All Forum Posts by: Llewelyn A.

@Kelvin He

@Dennis M.

Dennis, I want to point out that Kelvin indicated that he is NOT BETTING on Appreciation.

What Kelvin is doing is betting that his 96.5% LTV loan of $240k of a $250k purchase will disappear in 30 years, which it will. That's just Math.

Additionally, he will take a $200 per month loss in the 1st year he rents it out entirely ($2,200 expenses but only approximately $2k in rents).

Let's just assume the above scenarios plays out for the entire 30 year holding period.

So Kelvin will lose $200 per month or $200 x 360 months = $72,000.

Assuming NO APPRECIATION, the mortgage disappears in 30 years.

If Kelvin then sells the property at the same price of $250k, his return would be $250k minus $72k minus $10k for down payment = $168k profit in 30 years.

Considering that Kelvin would only put in $10k as a down payment, $72k as payments towards the property over the 30 years, his investment is $82k which then returns proceeds of $250k.

If we did a non-compounding calculation of ROI we get $168k profit / $82k Invested = 204% in 30 years or 6.8% per year.

If we did a Compounded Rate of return, we get a 6.12% IRR over the 30 years. Here is the IRR Chart:

What Kelvin is saying is that this is the most pessemistic scenario where he will have ZERO Appreciation AND NO CASH FLOW INCREASES due to increasing rents versus expenses.

Kelvin can then come up with an optimistic senario, such as add 5% annual appreciation with 2% annual cash flow growth.

That would supercharge his IRR.

Aside from this, the danger, as others state, is that Kelvin cannot afford the negative 200 per month cash flow. BUT.... common guys... negative 200 per month?! I mean this doesn't kill anyone that I personally know who has disposable income to buy an investment, even for $10k savings like Kelvin.

Of course there are a ton of other considerations such as Capital Expenditures and Tax Savings, but we are not building a very complex and sophisticated spreadsheet just yet. If it were me, I would actually do it.

I would definitely look into the economic factors that are going to be driving the value of the properties in that area as well over the 30 years, however.

To me you can get the numbers completely correct, but if you don't know the economic trends that are happening, a good investment can turn into a nightmare no matter how much cash flow you are generating over the years.

There are too many examples of cash flowing properties that stopped cash flowing such as places like Detroit, Bethlehem, Allentown, etc. Generally one industry towns where the Industry dried up.

The economics is a necessity to long term buy and hold investing. If you are not doing that, good numbers can turn out bad.

But that being said, this is well within my risk tolerance level as long as there are no negative economics that will impact the next 30 years.

@Rachel H.

@Jason Lee

Rachel:

Going to the Agent's Broker was one way I was thinking of doing it.

Actually, I read that on an Offer Rejection, I can require the Listing Agent to have the Seller sign the rejection or at least request for the Seller to sign the Rejection.

The Listing Agent will need may refuse to do it, but that will not look good should I bring up a case against him.

Another great thing about our particular MLS, REBNY, is that it provides arbitration among it's members. Brokers should have very good documentation. But I won't go that route until I see if the Sale goes through and the Buyer paid LESS than my Offer AND they used Financing.

At that point, I will bring up a complaint so I can see what actually went on.

Jason:

Sorry if I mis-communicated. I was thinking I may ask REBNY Legal Dept to advise how to go about getting confirmation of a rejected Offer and whether or not I can get a signed Offer rejection. Both of our Brokerages are REBNY. So REBNY Legal will have a significant role in the request should they say this can be done.

ALL:

I am assuming you all know about the corruption in Real Estate in general since some of you had a huge difficulty during the most recent financial crisis.

In addition to that, one of my brothers was caught up in a Dept of Buildings scandal in Jersey City where the Inspectors were arrested for taking Bribes. The problem was that my Brother and his Contractor didn't play that game and unfortunately, the Inspectors caused delays in inspections and nitpicked on things to the tune of more than a 2 year delay of construction, causing 100s of thousand of dollars in extra costs.

Even today, all you need to do is Google "Building Inspector Arrests" and you will see the large amount of articles and confirmation of what really goes on.

Every time I have to scratch my head on why I need to do something that doesn't make sense it shows me how the system was designed to promote a certain corruption that keeps getting worse.

Most recently, there was an Article in the NYTimes that showed how large Corporations have started gaming the NYC Housing Courts to harass tenants just by filing a $45 court case against them, whether or not there was a legitimacy. What happens here is that the Courts are now completely overwhelmed and real cases have difficulty coming up on any reasonably timed basis.

You may call me Paranoid, but I personally know enough people who had lost real money due to suspicious and confirmed corrupt circumstances. 

@Jay Hinrichs

@Jason Lee

NYC is FAR different than any other City when it comes to Real Estate.

There is no City Wide MLS but rather several MLS that a Brokerage can become members and NAR is not one of those.

The MAJOR MLS's are:

REBNY - Real Estate Board of NY

This one is for MOST of the expensive areas of Manhattan and Brooklyn

Brooklyn MLS - This one is for the other areas than the expensive areas of Brooklyn

Long Island MLS - This one is used primarily for Queens, NYC

Staten Island MLS

Then there is StreetEasy, Craigslist, etc.

Because there are SO many MLS.... it is easy for a Broker to list their Property on one MLS and then not follow the rules of the other MLS that they belong to.

I don't think Jason really understands the level of corruption and Games that Brokers play.

Because I started a Brokerage as I became a Broker and I have been an Investor for 21 years in the Brooklyn Market, I have seen a LOT of it.

I thought I really understood it until I opened up the Brokerage Office.

Now I think I got a full understanding and I know what to do to ensure I am fully insulated from the Games that are being played.

Brooklyn, if not all of NYC, IS the Wild, Wild, West of Real Estate.

I resolved a very difficult situation just recently involving a $400k Earnest Money Deposit. Even with Attorneys, I had to walk a careful tightrope or we would have eaten up 10s of thousands in Litigation fees to recover the ERM.

ANYWAY...... I don't think non-NYC Brokers realize the level of sophistication that certain elements work over here but I think you all hear about it.

Even Kushner Companies have been accused of corruption in his dealings with Rent Regulated Apts. When you see what Developers, Brokers, Agents and others actually do, all the rules and regulations on both MLS's, City, Federal, etc. are bent or broken.

It is both difficult and exciting! :)

It's exciting because I know I'm swimming with the Big Sharks. While it is dangerous, it also shows me how much I have moved up in the world.

@Wayne Brooks

@Russell Brazil

@Jay Hinrichs

@Jason Lee

Thanks all for your comments. It's all appreciated.

Jason, as a fellow REBNY Member, we have access to their Legal department and I have met REBNY's Legal team on several occasions. I wouldn't dream of approaching the Listing Agent without discussing it with our Counsel.

There are actually a lot more facts which I left out AND I have spoke to a few NYC Brokers that I know PERSONALLY to get their opinion.

I am also a VERY experienced Buyer with over 2 Decades buying and owning Brooklyn Properties.

Regardless, I am putting into place a strategy to ensure that my Clients or I will NOT be turned down solely because a Listing Agent wants to collect the full commission.

Feel free to contact me if you are interested in discussing further.

About 2 weeks ago, I submitted an Offer to Purchase a Property for a Client/Buyer.

The Seller's Agent got back to me and said that there is currently an offer with "No Finance Contingency" and because my Client will be using a Mortgage, the Seller is refusing to send over the Contract to the Buyer's Attorney.

The Offer was for $1.6 Million and the Commission the total commission would be $80k. The Listing on the MLS (called RLS here in NYC) has the co-Broke at 2.5% or $40k.

It's been 2 weeks and so far, it is not in contract.

I am starting to think that the Agent is holding out on Offers that has a co-Broke.

Is there any legal way for me to find out if the Listing Agent actually submitted the Offer to his Seller?

I was thinking of trying to talk to the Seller directly, but I'm not sure that will break any rules.

I also personally know the Seller's Attorney and I can directly call him and inquire.

What do you think would be the best way to go about this? Is it even worth pursuing? My Client would definitely be interested on moving forward to the point of increasing his Offer.

HOWEVER, again, it was told to me that there would be no Offers entertained if it included a Finance Contingency.

For those who don't really know the NYC Market, I cannot say that "No Finance Contingency" is UNCOMMON because it happens often enough.

Any advice, especially from NYC Brokers/Agents would be appreciated.

@Rich Cavanagh

Hi Rich,

I think because a lot of people don't really do a projection of Rents and Expenses, they don't really know that if your Expenses INCREASE MORE than your RENT, you can still wind up Increasing your Cash Flow.

Look at this example spreadsheet as an example:

The Gross Rent is only increasing by 3% annually for 10 years.

The Expenses are increasing by 5% per year for 10 years.

BUT, because the Gross Rents are so much higher than the Expenses, about 5 times higher, a small increase in Gross Rents is larger than a "Larger Increase in Expenses."

It seems counter-intuitive until you do the math and experience it yourself.

This is one of many reasons why I invest in Brooklyn, NYC. Very HIGH Gross Rents versus the expenses and rents move up significantly every year.

In most of my properties, we typically raise rents above expenses. But when I do my projections, I always assume the increase in Expenses will be higher than the increases in Rents.

Therefore, in my particular calculations, it is always very conservative.

Also note that even if my Mortgage payment throws me negative in the 1st year and EVEN if the Expense Increases are higher than my Gross Rent Increases, I will still get increasing cash flow.

Given this scenario, you will not that I start out NEGATIVE $133 per month but wind up POSTIVE $1,684 per month.

AMAZING when you do the 10 year projections and doubly amazing when you actually put it in practice over 10 years.

Keep in mind this is COMPLETELY COUNTER-INTUITIVE and yet it's all about the Math.

Again, most people (probably 90% or more) will not realize the effects of this until they do the Math....... I cannot preach any stronger how Math really helps. Too many of the Guru classes just do simple math. But by expanding our Math Knowledge, it really shines light on the subject.

Sorry to jump into a CA thread but the reason for the thread is also INCLUSIVE of NYC! :)

I completely agree with David Song, but I wanted to expand it a bit.

Basically, lack of Inventory which was probably caused by lack of supply as demand increased above the ability for SF and probably most high priced Cities. Generally, this can be due to Building Codes (think of Landmarking here) and Rent Regulations.

The trend seems to be that those that cannot afford to live in these cities are the ones moving out with a few exceptions of those that are seeking a bargain.

BUT, those seeking a bargain are generally trading off something in order to get their bargain, usually it may be something like weather, closeness to high income jobs, walkability of a City (think Vancouver and NYC here), diversity of Restaurants, etc. the list goes on and on and on.

I think what most people who may look at statistics for Migration do not go far ENOUGH with their usage of statistics, and therefore, do not get the full understanding.

If you begin to incorporate Birth and Death rates into the Net Migration, you start to see a fuller picture. Even this isn't the full set of statistics that you need.

BUT, adding Births, you will see that wealthier families that stay will have children that then have advantages because of their wealth and go on to stay in these cities and get those higher paying jobs.

That would be in addition to the fact that the higher paying jobs also attract those who qualify for those kinds of jobs and their families, who then have children and so on.

In NYC, so many neighborhoods have become what we call, "Stroller Neighborhoods." It's a term that seems to expand all the time as established neighborhoods continue to have more children and gentrifying neighborhoods start to settle in and have children themselves.

The Death Rate needs to also be included. You will see that statistically, people are living much longer. Therefore, this will be reflected in the Death Statistics. This become important as the elder generations want to continue to stay in their homes rather than move to a different location such as retirement communities.

Enabling those to stay in their homes at an advanced age are products like Reverse Mortgages. You can use your Equity which has become enormous due to high appreciation to remain in your home and even get PAID! Why should you move? You are now wealthy and you can tap your Equity and have a monthly spending account in addition to your Social Security.

When you put just the NET Migration, the Birth Rate and the Death Rate together, you start to see a much more fuller picture.

You start to see Cities that push out lower income people out except for the few lucky ones that has benefited from Rent Regulations, but then put an enormous burden on Housing by effectively reducing the supply of housing as compared to the demand.

At the same time, Stroller neighborhoods expand and increase solely due to birth rates. This time because of the concentration of wealth, this creates an advantage to those that remained.

Just as a side note, in Brooklyn, there are 3 very incredibly popular Public Schools. These schools are so sought after that young families are willing to spend multi-millions on their homes to be within the districts of these schools, to ensure they put their kids at an advantage.

The problem is that these schools then become much less diversified. The Mayor and School Chancellor want to require 20% of the seats to be slated for low income families. BUT this will be a huge uphill fight since rich families have spend huge money to have this advantage.

Getting back on topic, you cannot just take into account just the statistics of Migration OUT of a city with out taking into account several other factors including Migration IN and their quality of both the ones that leave and the ones that stay and then migrate in.

Then you need to add in the Birth Rate and the advantages they will have.

Then the Death Rate and how this affects supply and demand.

Just my 2 cents and sorry if a Brooklyn, NYC investor like me snuck in to your thread! :)

I don't know if you mean that $10k a month is a particularly good thing because then I have to wonder what is the purpose of asking about the $10k per month.

Just knowing if someone is making $10k per month does not necessarily mean it's a good thing.

Example, Bob buys a property for $10 Million without a Mortgage and makes $10k a month or $120k per year. The Cap Rate/"Cash on Cash Return" on it is $120k / $10 Million or 1.2% ! No matter what market, that's a terrible Cap Rate, even here in Brooklyn, NYC!

Now, let's change the scenario a bit more and say that the purchase price is only $1 Million. The new calculation for Cap Rate/"Cash on Cash Return" (since we are not using a Mortgage) is $120k  / $1 Million = 12% Far better than the 1.2% but not great either! BTW, this Cap Rate is GREAT in the Brooklyn Market!

Just some food for thought!

@David Roberts

Hi David,

I added a column for the New Financing situation as you asked:

I zeroed out the Financing from the Purchase by making the DP% = 100% so you did not carry a mortgage.

I also lowered the CC% to 3% because you no longer had to carry a Mortgage which generally, you will need to have to pay a Mortgage Tax.

In the I Column, I added a new Finance Column where in 2020 you received $400k in your pocket.

HOWEVER, in 2029, you must then pay it back. If you used a HELOC to get the $400k, you will be paying Interest on that $400k. If you used an Interest Only HELOC at 6% you will be paying $24k per year on Interest for the outstanding balance. NOTE that you are gambling that the Interest Rate will AVERAGE 6% for the HELOC. If it increases above that, you will negatively impact your Cash Flow which will then impact your overall IRR.

You will see that it does not significantly impact the previous spreadsheet IRR if we assumed a 6% Average HELOC Interest Rate. So both IRR are 14% as it is in these scenarios.

The only reason to do this is to negotiate a better Purchase Price, but again, you are taking a chance that the HELOC is 6% on Average. You CAN do a cash out refinance and lock in the rate, but the rate will be significantly worse than on the Purchase. So again, you will need to take that into consideration.

You will need to throw into the mix whether or not getting a better price on Purchase for an All Cash deal is worth it, depending on the finance in the 2nd year.

BUT, if the price at purchase was the same, then you will not receive any more profit than what you would have had if you bought it with a Mortgage in the beginning.

See how useful these Calculations can be?

Without this kind of calculation, I really don't know how others are handling complex scenarios. To me, if you only use a calculation like Cash on Cash Return (CoCR), you can only know the 1st year and then what?! You make the assumption that it will do the same for the next 10 years?!

Ummm... I have a real problem with that! But it's up to the reader to decide if they want to get a better vision of the future of their investment.

@Tandi H.

Hi Tandi,

To go into complete depth with IRR, it will take an entire book!

In fact, there is an entire book! It's called "What Every Real Estate Investor needs to know about Cash Flow..." by Frank Gallinelli

Either case, I put together a very quick spreadsheet (took me 10 minutes) as an example. Please refer to this Spreadsheet:

To do a basic IRR calculation, you will need to project out a bunch of things including:

1) Your Investment: Cells A1 to B7

2) The Mortgage Balance Reduction: Cells A9 to B14

3) The Future Value you will sell the Investment: Cells D1 to E12

4) The Proceeds after the Sale: Cells D14 to E21

5) Your Rents and Expenses and how they will increase throughout the 10 Years: Cells H1 to L2

6) A Chart which will take into account all the above for the next 10 years: Cells G6 to M18.

After totalling up everything, you will get a single number. In the above case, 9% IRR.

You should think of it as putting the Investment in to a Certificate of Deposit, holding it for 10 years at the 9% IRR per year for the 10 years.

The IRR Calculations gives you a fantastic way to calculate ANY type of Investment against each other, including Stocks, Bonds, Real Estate, ANYTHING really.

Once you know all the Cashflows for the entire 10 year target life of the Investment, then you can get an IRR for it.

Now, let's look at a 2nd Scenario with this EXACT spreadsheet, but with different numbers:

We increased the price to $500k, buying in a location that has at least the national appreciation rate. The rent for the property is $3k per month with around a $650 per month total expense, but our mortgage is $2,398 per month, giving us the 1st year at a NEGATIVE cash flow of -578 annually or around a negative $50 per month loss.

If you notice, the IRR calculates 14%... which is much higher than 9% in the first scenario.

Typically, I accept a break even scenario to capture a much higher IRR. I have purchased 8 Multi-Family Brooklyn Properties in 21 years. At least 2 started out negative. All are doing significantly better then even a 14% IRR.

To give you a little bit of what I'm saying in terms of SIMPLE INTEREST CALCULATIONS, in 2004 I bought a property for $880k with approximately 25% down or roughly $250k invested. TODAY, that property is worth over $3 Million. If I sold it today, I will get back around $2.5 Million in Proceeds. If you do the SIMPLE INTEREST Calculation, you get a profit of $2.25 Million for an investment of $225k. The ROI is 900%. If you divided it by 14 years, that's roughly 64% per year for 14 straight years. NOTE, this does not even consider Cash Flow. TODAY, we Cash flow over $3,500 per month but when we started, we barely broke even.

So, without going too much into things, you can see how a basic IRR pro-forma 10 year business plan is put together.

This isn't even close to what the professionals would actually do.

We need to justify every number. For instance, why did we chose a 5% Appreciation rate? Well, it could be that the historic appreciation rate for the city and neighborhood is close to 10% (Brooklyn NYC is actually even higher than 10% for the last 20 years in the neighborhoods I have invested in). So 5% is CONSERVATIVE depending on where you are investing.

We can then look at how the rents and expenses are moving up. A 2.5% increase of market rents in NYC

is WAY TOO CONSERVATIVE while a 3.5% increase in Expenses is somewhat normal.

ANYWAY... I don't want to write a book for this post. I think you get the picture on how comprehensive and sophisticated you have to be in order to put together something like this.

Remember, this is a very simple and basic pro-forma 10 year projection IRR Business Plan. All numbers must be explained and justified.

I won't explain every calculation on this spreadsheet, but I think the reader of this post will get an understanding.

This is what I recommend on EVERY investment. That would also include EVERY TYPE of investment, not just Real Estate.

Hope some of this helps with the explanation of IRR.

Once you get a full understanding of it, you can then look at all the kinds of Real Estate in any kind of City and then put in the pro-forma assumptions conservatively.

When you do enough of these, you will start to get a picture on where is the best place to invest (or even what type of investment is the best) simply by looking at the IRR that is calculated.

Other factors that are not put into this spreadsheet are Cap Ex, Vacancies, Legal, etc.

But given all of those variables, you can add them into your IRR Calculations and project them out over the 10 years.

OK... I'm not going to beat a dead horse. You get the point.