All Forum Posts by: Llewelyn A.

@Mark Fedorov

What they are trying to do is stop the trending practice of some of the LARGER Corporations from getting away from paying taxes by moving their headquarters to tax heavens, then "Loaning" the US Subsidiary money, therefore incurring a huge tax deduction, against their US Profits. It's a scheme called "Inversion."

So they think by eliminating the Business Interest Tax deduction, businesses cannot do that and have to rely on their own money. What they call Equity Financing versus Debt Financing.

Really, only the very Rich will see these kinds of benefits.

The middle class or poor won't be able to do this, I believe. But others can comment.

Investor Llew

@Mark Fedorov

Here is the Tax Reform page from the Ways and Means Committee for Taxes:

A Better Way Tax Reform Proposal

Here is the Except on Page 26:

"Other Business Deductions and Credits Under this Blueprint, job creators will be allowed to deduct interest expense against any interest income, but no current deduction will be allowed for net interest expense. Any net interest expense may be carried forward indefinitely and allowed as a deduction against net interest income in future years. The benefit of immediate expensing of business investment operates as a more beneficial and more neutral substitute for the deduction of interest expense associated with debt incurred to finance such investment. Allowing investments to be immediately written off provides a greater incentive to invest than is provided through interest deductions under current law; allowing both together would be distortive as it would result in a tax subsidy for debt-financed investment. The elimination of deductions for net interest helps to equalize the tax treatment of different types of financing and reduces tax-induced distortions in investment financing decisions. Providing neutrality takes the tax code out of marginal business decisions, letting market forces more efficiently allocate investment where it is most productive. It also eliminates a tax-based incentive for businesses to increase their debt load beyond the amount dictated by normal business conditions. A business sector that is leveraged beyond what is economically rational is more risky than a business sector with a more efficient debtto-equity composition. The Committee on Ways and Means will work to develop special rules with respect to interest expense for financial services companies, such as banks, insurance, and leasing, that will take into account the role of interest income and interest expense in their business models. Net operating losses (NOLs) will be allowed to be carried forward indefinitely and will be increased by an interest factor that compensates for inflation and a real return on capital to maintain the value of amounts that are carried forward. Carrybacks of net operating losses will not be permitted and the deduction allowed with respect to an NOL carryforward in any year will be limited to 90 percent of the net taxable amount for such year determined without regard to the carryforward."

The Question is will this pertain to all businesses, including Pass Through and sole proprietorship? Or is this only for C-Corp? A friend of a friend cannot believe that their current businesses will lose their Business Interest Deduction and can only offset it by buying another business.

But that's what it seems like is the case.

Maybe someone with better understanding of Taxes, especially with the Republican ideology in terms of Tax Reform can comment here.

Investor Llew

Unfortunately, it seems that this Government wants to take away any kind of Debt Financing of either Business or Home.

It's pretty much in the Republican Tax Reform policy that they are pushing ahead. What's even more concerning is that there is an Opinion piece from the Party's think tank website, the Hill, that came out just recently. It is starting to seem to me that there is a genuine push to eliminate the Mortgage Interest Deduction.

Here is that Article: Time to Eliminate the Mortgage Interest Deduction

I anticipate that if the Mortgage Interest Deduction is taken away for Home Owners, then those investing in SFH will be vulnerable to a price correction.

However, if Debt Financing is eliminated completely, including Corps/Partnerships/Sch E properties.... then the whole RE Market will take a dive.

Just curious if anyone has been following this. It would seem that it's very important but it looks completely ignored.

Investor Llew

@Logan Turner

@Charles Worth

In 2006, I knew of a few friends of a friend, Mike, who bought low income properties in Florida... close to the Sarasota area. A friend of mine asked why I didn't do that.

I informed him that I don't believe that casflowing in these lower income areas are as stable as the cashflow I received in Brooklyn.

2 years later, my friend Mike thanked me for advising him during that time. His Cashflow Investing Friends experienced what it's like to lose their cashflow. They experienced some of their renters asking them to lower the rents because their neighbors who just moved in were paying much less than they were. They also experienced finding it so difficult to find a renter that they when without cashflow for a significant time, some even went into foreclosure.

I really don't understand this thought that once you get cashflow you always get the SAME cashflow.

I call this the Cult of Cashflow. It's a Cult to have such strong beliefs.

Analyze what really happened to Cashflowing properties and look what rental properties actually when into foreclosure.

In Manhattan, during the peak of the financial crisis, there were less than 100 out of 1/2 million rental properties that went into foreclosure.

Did the low income areas around the nation achieved such low foreclosure rates? I sincerely doubt that.

So what happened to my properties during these years? What happened was exactly the same thing that happened when the terrorists devastated NYC and the Nasdaq fell 66% (yes, the ENTIRE Nasdaq) around 2001.

All that happened was a blip. What you are paying for is the quality of the cashflow. It comes as a premium. When you buy into a 4% Cap Rate property, there are only two reasons to buy it.... 1) The quality of it is so good that you can withstand economic disasters, even if you are close to Ground Zero.... and you will achieve future Growth.

The reality is that there is a big reason why you need a HIGH Cap Rate on low income properties in C, D cities and neighborhoods. You need to get paid for the risk of the cashflow being reduced or even disappearing.

There are probably not a lot of BPers that can speak about their experience during the Dark Depth of the Financial Crisis where they were in these low income, C, D neighborhoods, that's probably likely that they quit Real Estate in General. To those Investors, they understand that if you had Cashflow now.... it's not a Guarantee.

BTW, I'm certainly not saying that you will always get Cashflow in an A or B area either. But one thing about places like NYC is that over years, your Cashflow will MOST LIKELY increase and you will get both the Cashflow you want and the QUALITY of that cashflow.

AND, I'm not saying that buying in a C, D area is bad either. What I was addressing is that if you wish to LIVE in an area where the Rents move up Dramatically, you are better off owning that Rental with a Fixed Rate Mortgage or you can easily be priced out as you can no longer afford the place you rent. In fact, this is why people move! They just can't afford the rent ANYMORE!

Once you buy your place to secure that you will never become priced out of the place you really wish to live... well.... go ahead.... by all the Cashflowing B, C, D Investments you want.

Also, if you do the math, if the apt you rent is moving up $200 or $300 per year or more... but your Cashflowing investments don't.... you technically are losing Cashflow. The only way to do better is to continue and buy more Cashflowing investments. But how does this all makes sense when you can just buy the place you want to live in first?

Investor Llew

@Mary Ann

I have been investing in NYC, Brooklyn specifically, for 2 Decades.

In my experience, ALL of my friends and family that did not buy their homes or if they didn't buy their homes, didn't invested in NYC where they actually would have loved to live, have regretted that decision.

By not buying where they wanted to live in the long term, the ones who did not buy anything, whether or not it was for living or just investing, are forever priced out.

When I was teaching, I always encouraged my students to make sure they buy their first investment (or home) in the place they will want to live in the future for the long term. If they do not, they take the risk of never being able to live in the place they actually want when they get much older.

Another options to not buying is to get a Rent Stabilized Apt. However, there is very little incentives for the Landlord to take care of the building and usually leave it in need of repair, pest control, etc.

Certain cities like NYC and SF is a must if this is where you want to eventually live for the long term.

Rents spike and continue getting higher.

Every year for the last 2 decades I keep hearing all the excuses.... it's too expensive to buy in NYC.

2 decades ago, when I bought my first Investment, a 2 Family in Brooklyn, was $350k.

Today, I can sell that investment for $1.9 Million.

BUT, instead of being happy that I have made so much money for that one single property.... what makes me more happier is the fact that I live in that Investment now (I moved back in to this Investment Property this year).

All of my relatives that lived in Brooklyn but moved out, either never bought or had bought but sold a long time ago..... cannot any longer afford to buy in Brooklyn anymore.

Even renting has become incredibly expensive.

As another example of this phenomenon, I had a friend, Steve, who lived in Manhattan.

We both invested similarly in to two different properties in 2004.

I invested in a 4 Unit property with a Purchase Price of $800k in Clinton Hill, Brooklyn. He invested in 3 rental townhouses, a 3 are 3 Units each, for a total of 9 Units and a total Purchase Price around $500k, in Bristol, CT.

Fast forward to today.

Steve's 3 buildings are still worth $500k. His cashflow has remained the same, approx. $1k per month.

My Brooklyn 4 Unit building, however, is vastly different. It started out at a slight negative cashflow in 2004. But today, it's cashflowing over $3k per month. The value skyrocketed to $2.2 Million.

Steve, unfortunately, could not afford Manhattan anymore. He moved to another State instead.

Had Steve purchased his home here in NYC instead of Bristol, CT........ Steve would have had the ability to settle down his roots here instead of being priced out of the NYC location.

I know Investors tend to think of only in terms of Today and find it very unpredictable to think of tomorrow, but please remember that even Squirrels think about tomorrow as they put away their Nuts for the Winter. If they didn't do that, they would starve when winter arrives.

The Future is VERY important.

Another analogy I like to use is to Drive your Investments like an Investment Vehicle.

When you look at past Data such as previous Sales, you are looking at the Rear View Mirror of your Investment Vehicle.

When you look at current data, such as the current Rents and Expenses to calculate your Current cashflows or your Cash on Cash Return, you are looking at the side view... watching the action go by as it is occurring.

When you look through the Windshield of your Investment Vehicle, you are looking at the road ahead.... seeing the path that it is taking you... and all the obstacles in the way.

You are less likely to CRASH your investment vehicle by focusing on looking through your Windshield than remaining fixated on the Rear View Mirror or the Side Windows.

If the bridge is out and you fail to see the bright red warning signs..... if your eyes are not looking straight through that windshield........ you will Drive your Investment Vehicle into the abyss down below.

So please..... Drive your Investment Vehicle like you drive your Car..... by MOSTLY focusing on looking through the windshield and occasionally checking your side views and rear view mirrors.

One more thing to consider. There is currently a Republican Congress and a Republican President. I have been reading that they intend on getting rid of using Debt Expenses to buy Investments. It seems to me that they are going to stop Real Estate Investors like all of us here on BP from deducting our Mortgages!!! Imagine how hard ALL Real Estate would fall. If anyone has any knowledge of this, please let us know. I'm constantly surprised that BPer's don't seem to be aware of the Republican Tax Reform proposals. 

Investor Llew 

It's really strange that BPer's are addressing Dodd Frank Repeal when the bigger problem is that the Republicans have proposed taking away the 1031 Exchange AND eliminating your write off for the Mortgage Interest.

The Dodd Frank Repeal seems to be a smoke screen to take your attention away from the real issue.

Investor Llew

I'm curious to know how we, as Real Estate Investors, think about the proposed Republican Tax Reform that is currently being proposed.

There are two very significant changes which will affect ALL businesses, but ESPECIALLY Real Estate.

The first is the elimination of the "Business Interest Expense Deduction" which I am assuming refers to any business which is bought using Debt. Basically, from what I have been reading, those of us who have bought an Investment Property using a Mortgage will no longer be able to deduct the Interest on that Mortgage as a Business Expense.

The other proposal is the elimination of the 1031 Starker Exchange Rule. From what I understand, they want to stop the deferment of Capital Gains but allow you to fully deduct the purchase of a new Property to offset the Capital Gains.

Both of these proposals seems to be a YUGE effect on all Investment Real Estate.

Another, more towards Primary Residences, is a proposal to increase the Standard Deduction by double the amount. This proposal will obviously make buying your home less desirable since you either take the Standard Deduction or you take an Itemized Deduction, which includes Mortgage Interest on your Primary Home.

All in All............... this is sounding DISASTROUS toward Real Estate in general.

I think for those of us who are in route to financial independence, these are two road blocks which have been put out there for us to navigate through.

In my mind, 3 questions come up.

1) Did I misinterpret the Republican Tax Reform correctly with these two rules? (I sincerely hope so)

2) If I didn't misinterpret it, how likely will this Tax Reform be passed considering that Congress and Trump are Republicans? 

3) If I did not misinterpret it, will previous purchased investments be most likely Grandfathered in?

I am hoping that I have completely misinterpreted it and that others who have been following this proposed Tax Reform will help to alleviate my fears.

I also thought that I would link the Earnest and Young report for research purposes: EY 1031 Tax Reform Analysis

Here is another quote from PWC:

"Interest As part of the move to full expensing for business investment, the plan eliminates the current deduction for net business interest expense associated with debt incurred to finance such investment. Businesses will be allowed to deduct interest expenses only against any interest income. “Any net interest expenses may be carried forward indefinitely and allowed as a deduction against net interest income in future years.” The report states that the Ways and Means Committee “will develop special rules with respect to interest expense for financial services companies, such as banks, insurance, and leasing, that will take into account the role of interest income and interest expense in their business models.”

PWC Tax Reform Analysis

Thanks,

Investor Llew

@Krystof Pilisiewicz

As a Brooklyn Investor for the past 2 DECADES, I will say that a lot of the Cashflow Rules DO NOT APPLY to high quality markets like Brooklyn, NY.

If you are buying a $2 Million Dollar Investment, which is what I now do, putting aside 5% for CAPEX = $2 Million x .05 = $100k PER YEAR...... that's just ridiculous! I'm sorry, but we need to think about the Math. And NO... a toilet in NYC is still about the same exact cost as a toilet in Detroit. Labor costs might be higher, but toilet replacements happen just as rarely if not more rarely because of better quality tenants than in lower quality neighborhoods. In fact, there are some BP Podcasts that mentioned how incorrect making an assumption on CapEx like this is just not correct for higher priced Investments in Major Metropolitan neighborhoods.

Some costs might be higher, but then some costs will be much cheaper.

For instance, it's very typical that one of my $2 Million Investments have Property Taxes that are SUB $10k. So, using the same percentage, a $200k Property would need to have a $1k Property Tax and a $100k property would have an equivalent $500 PER YEAR Property Tax! So, tell me where you will find this kind of advantage and still have very LOW vacancy rates and LOW Crime?

In terms of Vacancy Rates, these Rates are a Factor of Market Rents when it comes to high quality markets. When we have vacancy rates below 5% (which has happened for the past 40 years in NYC), as long as you are slightly UNDER Market Rents, Vacancy generally does not play a factor in this expense.

An example would be an Apartment in NYC which normally rents for $5k per month. Advertise it for $2.5k and you will get an ENDLESS amount of responses... literally thousands of replies!!

How do I know this? I do my own ads. Once I incorrectly advertised a $2k apt for $1k  My inbox exploded, I immediately checked the Ad and discovered the mistake. It took me only an hour to make the corrections but I had to call the 20 or so responses that inquired about the apt.

Once I put back the apt to the $2k slightly below Market Rent, it slowed down and I generally receive around 10 to 20 replies per week. From that, I take the best candidate, usually with a 700+ Credit Scores (and I will get some 800+ Credit Scores) and incomes typically far above my minimum of 45 x monthly rent.

The last re-rental I had done which was a month ago was a Veterinarian and his Corporate Lawyer Girl friend, combined income was $350k+ for a $3k apt.

An assumption that if you are not making a Cashflow DOES NOT mean you are somehow losing! There are at least 4 ways to make money in Real Estate of which Cashflow is just one! You are missing Appreciation, Tax Savings and Mortgage Balance reduction. In high Quality Markets, over time, you will get all 4 of these.

If you wind up taking a $1 Million 30 year fixed rate Mortgage where the Cashflow breaks even... and let's say the Cashflow breaks even for the next 30 years, and let's hypothetically say that the Investment NEVER appreciates.

Given these assumptions, ZERO Cashflow and ZERO appreciation, in 30 years that $1 Million Mortgage disappears. 30 years from now you will be $1 Million richer. The Math tells me that $1 Million / 30 years = $33,333 per Year. Divide that by 12 for the monthly and you get $2,778 per month in Equity Growth. This is the power of Mortgage Balance reduction. Why are most Investors I see on BP not even considering this? It's PURE MATH and PURELY PREDICTABLE! You cannot go wrong with the Amortized Mortgage of a Fixed Rate Mortgage. If you even want to do a 15 year Mortgage, even better, especially if the Cashflow breaks even!

What's missing in most Investors toolbox is the understanding of Future Calculations and therefore cannot see how money is made OTHER than current cashflowing properties.

Then, when they get some rules which are NOT for high quality markets, they apply these rules towards high quality markets instead of asking themselves, hey... does it makes sense given this scenario?

PLEASE..... don't make the assumption that all rules work for all kinds of markets and properties.

JUST do the appropriate calculation for each property in every market that you wish to analyze. If you only know one kind of calculation, then just stick with that kind of market. But you are severely limiting yourself. I would say learn as many markets as you can and understand sophisticated calculations like Internal Rates of Return (IRR) and then apply them appropriately.

While I'm not going to recommend that the OP buy this property, I will say that I don't know enough to do all the appropriate calculations because I don't know what would be an appropriate Rents/Expenses/Appreciation Growth Rate for the next 10 years in order for me to get the Internal Rate of Return (IRR) for this property and compare it to other properties that I know will Return at least 10% to 12% per year IRR.

BTW, a 10% IRR is a compounded Rate of Return per year. If you were to compare a 10% IRR with a 10% Cash on Cash Return (CoCR), the 10% IRR is hands down much better. You just have to know the difference.

Another problem with the "Cashflow NOW" crowd is that they cannot understand that your Cashflow now can also become NEGATIVE, which has happened to millions of Cashflowing Investments during the Financial Crisis of 2007-8. MILLIONS! But somehow you think there is NO RISK to your cashflow EVER going negative? PLEASE THINK TWICE!

I'm hoping that there are others who read this post that may wish to delve further into the world of sophisticated Financial calculations and open their minds to recognize other opportunities.

Investor Llew

Hi @Julie Verardi

I own a 3 Family, 4 Story Bed-Stuy Brownstone near Tompkins and Hancock Street.

Here is one year of my Water / Sewage Bill:

For insurance, you should call up and ask for Quotes for a Business Owner's Policy (BOP) which combines both Property and Business Liability Insurance. I would say it will run you around $4k but get quotes.

Hopefully this helps out.

Investor Llew

@Adrian Stamer

If a Agent/Broker is really honest, and he feels that he should state to his clients "Past Appreciation is not indicative of FUTURE Appreciation." Then the same statement should apply to Cashflow. "Past Cashflow is not indicative of FUTURE Cashflow." Then I would say that Agent/Broker is ENTIRELY honest.

BUT, if you just make the statement about Appreciation and leave out the Statement about Cashflow, that's only being 1/2 truthful.

Both Cashflow and Appreciation is not "Gambling." They are carefully researched and Calculated.

In fact, if you always Calculate the Future Appreciation and Future Cashflows for your target Investment, you will open up enormous potential. Why only do 1/2 the Calculation? 

Those that don't do future Calculations, at least those I know personally, are still struggling to make ends meet living here in NYC and investing in Cashflowing properties out of State.

If you are living AND renting in a high Appreciating area and you are not Calculating your FUTURE rent..... you are going to be in trouble in 10 years. Rents can easily double or triple in these areas.

Take for instance the example I gave for my property where the rent moved up from $500 per month to $2k per month in 20 years.

As an example, if you were renting that apt and you invested in a stable cashflowing Investment that made you $200 per month out of state where your cashflow is steady over a 20 year period, this is a LOSING situation. That $200 per month helped you 20 years ago when your Rent in Brooklyn was $500 per month. It helped you for the next 2 years until the rent moved up to $700 per month.

BUT, after your Rent in Brooklyn moved past $700 per month..... that Investor is now losing CASHFLOW because he chose to live in Brooklyn where his Rent would increase FASTER than the Cashflow he makes in his out of state Investment. Fast forward to today. At a rent of $2k per month, the out of State Investor is losing $1,300 per month from his original rental 20 years ago as his steady $200 per month out of State Investment did not move up but his rent in Brooklyn Quadrupled.

That Investor should have made his first Investment a Brooklyn Investment just to lock in his payments with a 30 year fixed rate Mortgage, stabilizing his cost of living in Brooklyn.

I keep seeing it again and again. The phrase "I can't afford to live in Brooklyn anymore." is heard all the time.

Even in the move "The Avengers" Captain America makes a statement that his salary doesn't allow him afford in Brooklyn! haha!

Is this a RARE situation?! NO.... it happens quite a bit.

Anyway, I don't want to beat a dead horse.

Another point is that other Investors believe that those of use who have made a YUGE profit investing in Appreciating properties as somehow "Different." We are either cut from a different cloth or put on a pedestal where we are somehow better than they are because of the large profits we made or we got extremely lucky. However, I'm no different than anyone else. I come from an EXTREMELY poor family, immigrants from Guyana. Despite my urging them to invest with me, many of my own family did the opposite. One, in particular, decided to buy a Car while I bought the Investment Property. After 20 years, the Car is worthless, my Property appreciated around $800k and cashflows $3k per month. I am no different than anyone else. I just adhere to a calculation that helps me answer the question, "What will happen to Rents and Value in the next 10 years if I buy here, or here, or here?" Most people, including in my own Family, don't bother asking that question. They just look at today's situation and somehow cannot take it upon themselves to research enough to get a good idea.

Too many Investors believe you cannot calculate Future Cashflows and Values. But yet this is what professional businesses like Starbucks MUST do in order to do well. There is no point opening up a Starbucks in an area which cannot support $4 coffee if the demographics cannot grow. In fact, you can let the Franchises do the research for you.

There is an old saying from a famous Football Coach..... "Luck is when Opportunity meet Preparedness."

You cannot get Lucky if you are not Prepared. You also cannot get lucky if you cannot recognize the Opportunities.

If you can do both, you can get EXTREMELY lucky.

In a way we are all lucky. We living in America, the land of Opportunity. You just have to recognize that you are lucky already. Just expand it to include other opportunities and prepare for it.

Investor Llew