All Forum Posts by: Llewelyn A.

@Jackson Ramirez

@Ryan E.

@Dave Foster

Thanks for the shoutout Ryan!

Jackson, Just a little bit more about me.

I have been buying properties since 1997 in Brooklyn, NY.

Your experience in 2004 which took you 3 years to work hard and save up to buy (in 2007 as I interpreted it) a single investment which the Market Value was $650k (in 2004) that increased in value to $1.2 Million, roughly a 100% increase is FANTASTIC in any other market EXCEPT in many neighborhoods in NYC.

My hats off to you in regards to what you have done by buying it at 55% of Market Value at the time.

Just to do some calculations, you would have purchased the property at 55% below $650k Market = 55% x $650k = $357,500.

I want to break it down in 2 different scenarios since you didn't mention that you bought it with a Mortgage or not. I want to assume you had a mortgage because $357,500 is a lot to come up with!

Scenario 1 - Bought it all cash

Profit: $1.2 Million minus $357,500 = $842,500

Total ROI: $842,500 / $357,500 = 236%

Years: 2018 minus 2007 = 11 years (assuming you bought it 3 years after the deal was offered in 2004 as you indicated)

Simple ROI / Yr: 21% PER YEAR! FANTASTIC!

Scenario 2: You put down 20%, borrowed 80%

Purchase Price: $357,500

Down Payment %: 20%

DP $: $71,500

Mort: $286,000

3.5% Closing Costs: $12,513

Total Investment: $71,500 plus $12,513 = $84,013

Assume 5%, 30 year fixed rate Mortgage principal is $286k, currently at 132nd Month payment

Selling Price: $1.2 Million

Mort. Balance: $225,689

Commision %: 5%

Commission$: $60k

Seller's Closing Costs %: 4%

Seller's Closing Costs $: $48,000

Proceeds: $1.2 Million minus $225,689 minus $60k minus $48k = $866,311!

To do the ROI calculations this way, you basically turned your investment of $84,013 into $866,311!!!! EVEN MORE FANTASTIC!

Now we can do the calculations for Simple Annual ROI:

2007 Invested $84,013

2018 Returned $866,311

Profit: $866,311 minus $84,013 = $782,299

Total ROI: $782,299 divided by $84,013 = 931%!!!

Years: 11

Simple Annual ROI: 931% divided by 11 years = 84.6% ROI PER YEAR FOR 11 straight YEARS!!!!!!! AWESOMELY FANTASTIC!!!!!!

I will tell you that from the world of ALL INVESTORS... including Stocks, Bonds and Real Estate, that kind of return is probably among the top 1% if not the top 0.1%!!!!! IN THE WORLD!!!!!!

Now, let's get back to what I originally stated that this is a AWESOME appreciation for just about ANY area.... EXCEPT in certain neighborhoods in NYC and other rare appreciating markets!

I will tell you that I invested since 1997. The returns in my 2nd Scenario with a 20% down payment and 80% LTV is just about what I normally do and the Appreciation Rates is a little bit higher than what you achieved from 2007 to today.

An example would be a property I bought in Clinton Hill Brooklyn in 2004 for $890k is now worth $3 Million today.

A second example is a property I bought in Bed-Stuy Brooklyn in 2014 for $900k, renovations of $375k, now worth over $2 Million.

I've done this 8 times consecutively and by intelligent decision making.

I think that you can look at certain up and coming neighborhoods in NYC that are primed for future appreciation where you can still buy in should you decide to house hack it.

I included David Foster in this posting because I think one of your option is to do a 1031 exchange into another property if you feel your area is currently peaking. There are definitely other areas that are still continuing to appreciate and have a way to go. David, if you don't mind letting me know your opinion on a 1031 Exchange in this circumstances, that would be awesome!

However, Jackson Ramirez also has the option to sell the property outright and benefit from the Primary Resident Capital Gains Exclusion of $500k if married. I would have a talk with a CPA to go through the tax aspects of it but doing the Exchange will defer your taxes until you finally sell.

Most people on this Forum will probably tell you to sell out and buy elsewhere. Ryan knew I would be one of the few that continues to Analyze high Appreciating markets like NYC and continue to invest here. I'm currently in Contract with a 3 Family Brooklyn property so I'm putting my money where my mouth is again.

Ryan is also correct. If you love where you live, you can take the Equity Line and buy another property versus doing the 1031 Exchange.

The fact that you have a Construction Crew available, I think you can do a 1031 Exchange to say, a 3 Family property and house hack a renovation and force appreciation from the start. If you picked a up and coming location, you can get huge appreciation in less than 5 years.

It's funny how one property, choosen in the correct neighborhood can give you the ability to retire in just 10 years.

Again, Congrats on your achievement and hopefully I added to the conversation!

As a dirt poor NY Immigrant that grew up from a 2 year old in the late 60s, living in the Alphabet City neighborhood in Manhattan, my experience by being beat up by virtually every kind of Gang, Hispanic, African Americans, Whites ( Irish and Italian gangs basically), etc.... embedded into me that Race plays both an obvious and subtle role in our City and I'm sure that extends throughout our Nation. NYC back then had neighborhoods that you really could not walk down if you were not the right color.

Today, NYC had changes a LOT, mostly because of Gentrification, but that's another story.

Either case, my childhood experiences told me that by the time I was ready to Invest after graduating College and working for a year, coincidentally as a Programmer like the main character, I knew I needed a White Male Partner to buy our first Investment Property.

That was back in 1997.

I can't prove that Partnering with White Males really helped, but I certainly felt that to ensure success, I really needed to start out that way.

In the past 5 years, Asians Males seem to have moved up the ladder, close to the top along with White Males. So I also have a number of Asian Americans as my Partners. That may be coincidental as well.

I also am close friends to some in the Real Estate Industry in Philly. I was told by the one friend that being an African America had a negative effect on his ability to List properties, even among African American Home Owners.

To this day I fully believe that my success in NYC considering my poor immigrant ethnicity is more about my Street Smarts than my Intellect.

I easily beat out my colleagues who worked with me at the best financial firms (including the Federal Reserve Bank of NY) in net worth, not because I am more intelligent than they are but because I used my street smarts to avoid external problems like racial disadvantages.

This could all be self-delusion on my part..... but that's the way I played it in the 20 years I have been Investing.

Now I'm on top of the food chain so much that I even have a wealth manager! I have a lot of people that never wanted to Partner with me seeing me as their potential future Partner.

There are still disadvantages I still have to overcome, such as now I am a Real Estate Broker and I need my Clients to not have pre-conceived notions of what I can do for them. One Client turned me down as their buyer Agent despite the fact that I have 20 years buying NYC properties AND I offered a rebate on my commission. I wasn't told what the real reason was, but I do have my suspicions!

Either case, I've had decades to hone my street smart skills and I'll overcome that as well.

@Bryan Tasumi

To further the conversation that seems to be going awry for some of the posters in this thread, the math is the math, whether or not they accept it or understand it.

Also, Cash Flow is only one of 4 ways of making money in Real Estate.

The other 3 are Appreciation, Mortgage Reduction and Tax Savings.

One of the best books that you can possibly read which is not on the best seller's list because it's ALL about the MATH is What Every Real Estate Investor Needs to Know About Cash Flow

A study of the above book will help you to understand that if you value ONLY cash flow then you will not EVER want your investments to be purchased where the Cash Flow is not a large positive amount.

HOWEVER, if you try to understand the other 3 ways of making money in Real Estate, then you will have other metrics that can offset an Investment that is either Negative or Break Even Cash Flow.

The reality is that for the 3 Scenarios, there is not enough information to determine if the single property is good or not.

We only know a few things including the Purchase Price, Rents and Expenses and also the way it was financed.

What most people are making an assumption is that the First Year's Calculation is the same for the ENTIRE time you own the property.

What is unknown is how to workout any kind of future appreciation rates in both Rental And Expenses so that you can determine the Future NOI.

Based on the Future NOI, you can then work out the Value of the Property by using the neighborhood Cap Rate = NOI/Purchase Price.

I have know plenty of Investors who chose to live in NYC only to find themselves priced out because they failed to understand that you need to calculate not only the 1st year Cash Flows but at least the next 10 year cash flows.

As an example, in the year 2000, I bought a 2 Family building for $140k, 15% down or $21k, $7k in closing costs.  The total investment was $28k. There was $40k in renovations so total investment was $21k + $7k + 40k = $68k. The rents were $500 each unit and it broke even on the cash flow.

TODAY, the rents are now $1,900 Each Unit.... YES.... that's a $1,400 increase on EACH unit times 2 units = $2,800 of MORE RENTS while the expenses climbed much less than the rents.

The Value of the building is conservatively $1 Million.

If I were to sell the building, I would profit $1 Million minus the remaining balance of the Mortgage, around $50k and some closing costs, say $75k. So... $1 Million minus $75k minus $75k = $850k.

So this building which is a LOSER to the several posters, 17 years later, cash flows hugely per month.

The ROI on the SALE would be $850k returned / $68k invested or 1,250%...... yes... that ONE THOUSAND TWO HUNDRED AND FIFTY PERCENT. Divide that by 18 years and you get approximately 70% per year. AND IT CASH FLOWs today more than $2,500 per MONTH.

I'm so sad I bought this LOSER of a property.

I am not preaching to buy a Cash Flowing Property or NOT.... what I was merely demonstrating is that MATH shows that the INVESTOR cash flows the Property.

So if you want to go to a Cash Flowing scenario in the ACTUAL property I bought in 2000... then I would have merely put more down. Then I would have cash flowed the property.

Did that make the property good or bad? NO... it was the FUTURE results that made it good or bad.

If you believe that there is risk of buying a property where you cannot make it cash flow, then you buy as according to your ability to cash flow the property.

I'm merely stating that the Characteristic of Cash Flow should not be attributed to the Property. It's the INVESTOR that cash flows the property.

@Bryan Tasumi

Hi Bryan, I just wanted to give a little bit of Math to show that in all reality... It's not the Investment that Cash Flows.... it's the INVESTOR that Cash Flows the Investment.

I know a lot of people think it's the Investment that Cash Flow, but I am putting forth the Math which shows a different observation, at least in my eyes.

I have 3 Scenarios but in all 3 scenarios you are buying the SAME property for $100k, Rent of $1,400 per month, expenses of $1k per month, just with different Financial options.

Scenario 1: You put ZERO down, Finance it 100%, your interest rate is sky high at 7%, your Cash Flow? NEGATIVE $265 per month.

Scenario 2: You put 30% down, Finance it 70%, your Interest Rate drops to 5.5%, your Cash Flow? BREAK EVEN (or just about $3 per month).

Scenario 3: You put down ALL CASH, ZERO FINANCING, your Cash Flow? $400 per month!

Here is the Spreadsheet with the MATH:

The Investment didn't Change.... it was the FINANCING THAT CHANGED... who is incharge of the Financing? THE INVESTOR.

That's why I say that it's the INVESTOR that CASH FLOWs the INVESTMENT... not the opposite.

I think the better way to put your original question may be rephrased as "Since you the INVESTOR Cash Flows the Investment... are you confortable with a NEGATIVE Cash Flowing Scenario and what Percentage of your Investments to you have it go Negative?"

Once you rephrase it this way, you can now see that if your Credit and other qualifications increase to the point where you can get better terms, you can even refinance the Investment and change a negative cash flow situation to a positive one!

Another option is to increase the rents that were under market or force appreciation with renovations, etc.

I know Math isn't a good topic sometimes... but I think an analysis can help shed light on your original question.

@Nicholas Aiola

Hi Nicholas!

If you don't mind, I'd like to get to understand Depreciation Recapture and Capital Gains a bit more than I do right now.

Hypothetically, let's put some numbers on a Sale and let me know how it works when determining Capital Gains and Recaptured Depreciation.

Purchase Price: $300k

Sale Price: $500k

Total Depreciation: $100k

Holding Period: 10 years

So... from what I understand, The cost basis would be lowered by the Depreciation. So in this case, the cost basis would be $300k minus $100k = $200k.

So now we can figure out the Capital Gains to be Sale Price minus Cost Basis = $500k minus $200k = $300k CG.

So first we recapture the depreciation at 25% which would be $100k recaptured and you would pay $25k in taxes.

Then you take the remainder of the CG minus recaptured depreciation = $300k minus $100k = $200k and pay Long Term  Capital Gains? Let's say for me, the LTCG is at 15%.

So I would then pay $200k x 15% = $30k?

If that's the case, then I paid $25k in Recaptured Depreciation plus $30k Long Term Capital Gainss = $55k Tax in this Hypothetical Scenario?

How badly am I off with this understanding?!

With so much to the tax code, it gives me a headache trying to figure it all out!

Thanks so kindly to straighten me out!

@Nicholas Aiola

Hi Nicholas!

Thank you again for providing such a great opportunity for the public to speak to a Certified PUBLIC Accountant! You're the best!

I have a question in regards to how I am conducting a specific transaction as a Brokerage.

My Brokerage is an LLC.

One of my friends is going to purchase a Condo.

I agreed to "Rebate" him part of my commission. I am curious how this will impact both of us.

Let's put some numbers to it just for an example.

Let's say I'm going to receive a $10k Commission.

However, I told the Attorney that he should include in the Contract of Sale that the Broker, myself, will "Rebate" $5k of the Commission from the Seller back to the Buyer to pay towards the Closing Costs of the Buyer

In my case, I am thinking that I will be responsible for $10k minus $5k = $5k put towards my LLC Business Income, correct?

In the Purchaser's case, how does this impact him? Does it just reduce his closing costs which ultimately adjusts his cost basis by decreasing it by $5k, making him responsible for it at the time he sells the property?

Much appreciate it!

Thanks!

@Shiloh Lundahl

I think you are asking the absolutely right questions!

You have to be able to source the information that you are receiving and determine and be able to qualify that information.

In Sales, it's done all the time with Leads. Leads come in, but 95% of it maybe garbage. By Qualifying the Leads, you can get to the people who need your product or services as quickly as you can without going through the pain of wasting a lot of time and money.

Even in educational facilities, I think the first question people need to ask is given the Education that was given to the Student who Graduated the program, is that person now employed in the area that he was Educated and at what Salary?

I've learned to ask this question because most of my properties are in Neighborhoods in Brooklyn where there are a lot of Colleges and Universities. I get to see a lot of the Graduates, their professions and their current salaries as they apply to my Apts as tenants.

I will tell you that I'm not surprised that a lot of these Graduates are either not employed in their field of study or not making as much money as you would expect from someone Graduating from a prestigious school, etc.

Some of the stories are heartbreaking. I had one tenant who graduated Harvard with a Performing Arts degree. I can't even imagine what her debt would be. She wound up working at a Nanny, a Waitress and currently, a Personal Trainer. She couldn't qualify as my tenant without a roommate that was extremely qualified.

Over the years, I started to be very discriminating on the information and advice that I am given.

If it's education, i want to know the success rate of the Graduates overall. Then I want to know the success rate of the specific profession. And then I want to compare the Cost of that Education with the Salary of that profession.

If it's Financial Services, If someone wants to sell me a financial product, and there are plenty of people that do, I want to make sure that they know what they are talking about. So I ask them to show me that they themselves are financially sound by asking them questions in the same way I ask a tenant... how is your Credit Score? What is you annual salary? 

It maybe funny, but I need to get to know the people who could potentially steer me the wrong way with my hard earned money. But I make it a point. If I am doing much better than you, the Financial Advisor, then your advice is suspect. It may be good, but If I am doing better than the Financial Advisor himself, especially in measurable metrics like overall Internal Rate of Return (IRR), then I'm probably much better off with my own advice and not switching it around.

I am completely in agreement that you need to qualify and discern any advice you are given. That includes Guru classes, BP, etc. I really would like to know any statistics that are available with the Guru Class Graduates, especially. If you don't know those statistics, I think you are buying a program blindly.

I also want to mention that experience is not actually the only metric you need when seeking advice.

For example, I have seen plenty of people try to give marriage advice. The funny thing was that one guy that was giving Marriage Advice claims he knows all about Marriage because he was Married 5 times! haha! Really? Should anyone take Marriage advice from him?!

When it comes to Investing, I like to say that while you are looking for advice from a Good Investor, it may be difficult to understand who IS a GOOD Investor.

Looking deeper into it, you can say that a Good Investor is someone who has made money. HOWEVER, this may not be true at all. If you bought ANY Investments outside of Detroit since 2010...... it is actually VERY DIFFICULT to LOSE! You could have probably kept your eyes shut, thrown a dart at a map, and bought a home or Investment anywhere and made some money!

In fact, I know several people who did something like that. They were really clueless why they bought where they did, and mostly because they just wanted to own their own home and not pay rent. Over 10 years, their home became every expensive! One of them decided to call himself a Real Estate Guru... but really, he just got LUCKY.

So, making money doesn't mean you are good if you made money when everything is going up. That's the point.

So, how do you tell a Good Investor from a Lucky Investor? There really seems to be only one way... the Investor needs to go through a downturn. If that Investor did not, then you can't really tell.

If the Investor survived through a downturn without much damage, then that Investor is PROBABLY good and not just lucky. If the Investor broke even during the down turn, then it's more likely the Investor is Good versus Lucky. If the Investor made money not only before the down turn AND also during and AFTER the down turn.... that Investor IS GOOD, without a doubt.

That's one reason why I sometimes let people know that I have 2 decades of Investing, went through at least 3 down turns, and have done GREAT during each of those cycles.

So, to me...... you are absolutely asking the right questions. 

 Hi Guy..... in no way am I suggesting anyone do what I mentioned in the hypothetical example.

I'm just giving an explanation on your question on "if you've got equity, use it before it's gone" just before the Crash.

In my example, you wind up taking out $100k in Equity from House 1. You wait for the crash, you buy the 2nd Property with that money from the Equity in House 2.

Now House 1 and house 2 goes back up to it's previous peak. You then take out an Equity Line from House 2 to pay back the $100k you borrowed from house 1.

Now you have 2 houses for the Price of ONE!

This, of course, requires good timing and a certain risk tolerance.

If you really wanted to put this on steroids, you can buy House 2 with the $100k from House 1 as a down payment of a $500k property that will go back up to a $1 Million property when the prices come back.

You can imagine that the returns are ASTRONOMICAL!!!

Again... I'm not saying do it..... I'm saying that if you time it really good..... WOW.. your returns will be phenomenal!

This requires a certain amount of knowledge of Economics however, which can help you time it. Studying the Business Cycles, etc. really does help!

I've managed to do it to a certain degree. As a result, my Partners and I have done incredibly well. Just not Astronomical.

But really, I get your point.... your risk tolerance level won't let you do it and that's very fair for anyone.

I, However, will continue with this particular strategy when I anticipate the Market coming down again. I just don't see that happening in the next 2 to 5 years in NYC. The demand is just too high with a very high standard of qualification for Mortgages.

The down turn will happen, and I've been through 3 major down turns in my Real Estate Career so I know them quite well. Each one I have not only survived, but made money.

The next time, I may supercharge it! :)

@Guy Yoes

The Strategy of using your Equity before the Crash is a GREAT Strategy.

Let's look at a hypothetical situation.

You own a property. It's peak before the down turn.

At Peak, your property is worth $400k. Let's say it will fall 50% in value to $200k.

Let's say you also have a $200k 1st Mortgage.

At Peak, you have the opportunity to take out a Loan or HELOC of $100k, for a total of $300k of liens.

You pull out that $100k from the HELOC and have it sit in the Bank. Let's say you are paying 5% in Interest or $5k per year.

At the BOTTOM of the fall, Banks will try to close all of the 2nd and above Loans. So they will try to close your HELOC Loan of $100k. But they can't because you have taken it out. So they will freeze your HELOC so you can't take anything more out of it. But it doesn't matter because you moved the money out anyway.

Now your property, at the bottom, is worth $200k, dropping from a peak of $400k.

If your property dropped 50%, then other properties dropped 50%.

You then search for properties that dropped 50% from $200k to $100k. You may find many and have the opportunity to buy the best of those at the worst of times.

As Warren Buffett says, "The time to buy is when there is blood in the Street." That's this time.

You snatch up the new property for $100k which was formally $200k.

As time goes buy, say a few years, both of your properties revert back to it's previous peak.

Your 1st Property is now worth $400k from the old peak and the new property is worth $200k from it's old peak.

The idea is that once the peak hits, you take your money out of equity. Once the bottom hits, you buy like crazy.

Normally no one has money at the bottom because Lending Dries up. BUT, you had already prepared for that by taking the Equity out when the value of your property is at the top, which was the best time to do that.

Imagine you did this during the Financial Crisis of 2007/8. You would have made a killing in some markets that dropped 70% to 80%.

The strategy is quite sound. I was able to do a bit of this during the Financial Crisis.

Hope this explanation helps.

@Michael Rutkowski

So that really protected Investments in NYC, particularly the ones that were in or close to Prime Neighborhoods which may have had quite a bit of Coops.

That doesn't mean we didn't have large amounts of foreclosures. But if you looked at Manhattan, it was so minimal in the prime areas, your could probably count them on just your fingers and toes in any given month (actually, it may have been so low you could count them on your fingers and toes in any YEAR).

I have been owning Investment properties since 2 decades here. I went through 3 different crisis including 9/11... the fall of the NASDAQ to 66% of it's value in 2001 and the Financial Crisis of 2007/8.

None of that had much of a significant effect on my Investment Properties. What it did do was forced my Lines of Credit to close and increased the standards of qualification for a mortgage so I couldn't buy at exactly the best time.

If we have a dip again..... I'm prepared to buy as much as I can! So I'm looking forward to it if it comes again!