise internally?

@Clayton Coombs

@Matt Ward

@Eamonn McElroy

@Luciano A.

I do want to congratulate Clayton on having a really great year!

First, I wanted to thank everyone here that offered advice that I did not @ Mentioned. Of course, however, that the reader of this thread really needs to understand this is a very complex topic and not all advice should be taken, but all should be researched thoroughly.

Second, I mentioned Luciano mainly because I do understand where he is coming from when he mentioned that the advice of buying for low cash flow AND high appreciation hurt him or others who have followed that strategy in the past.

Rest assured, there will be others that will be hurt by the low, no or negative cash flow AND high appreciation strategy in the future. BUT there will equally be those that will be hurt by buying high cash flow and NO appreciation as well. There is no monopoly of hurt by buying with the no cash flow high appreciation strategy. I personally know quite a bit of people who have been hurt by buying cash flowing properties where the cash flow suddenly disappeared when unemployment skyrocketed.

Now, many of us got into the Real Estate game one way of another and many of us will encounter Rich Dad, Poor Dad. While I don't really think of his advice as fantastic, he makes some really good points, including this one:

Note where the Self-Employed quadrant is. Note how he is dressed on each side.

The funny thing is that should you follow the advice from this diagram, and you actually make your way into the Investor quadrant, not only does your Money work hard for you (and you get to play a lot of golf), but you will AVOID paying a lot of taxes until you sell the Investment, and in the case of Real Estate, you can exchange until you die, or hand it down to your children at a stepped up basis.

Flipping to me is a job. Buying sound, good, quality Real Estate where you don't do much work because it's highly desirable, where the job market is very strong even in a down market, AND you hardly have to put any time into it because it runs like a well oiled machine, puts you in to the Investor's Quadrant, paying very little taxes until you die.

Over my 21 years of buy and hold Investing in Real Estate, while I was doing this before reading Rich Dad, I always understood that the way to avoid paying taxes is to be in the Investor's Quadrant. Unfortunately, many people either confused or ignored the concept of what an Investment really is.

The MORE you work, the more your Investment is a Business. The LESS your work, the MORE your investment IS AN Investment.

I mentioned Eammon and Matt here because they gave the advice of low cash flow, high appreciation as a tax avoidance strategy. In this case, that IS what I have practiced over 21 years. What they gave in theory is what I do in practice. AND IT WORKS.

The one gotcha is the dangers of a down market. This is why you have to be very smart and use the gift you have been given that separates you from the animals.

OR... even if you don't want to separate yourself from the animals, then think like a Squirrel!

Squirrels know that if they don't put away their nuts for the winter, by the time the winter comes, they may not make it through.

The Squirrel needs to think about the FUTURE because he isn't gathering his nuts to eat it NOW. It's this thought that allow him to weather the winter.

Us INVESTORs (by the way, I don't consider too many people Investors if they are owning Real Estate but are doing a LOT of work for it, those people have a job), in order to be good, need to think about the FUTURE, in my case, at least 10 years out, and always saying to myself, how many NUTS do I have to put away to weather the intensity of the WINTERs that I see in the FUTURE?

Since I'm from NYC and I buy in quality neighborhoods, over the several Economic WINTERs that I went through, the NUTS (Investments) that I have GATHERED have done so well, I slept like a Baby in my little squirrel hole, AND, I have successfully avoided paying a lot of Tax by utilizing the tax loopholes (think 1031 Exchanges, holding onto the Investments as you get taxed only if you sell, etc.).

I don't want to change the topic, but to me, Flipping is at BEST a business, and businesses pay Tax, which is unavoidable.

INVESTMENTs are you tax shelters.

You decide which quadrant you want to be in.

@Account Closed

I'm in agreement with Minh and Russell.

For some reason, this forum has a number, if not the majority of people who live in high appreciating areas who want to invest in non-appreciating areas where they MAY likely to get some small cash flow.

I'm sure those of us who have invested heavily in our Appreciating Markets are just killing it.

Over a ten year period of buy and hold investing in Brooklyn, my Partners and I have made over $10 Million in unrealized profits from Appreciation and a LOT of cash flow (which is completely realized) due to rent appreciation.

In my personal experience, those who don't buy their first home in an appreciating market are in danger of being priced out in the market they really wish to live in for the long term.

I know a LOT of friends and relatives that are currently priced out but was not 10 years ago.

I know of a specific investor who loved Manhattan and rented a really nice apt 20 years ago. He bought cash flowing properties in a working class neighborhood in CT and cash flowed about $1k per month.

That same friend's Manhattan apt moved up from $2k monthly to $4,500 monthly.

His CT cash cows? The same value and the same cash. Today, because his rents moved up while his Cash Flow did not, his Net Cash Flow is NEGATIVE.

Funny how NOT buying where you want to live can be the biggest mistake one can make.

He eventually got priced out and moved to a different State. Imagine that it can happen to anyone who does not secure their home where they really want to live first.

Now, if you think about it, over the long term, why would you not want to do this as an investment strategy if you DON'T depend on the Cash Flow?

I think the biggest myth from reading these forums is that Cash Flowing Properties don't Crash even in a Crash!

Please.......... don't believe that Myth. There are some really fantastic and long term Investors here who have made it through Crisis after Crisis and we know that is a Myth.

The 2nd Myth is that High Valued Properties will suddenly crash. This again, is another myth which really doesn't make a lot of sense.

If your property is in a highly desired location, particularly if it commands a large demand among renters who are beating down your doors to rent from you, even if your property value goes down, you are actually more immune to losing cash flow in a crash than the supposedly immune cash flow properties in Myth #1!

Now, I'm not saying the above happens to EVERY property in EVERY market. These are Myths that I find to be the case in General and certain counter to the main stream logic on this forum.

In my case, my money is where my mouth is. Even in the upcoming crash predicted by so many people on this board, chances are my properties, being in close proximity to Amazon HQ2 in NYC, will not only continue to rent well, but may in fact rise in value during the next crash!

I'll be keeping my eyes out for that Crash because it will surely be the best opportunity for me to scoop up great opportunities that others have shed at probably the worst time for them to do so in my area.

If you really think about it, most investors will sell at the absolutely worst time and buy at the absolutely worst time.

When you sell into a falling Market, chances are you will sell when the price is at it's bottom. When the recovery occurs, chances are you will probably buy at the top. This is your typical Investor.

Something to really think about.

I think there is no point on trying to predict the Market Crash because you should always put in the protection on the downside because the upside doesn't need protection!

The problem is that most regular investors really don't know how to protect their downside.

For instance, they have heard about Hedges, but they either don't what it means or don't know how to implement it in their Investments.

An example would be buying a PUT to protect your Stock if it should Fall. If you followed that, those who owned GE stock would not have lost very much.

Because this is Real Estate forum, finding out about protecting the downside of your real estate investment should be something you should be doing.

In my case, I buy in Prime neighborhoods. Even during the Financial Crisis, there was barely a blip when it came to finding tenants. The rents were stable. Prime Neighborhoods has an implicit PUT in large Metro areas, especially with a lot of job.

The question for most of you who are NOT buying in these Metro areas, especially those with added protection like NYC, what is your protection against the downside?

It would be interesting to hear from those that went through the Financial Crisis. What affected your properties the most in either positive or negative? AND, would you have bought differently if your Investments took a severe hit?

If you were like me and really did not get affected at all, how do you attribute that kind of stability? What was it? If it was stable rents, why was the rent stable in your area versus other places like Vegas and Miami (moved down more than 50% of property values)?

For those wondering what I am attributing to NYC as a resilience against property value decreases in prime neighborhoods, there are quite a lot of reasons.

One primary one, for instance, is that most of the Apts are NOT CONDOs. They are Cooperatives.

A Coop will not put up with flippers. The Coop Board will do a better job of qualifying you than even a Mortgage Company. So you cannot pull the games that were done in Miami. Those big skyrises with empty apts were being flipped online on Websites like CondoVultures.com No one really lived in them. It was playing musical chairs and ultimately, the music will stop.

The other great thing about NYC is that it's very international. Foreign investments and tourism pick up when ever the dollar gets weak, for example, during a Crisis.

And YET another is that NYC has a large amount of Reputable Universities including New York University and Columbia University. When we are in a crisis that affects employment, one of the first things people do when they are unemployed is to get more education to become more competitive in the job markets.

Anyway, these are several reasons I attributed towards why I did not really feel the kind of pain I know occurred during the financial crisis.

Just curious what happened to others.