All Forum Posts by: Llewelyn A.

@Michaela G.

That's not enough information for me to make a decision to buy an Investment. I need at least the following:

1) Projected 10 year rent increases

2) Projected 10 year expense increases

3) Economic Dependencies... is this a Detroit where it is 90% dependent on Automotive or is it like NYC where there are 100s of industries that will support any single downfall in a particular industry?

4) Climate Issues - Is the area vulnerable to increased flooding?

5) Are there any Developments that can impact the location? For instance, a major transportation hub like a Subway Station? Maybe a large Business Development office? Or perhaps a new Water Sewage Plant or homeless intake shelter which can negatively impact the area?

I can't really determine if an investment is good or bad based on the 1st year information.

I consider an investment a Vehicle.

When you drive your Investment Vehicle, your eyes need to be looking through the windshield and watching what's in front of your (the future). If you only drive looking at the side window (the present or 1st year data), you will crash your investment vehicle if the road is not completely straight without any obstacles. If you look only in the rear view mirror (the past data), you will crash your investment vehicle again, if the road isn't straight. BUT, if you look 95% in to the Windshield (the future), you can avoid obstacles like when the bridge is broken and you are about to fall off.  You will also be able to avoid any turns in the road, even find alternate routes if necessary to finally arrive at your successful destination.

@Michaela G.

@Stuart M.

I would like to change the scenario of house 2 a little differently.

Let's say that House 2 was purchased with All Cash instead of $25k down. So the investment would be $500k.

Since the Rent is $4k a Month, obviously, Stuart would be at a very good Cash Flow per month, in fact, better than in House 1.

Does that mean to you that all of a sudden House 2 is less risky or that House 1 is more risky?

What I'm pointing out is that it's not the HOUSE that's risky or not.... it's the INVESTOR, in this case Stuart.

Stuart's example of House 2's scenario is to finance it with $25k down or 5% down and mortgage it at 95% LTV.

House 2 is perfectly fine as an Investment.

What Michaela is probably saying, and she can speak for herself, is that when you, the Investor, sets up the finance in such a way that you give no room for the possibility of something happening where the cash flow can pay for it, you take the risk you don't have enough of a savings reserve to overcome that problem.

What I'm saying is that, yes, it's true, Stuart's House 2 scenario as is leads to the risk of not having enough cash flow for future repairs should it come about.

Stuart would need some way to get some extra money should that occur. That may mean borrowing from some source like his Savings, taking a personal loan if there isn't enough equity, etc.

OR, Stuart can put more down and increase the Cash Flow, which he can then save for future repairs.

HOWEVER, I want to point out that House 1 or House 2 are neither good or bad.

What is Good or Bad is how Stuart decides to Finance either one.

When we use some metrics like Cap Rate, we don't include the financing (also called Debt Service). That can give us an overall measurement of the ROI in the 1st Year.

So if you calculate the Cap Rate on both House 1 and House 2, the financing and Cash Flow will not be taken into account. Therefore, you can pick the more profitable Investment, but again, given only the 1st year.

The Financing Part of it is really more about how much risk you want to take on in regards to the lowering of the Cash Flow you will have as you pay the monthly Mortgage.

NOW, in my opinion, once we have an understanding that the Monthly Cash Flow depends not on the Property but on the Investor that decides what kind of terms for the Financing, then if we were to use the words speculation, it's more about the Investor Speculating that the lack of cash flow can work in this scenario where he may depend on future increasing rents to raise the cash flow.

If the 1st year initial cash flow is too risky, all the Investor has to do is put more down. Hence, it's not about the Investment, it's about the INVESTOR.

@Stuart M.

Hi Stuart. I'll probably be one of the only few that will lean towards House 2 approach.

I've been buying houses in Brooklyn, NY for the last 20 years. It's your House 2 on steroids.

Results are incredible. Real Example:

Year 2000:

Purchase Price: $140k, $21k down and $7k Closing, $119k Mortgage

Rent: 2 Units at $500 each per month

Cash Flow: ZERO

Repairs: $40k

------------------------

Year 2017

Current Value: $1 Million

Profit if Sold: $1 Million minus $40k Repairs minus $21k down minus $7k Closing minus $80k Mortgage Balance minus $50k in Commissions minus $35k Seller's Closing Costs = $767k profit on $21k down plus $7k Closing plus $40k in repairs = $767k / $68k = 1,128% ROI just on Appreciation and Mortgage Reduction.

Current Rents are $1,850 for Unit 1, $1,900 for Unit 2. Cash Flow is approximately $2.5k per month

-----------------------

I started getting Cash Flow in Year 3 with the above property.

I used the Equity to Buy other properties. In fact, all other properties came from the Equity of the previous properties.

Some call it luck. I did this 8 times in 20 years. Virtually all properties are similar to this one.

I will say that I was also a highly paid Programmer when I graduated College in 1997 and didn't need the Cash Flow to put food on the table.

BUT, I will also say that if you don't need the cash flow, you can get into these kinds of lucrative properties.

You can't just do the numbers. You need to assess the long term effects of economics as well as other external scenarios like Climate Change.

I'm not sure about Boca Raton or where you are planning on investing finally.

Florida will deal with Rising Sea Levels, but 2017 was devastating in terms of Hurricanes. Prices will be in the next 30 years will depend on what Florida does to counteract Climate Change, if anything can be done. If anything, you will have to take into account higher increasing Hurricane Insurance over the future years.

That's also the beauty with doing a long term analysis. It makes you think of the future. I normally put together a 10 year projection and take into account all the effects of future Economics and other things like Climate.

Just like a Squirrel who has to put away nuts for the winter, if that little animal didn't think of the future, he'd starve to death before the Spring!  

@Russell Brazil

@Jay Hinrichs

Jay: Thanks for the explanation. Now I understand why all the 3-Day Real Estate Wholesaling seminars seem to target every place BUT New York City. Funny how many NYers go to these seminars and then try to Wholesale, and I'm guessing, in a low Priced area.

Russell: You are absolutely right. I didn't mean to suggest that the Listing Broker's/Agent's skills and activities are not important. I can definitely imagine how important it is, especially with the really high priced Properties.

I probably should watch a few of those Million Dollar Listing episodes!

All: So now i'm curious, how important is that kind of staging or sprucing up, colors, etc. to the Wholesaler? I am guessing that they don't really care because they already have a Buyer's list and know what those Buyers want? They are not pitching to Home Owners but maybe Investors in General?

@Chris Mason

@russell Brazil

I'm sure that the State Department, Division of Licensing would rule that the Wholesaler was practicing Real Estate without a License. I'm equally sure that the Agent that lists a Property on the MLS will be in trouble as well if a complaint is filed. Which then means the Broker who employs that Agent is also a responsible party since he is suppose to be supervising the Agent.

Even if the MLS allows it, it still is a Net Listing with the Assignment, no?

Seems like the risk for the Broker and Agent isn't worth it as both can be reprimanded or at worse, lose their license.

If the Owner of the property finds out and feels that he got screwed, I can see him filing a Complaint.

I'm just wondering if this happens quite often.

I'm in NYC. I can't believe this would be normal here because the Earnest Money on Contract would be 5% of purchase. With Properties normally $500k or above, that would be $25k to get into Contract.

I'm not even sure it's really worth it for the Wholesaler either. Why not just get your License and just do it all legally?

From what I understand of Agents that Lists Properties, it's a good business because there isn't much to do. Just put it on the MLS and let the cooperating Broker find the Buyers. So the Wholsaler who becomes an Agent can just put a bunch of properties on the MLS and not even bother finding a Buyer since someone else will if it's priced correctly. Do enough of those, and you will be killing it.

Since the Wholesaler who is now an Agent doesn't have to find Buyers, he cuts out a huge amount of work and doesn't have to worry about things like breaking the law or double closing, etc.

I guess I'm just not understanding the Wholesaling Process because it seems to me a good Wholesaler can be a Great Listing Agent.

@Russell Brazilundefined

I'm getting very curious.

I'm a new Broker so I haven't yet set up my Access to the MLS.

How can an Agent List a Property from someone that doesn't actually own the Property but just has a Contract under assignment?

Doesn't the Listing Agreement has to be signed by the actual owner? Or am I completely misunderstanding this thread?

Wow..... And I thought NYC was crazy! Finally, I found an even crazier Tenant/Landlord City!

Joking Aside, one of the reasons why Apts are so expensive in cities like SF and NYC IS because of rent controls! It works like a lottery system where if you get an apt, you can make money and according to those tenants, as much as $100k or more!

NYC has over 1 Million rent control apts, greater than the whole population of SF. So maybe we are worse just because of the amount of apts that are rent controlled.

Although I own more than 25 Apts in NYC..... I avoid rent control like the plague. But it certainly drives up the value of Market Rate apts and the vacancy rates are extremely low, 3% here in NYC.

@Will Lee I wish you good luck and hope that the Seniors will just take the money and use it as a down payment somewhere that they can afford.

@Howard C

@Mala S.

Hi Howard. I'm not sure you are correct that the Certificate of Occupancy is classified as "Miscellaneous Two Family (B9)".

See Snapshot here:

Note on the DOB website, one of my properties is classified as "B3-2 Family Dwelling."

HOWEVER, read what it says to the LEFT. "Department of Finance Building Classification:" The "B3" is a FINANCE Classification, not a DOB Classification. The only way to know what your Building is legally set up to be is to look at the Certificate of Occupancy (CofO). There is a link I circled above in the image where you can click on it and it will take you to the Certificate of Occupancy area. You will find something similar to this snap shot:

Note that mine says "NO COs ISSUED OR NO IMAGE AVAILABLE". If you see this, that doesn't mean there is NO CofO.... it just means if there is a CofO, you can go to the Buildings Dept at 142 Joralemon Street in Brooklyn and try to get the Certificate of Occupancy. There may not be any there, but if there is, they will have it in their records. Then you will know what the actual DOB Classification is versus the Dept of Finance Classification.

Mala is advising you correct as well. Eventually, you can take the information you discover to an Architect. But before that, DOB has a "Owners Night" every Tuesday from 4 pm to about 8 pm.

Get all the correct information and take it there and you can have your questions answered directly by the DOB.

The DOB can advise you first and you may not need an Architect involved. They may be able to advise you as to the Letter of No Objection (LNO). A good Expediter may be able to solve this problem as well.

So, before you go to the Architect, I would first do some leg work and find out everything correctly.

OR, you can just hire an Architect. The problem here is that you are completely in the dark on how it all works. I like to be somewhat hands on myself.

@Howard C

Sell it as is but pull out the Kitchen.

The basic problem is that a Buyer won't be able to get a Mortgage with an illegal apt. It may show up during the Buyer's Inspection and for the Buyer's Appraisal as a two family but the Buyer's Title Records will show it with it's current single family CofO.

Is it taxed as a two family? I am assuming that it is not because the Buildings dept turned down the request for a letter of no objection, correct?

You can talk to a Broker who can list your property and have them advise potential Buyers of the problem.

If the Buyer wants to continue, the Mortgage Bank will ask you to pull out the extra kitchen, assuming you have 2 kitchens. Pulling out the kitchen just basically mean take out the Stove and capping the Gas for it.

It's actually quite common in NYC and I have been to open houses where there was an obvious illegal extra apt. I remember one open house where the Listing Broker was an Attorney she brought her affiliated Mortgage Representative with her.

I confirmed with the Mortgage Rep. that during the Buying Process, all that was necessary was to remove the Stove in the illegal unit.

Of course if there were any other violations, they will have to be corrected and then inspected by the various NYC departments such as HPD, Buildings, ECB, etc. to clear them before the Closing.

Just call several Real Estate Brokerages and talk to the Broker. I'm sure this won't be a problem. You will need to give full disclosure and be willing to pull out the kitchen.

Any Brokerage will do a Comparative Marketing Analysis (CMA) and will advise you on how they will compare your property. I'm even sure some may list it as a 2 Family and let Buyers know before they put in a Bid. Some may even list it as a single Family but have some language regarding possible rental unit. There are all kinds of Ads I have seen listed.... especially phrases like "English Basement," which is pretty illegal in NYC.

I have been a RE Investor for 20 years in NYC and I have seen Brokers list everything, legal or illegal. When I became a Broker, I spoke with many other friends who are much more experienced on the Sales side and they basically call Brooklyn the Wild Wild West of Real Estate!

I also want to mention that I am a Newly Licensed Broker in NYC. While I am giving you my opinion, just verify all the information thoroughly. My opinion here should NOT be considered as if I were representing you.

@Nicholas Aiola

Hi Nick. Just thought of an interesting scenario after reading a BP Poster's dilemma.

Basically, the Poster has a Primary Residence that had increased very well in value.

They want to convert to a Rental but do not want to give up the Capital Gains Exclusion on Sale of a Primary Residence.

Can that poster Create an LLC, sell the Property to that LLC, take the Capital Gains Exclusion, and reset the cost basis of the Property for the LLC?

Let's say there was a Contract involved which can clearly define the Selling Price so that there is no tax obligation after taking the Exclusion, in order to establish that cost basis.

So say Jack and Jill forms an LLC called Jack and Jill's Rental LLC.

Jack and Jill bought the Property for $100k. Sells it to Jack and Jill's Rental LLC for $600k.

The $500k of Profits on Sale is excluded using the Capital Gains Exclusion.

Jack and Jill's Rental LLC now owns the Rental and the Members are both Jack and Jill.

The cost basis is now $600k.

By doing it this way, Jack and Jill no longer have to fear losing the Capital Gains Exclusion.

What do you think?