All Forum Posts by: Llewelyn A.

Here is the order of the most common 4 elements which will make you a profit in Real Estate listed in ORDER of which will give you the BIGGEST return.

1) APPRECIATION

2) Mortgage Balance Reduction

3) Cash Flow

4) Tax Savings

NOTE, Appreciation will give you the BIGGEST return, especially if you invested in the very high, long appreciating markets.... LIKE BROOKLYN, NYC.... a Market I have been investing in for 21 years.

If you feel the Biggest driver of Wealth is a Gamble, then don't gamble. LEARN how to calculate appreciation and factor it into the 4 factors above.

If it was easy, everyone would be rich. So learn thing Internal Rates of Return, Future Value, Mortgage Amortizations and historic appreciation rates. All of which will help you. However, because these calculations are not easy, many people don't use them or understand them.

If you haven't learn them, of course Appreciation is a Gamble! But by learning those calculations, it might open your mind to the possibility that YES, you can factor in appreciation into your calculations!

BTW, not using historic appreciation rates can also cause you to have subpar Investments even if your cash flow is decent and that's all you used to make a decision.

You can easily become out-priced by not investing in these appreciating markets. So those NOT investing in these high appreciation markets risk not being able to buy in those markets.

I have plenty of examples of relatives that never bought in Brooklyn, but rather rented.

Over the 21 years I have invested, those relatives seen house prices move up so dramatically, they not only cannot buy, but their children won't be able as well.

An example is one of my properties I bought in the year 2000. I paid $140k. We appraised it in order to take out an Equity Loan and it appraised for $1.4 Million, 10 times what I bought it for 18 years ago.

So, I would caution those that want to live in high appreciation areas..... if you still have not been out priced, do you believe that somehow the prices will come down to to levels you believe you can snatch it up? Or will you just wait until it's just too late.

It's not all previously high appreciating Markets that have done as well as Brooklyn, NYC. But there are so many that those that did not buy in the high areas of appreciation, especially where they live, taking the advice of "Appreciation is a Gamble" did the complete opposite to them. It actually hurt them the most rather than helped them.

It was so incredibly disappointing that of all the friends, family and business partners that I have had in my life, 95% can no longer afford to buy a home in NYC despite all of the efforts of investing in other asset classes like Stocks or mutual funds. Some of them have done well. But the reality is that even someone who had done well over the year, they may still not be able to afford to buy their home here in a decent area.

Something to consider.

Just a short bit so I can stay on this topic.

Because I don't consider Cash Flow to be a Characteristic of the Investment, I know that I can have an effect on whether or not an Investment Cash Flows.

For instance, if I financed a NYC property with a 100% Mortgage and Zero down... of course I will have a negative cash flow.

BUT, if I paid all case and ZERO Mortgage.... of course I will have a Cash Flow.

So I fully believe that it's NOT the Investment that Cash Flows.... it's the INVESTOR!

Once you realize that it's the Investor that Cash Flows an Investment, then you start to realize how important the other 3 factors are.

So maximize the other 3 factors and then see if you want to Cash Flow the property, or NOT. It's really up to you!

@Clint E.

@Steve B.

Yep! My Bad about the Insurance analogy! I re-read it and found I completely am missing parts which turned it into a bad post. Sorry readers!

But yes, it's not easy to predict which asset classes will wind up being negatively affected by legislation.

Nothing is a guarantee in life. But if you are going to play, better to do it with some thoughts towards the future.

This is exactly why I buy only 4 Unit buildings or under in Brooklyn, NYC.

If this legislation passes, it will cause a HUGE demand for multi-family buildings that are NOT subject to rent regulations.... which is EXACTLY my own buildings.

SO BRING IT ON! haha

The reality is that if building owners are not anticipating changes in Legislation to affect a certain building class in the future, they are gambling with their particular asset class.

I knew a long time ago (21 years and counting) to make sure I invest only in buildings that has a high probability of never being the target of rent regulated.

THUS, this logic continues to push up my building's values.

This goes with ANY Investment, not just Real Estate.

Take Insurance Companies, for example. If they are forced to provide healthcare to every sick person (Ironic.... isn't it... that Insurance company should insure the sick.... obviously a broken system when the incentive of Insurance Company is to only insure the healthy) imaginable by force of law, Insurance company values will go down.

NOW, revert it back to the old system where Insurance company can basically provide insurance for the healthy... and BAM! Prices go up!

So if you see what is happening is that the political landscape changes hands now and then. Because I don't want to have to switch investment types every time legislation causes a problem or reward, I buy Asset Classes that is normally not targeted by legislation.

So.... the point here is know your Asset Class VERY WELL... including possibility of future legislation. In fact, future legislation is probably the one variable that will impact your bottom line the most! So give it the importance that it deserves!

@Jesse Houser

Here's my take on RE versus Other Investments:

If Shi* hits the Fan, you can always live in your RE Investment, but you can never live in your Stock!

I love that saying... either case, you get the point.

Other that that, I agree with the others.

@David Lilley

David, I do better than a 20% IRR over my 21 year history. I not only hold on to these very highly appreciating properties, but I then take out what ever I can of the Equity through loans to increase those returns.

There really isn't much that can compare to the returns we make except a few very high performing stocks. Even then, we still do much in the aspect that we would rather risk a larger amount of money on Real Estate than on a stock.

Anyway, this isn't that discussion. There are plenty of threads about cash flow and appreciation on BP.

@Elenis Camargo

Hey! Brooklyn in the House! Ha! 

Some of my RE Investment Students also live in Crown Heights. If you want to join a group that's focused on learning how to invest in any Neighborhood, whether or not it's for Cash Flow or appreciation or both, send me a Private Message.

I have been investing in Brooklyn since 1997 and currently have 8 multi-Family buildings, mostly 3 and 4 Family.

The neighborhoods we invest in is Ditmas Park, Windsor Terrace, Clinton Hill, and Bed-Stuy.

We had a 3 Family in Contract on Classon and Bergen, but the Seller got sued by a relative and we got out recently. Now we will target a new property soon.

Learning about investing in your neck of the woods will be a contrast to investing out of State. But knowledge is power and you can make a powerful decision once you understand the different strategies.

@Elenis Camargo

Hi Elenis, one of my partners just got approved to close on a loan from a Bank called East West Bank: Click here to visit the site

It's the only NO DOC, No Owner Occupancy HELOC that that I have ever seen.

The details on the loan is:

Position - 2nd Lien Position

Amount - $350k

Rate: Variable at Prime plus 2% (1% if 1st Lien position)

Closing Costs: Owner pays closing costs estimated at 5%. This is NYC and we have a hefty Mortgage Tax on multi-family. So at least 2.8% is used up on the 5% closing costs.

LTV: 60% if the CLTV is below $1 Million. 50% if CLTV is above $1 Million.

As @Account Closed mentioned, this is an EXPENSIVE loan.. but... because my investments are in NYC, the Cash Flow is minimal. Therefore, the NO DOC HELOC is really my only way to go for these very expensive, very low cash flow properties. It's still a lot better than Hard Money.

Hope this info helps.

@Account Closed

Aidan: You can private Message me. I have been a Brooklyn Investor for 21 years and currently hold a portfolio of 8 multi-family properties, mostly 3 and 4 family buildings including several Brownstones.

David: It may not seem intuitive to you, but there is a LOT of money being made here in NYC.

I for one have made around $10 Million in unrealized profits for my Investors and myself.

Investing in big Metro Cities, you need a reason to trade High Cap Rates. That reason is huge appreciation.

An example of the kind of appreciation I get would typically be like a property I purchased in the year 2000.

The Purchase Price was $140k, $21k down, $8k in closing costs, and approx. $40k of renovations. Total invested, $21k plus $8k plus $40k = $69k.

Today, I can sell the building for at least $1.2 Million. If I were to sell it today, I would wind up with $1 Million, profitting $1 Million minus an investment of $69k = $931k. The ROI on the Sale would be $931k divided by $69k = 1,350% ROI over the 18 year holding period.

But there is no need to sell because this property also increased in cash flow and is doing excellent.

Where else can you get fantastic deals like this?

Either case, I'm not here to preach about investing using Future Value formulas such as Internal Rate of Return (IRR).

I am here to confirm Aidan's understanding of Investing in large Metro areas, and specifically, NYC.

@Justin Greenwood

@Mike Dymski

Mike: Yep, I don't understand how people can "Sweat the Small Stuff" which is the monthly cash flow versus paying attention to the major Cash Flows, which are the purchase price and the Selling Price, the 2 biggest factors in your ROI. However, there are so many Guru books that harp on the Small Monthly Cash Flow I think the general population stays away from the Golden Opportunities which are the high Appreciating Investment Properties. It's like you sacrifice the Pie for the Crumbs.

That's all good for me! Lowers my competition.

Justin:

Take a look at this Spreadsheet:

What it seems like Gallinelli is saying is that you should create 2 different scenarios, one pessimistic (selling at a 9.5% Cap Rate) and one that's optimistic (selling at 8.5% Cap Rate).

If I run the pessimistic numbers, the Selling price at the 9.5% Cap Rate in Year 5 would be Year 5 NOI / 9.5% = $152,605 / 9.5% = you would sell the building at $1.606 Million. Then you pay for Closing Costs and pay off the balance of the Mortgage. The proceeds would be left ($452,078) and you use that in your IRR Calculation which you see in Cell B23.

I get a slightly different answer than Frank. Mine is 15.92% IRR while you indicated Frank gets 16.17% IRR.

It's not that far off and I bet the numbers are a little different because Frank maybe adjusting the Closing Costs a little bit down because the Price is lower. But I don't know for sure.

Comparatively, the Optimistic scenario of an 8.5% Cap Rate by year 5 will return a 22.54% IRR over the 5 years. Again, slightly different than the 22.33% you indicated in the book, but not far off.

HOWEVER, the important thing to note is that there is a HUGE difference between 16.17% and 22.54%.

What this tells you is that yes, you better buy in places where the Cap Rate is trending DOWN!!!! Because that will give you HUGE Returns!

Case in point, NYC had Cap Rates trend down for the 21 years I have been investing here.

However, that may not hold up for the next 21 years. So one has to be conservative in their future value assumptions now. Again, all dependent on Economics. 

@Justin Greenwood

Hi Justin. Don't worry too much, it really takes a long time to really understand how these complex calculations work.

But once you do, you will finally understand how to invest in ANY market, whether or not it's in NYC or Buffalo!

What's even more is that using the IRR, you can also then make comparisons to a whole lot of other types of Investments.

To answer your question, however, please refer to this snapshot:

Rather than calculate the IRR for each and every year, I just decided to calculate the 5 year IRR for the numbers you type out in your last post.

You really should split it out as I have done in this spreadsheet.

First, make a column only for the Buy/Sell, or as I put it, Appreciation.

When you buy the Investment, you paid $323,472.

Noticed you PAID for the investment.

Most people don't really understand Cash Flow so they don't understand that Cash Flow is really just a direction of how cash is flowing.

You need to first pick a reference point and then you can figure out how to properly put a sign on the Cash Flow.

In this case, we have a Cash Flow of $323,472.

HOWEVER, we need a reference point. That reference point is your pockets.

$323,472 leaves your pockets to buy the Investment. THEREFORE, the $323,472 is a NEGATIVE Cash Flow relative to your pockets.

The way I like to put it, how do you feel when money leaves your pocket? NEGATIVE!

So year Zero, your very first Cash flow is a NEGATIVE $323,472.

If people understood that every investment that they BUY starts out NEGATIVE, then they wouldn't be so hung up about Negative Cash Flows. I am hoping that the readers of this post will just try to understand that Negative Cash Flows are just numbers you put into a Calculation and that you should put more emphasis on the Assumptions and the Results. BUT HEY... that's just me explaining it.

NEXT, we know that in year 5, we sold the investment for $541,310. Money goes into your pockets then, so it's a positive cash flow.

That's the explanation of Column B.

Next, we need to know all the cash flows for all the years you held the investment, which is the next 5 years.

During that time, you received the cash flows as according to Column C.

We then total up all the Cash Flows in Column D.

NOW, we are ready to do the IRR Formula!

Here is the snapshot of the same spreadsheet, but with the IRR formula revealed:

So you can see, Excel Calculates the IRR for that 5th Year as 19.24%... very slightly off from Gallinelli's 19.25% for year 5. We should ask Frank to correct that! haha! Just kidding.

Either case, doing the calculations is just one part of it.

What Gallinelli does is explain the long and hard work that goes into doing the calculations so that you can get a very clear vision on the future of your investment.

Once you get this vision, you will clearly know if this is a good investment or not. And even more, that you can do the same IRR to other properties or even a stock investment. It's really all about cash flows.

What you also need to get a really good understanding is what does that 19.25% IRR really mean?!

It's actually a fantastic number! It sort of means that if you put your money into a savings account for 5 years, the interest in your savings account will be 19.25% per year for 5 straight years!

Even this doesn't really tell you how powerful 19.25% Compounded IRR really is! Because it's a compounded calculation, it can turn a small investment into a very large one over many years! Well.. in my case, 21 years! haha!

It's not an exact comparison, but it's close enough. There are some discrepancies in regards to the time value of money and I'm hoping you will go over the book to get a really good feel for it.

Once you understand all of these concepts, you will really understand investing.

There is a lot that goes into the projections, however.

Keep in mind that once you start thinking of the future sale price and the future cash flows, you start to think, HEY......... I BETTER GET A GOOD UNDERSTANDING of the FUTURE.

Well... how do I do that?! Time to study Economics and pay very close attention to it.

To emphasis this point, think of a scenario where if you didn't follow the economics, things would have turned out VERY bad.

Take Investing in Detroit before it went bankrupt.

10 to 20 years before Detroit went Bankrupt, there were very clear economic signs that domestic autos were in trouble. Detroit was 90% dependent on Domestic Autos.

If you followed the Charts on Ford, GM and Chrysler, you would have seen that they were declining for an awfully long time. There were plenty of signs that said RUN! Get away from here!

So even if your numbers for all the calculations were GREAT for year ONE, by the time Year 10 came, you would have lost a lot of money.

This is the BIG problem I have with these single year calculations like Cash on Cash Return. You make one calculation based on todays number and BAM... you pull the trigger. No thoughts on the future. No Economics, no Nothing. Everything based on knowing the Rents, Expenses and your investment money. WOW.... really? That's all you need to know?! I'm always shocked that's how people do it.

To me, that's just throwing darts on a board and hoping it will stick on something that will make money.

Learn the IRR. Understand the Assumptions that go into it and then you'll understand the importance of getting out your economics crystal ball.

My Partners and I invest in NYC for the last 21 years. Our Crystal Ball energized by Economics and armed with the IRR calculations told us to buy here in NYC despite all of the bad advice given to us that it's too expensive.

We've heard that same comment for the last 21 years and we will hear it again for the next 21 years.

I don't pay attention to Gurus, Posters or anyone else.

I only pay attention to the Economics and the IRR.

You can only imagine how much we made owning NYC properties over a 21 year holding period, accumulating 8 multi-family buildings.

It has been phenomenal!

You are on the right track.

The book you have should have been on the best seller's list but it won't because most people don't want to work too hard to understand more sophisticated calculations. I wish those people good luck with that.

Hopefully I helped explain the numbers for you!