All Forum Posts by: Llewelyn A.

Some very interesting comments and definitely and interesting topic! Thanks for starting this @Jay Helms

I am a LONG TERM Buy and Hold Investor in the Brooklyn, NY area. I have been holding onto properties since 1997 and I have bought 3 properties within the last 2 years. AND, I will probably buy 2 more properties in 2017.

Since 1997, there has been MAJOR Economic Corrections, including the NASDAQ Crash in 2001 (loss of 66% of the entire NASDAQ Market), 9/11, and the Great Recession. So I obviously have been through ALL of that.

I agree with the general sentiment here that Interest Rates have only one place to go, and that's up. In fact, I closed 2 weeks ago on a $1.71 Million 3 Family where the Interest Rates jumped from 4.375% to 4.75% in just a matter of DAYS. But that's more inline with Trump's election as just about every Bond Trader knows that Bond Prices will fall (thus raising Interest Rates) as the incoming administration primes the economy to increase inflation through policy. During this time of Bond Price Correction, one of my Investment Partners received a $967k Mortgage, 30 years fixed, JUMBO, Investment Grade at 4.625% (discounted from buying down the rate slightly from the 4.75%). However, Rates just days before the election was around 4.25%. That's a HUGE jump.

I also want to point out that the Feds don't drive the Long Term Mortgage Interest Rates. (Funny though, the Treasury used Quantitative Easing (QE) which acts as Bond Buyer to keep Rates low to allow the Housing Recovery). Long Term Mortgages are pegged more towards Long Term Bond Prices and 10 Year Treasuries. So follow these Markets to know what's happening to the 30 Year.

Follow the Feds Fund Rates to follow what's happening with your HELOCs and ARMs, however. This is important as a lot of Home Owners and Investors took out these kinds of loans. If they did in your neighborhood, you maybe adversely affected.

Since we ALL seem to expect Rates to Rise, I would like to give my opinion on how to prepare for it.

There are several things you need to do.

- Get LONG Term FIXED Rate Mortgages NOW.... this is EXACTLY why House Hacking is the way to go if you are a long term Buy and Hold Investor like my Partners and I. House Hacking allows you to get 30 year fixed Primary Residential Loans. That's why I chose to Partner as long as the Partner can qualify to buy and live in the Investment Property. The low 30 year fixed Rate Mortgages are the best hedge against rising inflation. If you can't House Hack now... you just don't have the right partners or Strategy (such as adding capital to the Primary Resident Partner while you are the non-Occupying Co-Borrower). The current interest rates, despite the quick move up, is still low and will not last for long, probably will remain under 5s for a year. Refi into Long Term Fixed Rate as well if it's not a purchase. I've Refi'd all my properties and bought new ones with 30 year Fixed, low interest loans. Great protection against Rising Interest Rates!

- KNOW YOUR RENTAL STABILITY. After ensuring that your largest expense, the Debt Service is completely secured from rising by locking in your long term low Interest Rates, you need to make sure you are in a Stable Rental situation. Like Billy Joel sang a long time ago about Allentown, PA.... "We're Living Here in Allentown... and they're closing all the Factories down..." You better know what will affect your Rentals. There are tons of examples that illustrate this, including Detroit which was 90% dependent on Domestic Automotive. Basically, IF YOU ARE INVESTING IN A ONE INDUSTRY TOWN (or few industries), you better know how this industry is going to fair or you will get killed in the downturn as the Industry sheds jobs. I am completely protected from the large amount of Industries that NYC has that it would take a Massive Economic upheaval greater than the Great Recession to bring my rentals down. Vacancy Rates are around 3%. It's incredibly difficult to get better protection.

- LOW Unemployment is a signal that a Recession is around the Corner. When Unemployment falls to a very low level, there's only one way to go, UP. Rising unemployment leads to loss of GDP which is why we wind up in a recession normally defined by a Fall in GDP, 2 consecutive quarters in a row.

- When (not IF) we go into a recession, you better know who will be laid off first. Generally, low income earners get cut (you would think they should cut the Fat first, but that's not true), especially whom a business has no dependency on and can either increase the workload on the remaining employees or automate. We already know that companies like Uber will start to automate their Car service business. So know who you are dependent upon for your rents. This is probably the most important part of your business. Anyone can run a Business when everything is going well. As Buffett says, "When the Tide Comes in, All Boats Float." But where the CEO (and you are the CEO of your Investment) earns his money is by sealing up any leaks. Get rid of potential Cracks, buy water-tight Investments. I just bought a 3 Family Brooklyn Investment. I just places a tenant. They didn't have extremely large income which would have been required (45 x monthly Rent of $3k), but they had $200k+ in their Bank Account in CASH. So they are qualified. You get these kinds of renters in NYC in good neighborhoods. Again, protection against Market downturns.

The above are my recommendations from Experience.

Now, it seems like there were a few comments about places like NYC being vulnerable to a downturn. The reality is that a lot of statistics use METRO Centers. Robert Shiller's Home Price Index NY Metro Area, probably the most popular of all the Home Price Indexes includes: New York–Northern New Jersey–Long Island, NY–NJ–PA. Real Estate is really a LOT MORE LOCAL than that huge area. So take these statistics with a Grain of Salt. Even within NYC there are differences in Neighborhoods that react differently in Economic Downturns. So you really need to be very specific in high densely populated places.

The Reality is that in my area of Brooklyn where I invest, a lot of properties were bought with ALL Cash. Also, because Conforming Loan Limits for a single family home is $625k for a single family where most of the SFHs are well over a million, there is a large amount of Equity that are going to protect these kinds of properties in the next downturn. However, you need to know if other home owners have used higher leverages in your area. If they do, then your area may become vulnerable to price correction.

You should be very aware of increases of Foreclosures. Mainly because it's a big burden on Cities. There is normally a priority on Cities cutting down on services. It GENERALLY (but not always) is cut in this order: Fire Dept, Police, Teacher, Sanitation, etc. Cities that do this worsen the problem for you if you are in low income areas. Basically, those areas cannot protect themselves as well as higher income areas which will pay for security once the Police Services get cut. As crime rises, those who can afford safer places will migrate towards those safer places. This basically creates extreme neighborhoods. High Crime Neighborhoods get higher and lower income gets lower while quality neighborhoods hold their price values. That's exactly what happened to my properties. Hardly any change in Value or Rental.

There is no doubt.... there has to be a correction somewhere. If Wages don't increase along with Inflation, this will be a bad correction and cause any of the above to be even worse. If Wage Inflation happens, and we really do hope it happens, then your Rents will definitely help you pay down those Fix Rate Mortgages incredibly fast!

The Reader of this post should do their own investigations and know that the only you can guide your Investments. You are driving an Investment Vehicle..... so you must look out the Windshield (to see what's in front of you) all the time. It will help you avoid obstacles and stay safe.

Investor Llew

I am a Brooklyn Investor for the Past 2 DECADES, so I know Brooklyn VERY well. I also hold 7 Multi-Family buildings so I have a LOT of experience.

I just wanted to comment that when it comes to CapEx, you cannot use the same generic one size fits all for every single piece of Real Estate.

When you purchase Property, there are TWO things you are purchasing, the Buildings, which is where the CapEx is being generated and the LAND, which does not have the CapEx expense.

For those that really don't invest in Major Metro Areas, there are some real differences between those that are NON-Major Metro areas.

A funny story can illustrate how this works.

There was a fight between a Couple that owned a Town House in Manhattan valued somewhere around $5 Million. They divorced and the Wife got the Building. The Husband decided to disconnect the Gas line in the Basement and blow up the house so she wouldn't get it. Unfortunately for him, he got caught in the explosion and they both Died!

When all the smoked (pardon the pun) cleared, the property was demolished. It then went to an Estate Auction and sold for $6.5 Million! It was worth much more because of the LAND value. You will typically see that in the Center of Major Metro Areas.

I can also illustrate that with one of my own properties in Brooklyn. I had an appraisal done for a ReFi. The Replacement Value of the property was less than $1 Million but I can sell it today for $3 Million.

What I normally do is to thoroughly inspect the property with a team of my trusted Contractors as well as doing a detailed Inspection Report. I then add up all of the costs of all the things that will need to be replaced and/or repair in 10 years (roof, heating system,appliances, etc.), add some padding to it like an extra $20k or so and then divide by 10 to get the Annual CapEx. So if my Contractors and detailed Inspection Report suggest I need $50k in CapEx in 10 years, then I may add another $20k in the 10 years and divide $70k by 10 = $7k per year or approximately $600 per month.

Funny, you would think that a $3 Million, 3 Family building would be ultra-lux, but it's just a regular multi-family building in a good neighborhood in Brooklyn. My Ranges will cost only about $500 brand new (I just bought a new one today).

I don't think the one shoe fits all works for $100k multi-family buildings in low income areas versus high Multi-Million Dollar multi-family buildings in dense and desirable areas where you can command high income.

The two kinds of investments need different calculations and strategies.

I absolutely know these differences because of my other friends that decided to invest in non-Major Metro areas outside of my Area. I'm not going to harp on the results except to say yes, my friends did ok. However, their property values are cashflowing today, but there is a HUGE contrast between my properties and theirs.

I have these examples from my personal experiences where I contrast the differences in the Calculations. Just add me as a Colleague and go through my posts. You'll find some of them.

Investor Llew

@Laraine Sookhoo

Thanks Laraine.

The problem I am finding for the normal 95% of RE Investors is that they DON'T talk about these calculations. You can see how sophisticated and complicated these are and yet this forum will get buried over time while the most popular forum discussions are things with the normal, simpler calculations such as CoCR.

This is exactly why I stopped going to Network Meetings. There's no point if I am the only one who can talk in terms of IRR/RoR etc.

When you get to big business, no one discusses CoCR. You cannot deploy $10s of Millions to $100s of Millions based on CoCR. Everything becomes a IRR calculation or a RoR calculation.

The simpler calculations are gimmick, I feel. You can probably grow a small amount of properties that way, but you will have to get lucky that there isn't a down turn in the economy which will make your Cashflow disappear for a several months or so. That is usually what makes the CoCR investor wind up losing.

I am hoping that one day these more sophisticated calculations will be a part of a general discussion here on BP, but I really doubt it.

Investor Llew

I would buy a Trump Tower Condo at his head quarters.... heard the Security there is YUGE and AMAZING! :)

I'm a Brooklyn Investor and I have to say I LOVE Millennials! A lot of my rentals have moved up because of their creative spirits and adding value to neighborhoods because they had the talent to see what it needs and then provide it.

Many of them create businesses, especially things like music scenes, coffee shops, Gourmet Restaurants, etc. You have to see how it really works by studying Williamsburg!

Unfortunately, like a lot of generations which experienced moving into Gentrifying neighborhoods, many become victims of their own creativity and improvements.

Eventually, the more wealthier the neighborhood became because of their creative talents, the more the Yuppies take over and bring up the rents above where the younger Millennials could afford.

It's a scene that seems to repeat itself again and again and mostly in dense Urban areas and Metros.

I took it upon myself to teach RE and managed to Partner with several of them between the age of 26 and 32.

We did phenomenally well. They are not Lazy. The ones I know work very hard and have good earnings.

The ones who rent, they are struggling for the most part, but not all.

I will say a lot of the Millennials can be described as out of towners who wanted to see a better world and be where the hipsters are. I think for this Generation, they moved from Suburbs to Metros where they can do the kind of work that they love, mostly creative. So things like Warehouses that can accommodate an Artist workshop and living quarters are extremely desirable and you can't generally get that in Suburbs where most of the Clients of an Artist may not be close enough to see your work in your Workshop.

My Millennial Partners are a subset of the vast majority as they make a decent amount of money. But none can single handedly afford to buy a multi-family here in Brooklyn. So I taught them Property Analysis and Partnering.

Because the Properties themselves have skyrocketted (for instance, we bought a Bed-Stuy property for $900k in 2013 and it's now worth around $2 Million with only $350k of Renovations), these Millennials who Partnered with me learned a lot and they continue to build up a portfolio with me.

They can travel and do whatever they want now in just about 3 years or so of investing as the Properties Cashflows also skyrocketted.

So, you may think they got lucky to meet me. But the reality is that I needed them as the Mortgage Market prevented me from getting the kinds of Loans that I needed to make these properties work. The highly paid Millennial became an advantage and allowed my Business Models to work.

I fully think if a Millennial is taught correct, and they are willing to work in a field which can give them the seed capital, they will do exceptionally well with help from someone like me who can mentor them.

So it really all depends!

Investor Llew

@Ryan Fortier

I do use the Internal Rate of Return (IRR) normally. But I'm finding the Calculation results to be a bit difficult to interpret. Here is the IRR in the Scenario where you kept all the Cashflow in the Bank Account and then Distributed the money at the end of the 10 year holding Period:

If you opened your Bank Account and put in $30k, then you renovated for $6.5k, kept all the Cashflows into the Bank Account, sold the property and put the proceeds into the Bank Account as well, you will wind up in year 2026 with $55,967. The IRR for that works out to be EXACTLY as if it was the Rate of Return as I calculated it the the First Post in this Forum.

I do this as a demonstration against the RoR and the IRR that if the strategy is the same, keep everything in the Bank and not take it out to use, you get a 6.43% on Both.

Now, let's look at the way you would set up the IRR normally:

In the Normal IRR Chart, you would set up your 3 Columns of Cashflows. Column T is the Investment/Sales Proc. Note that the Investment is Negative due to a PAYMENT to buy the property. In T14, after selling the Property the proceeds is $25,926.

We Add another Column for Renovations and another for all the Cashflows (NOI minus Debt Service). We then Total them up and conduct an IRR on the Total Column. It gives us 9.13%

So you have 2 choices: IRR or RoR. Well, I can definitely explain the 6.43% as both an IRR and a RoR.

However, the 9.13% IRR which is NOT the Rate of Return. There is a good discussion on this very topic here:

Good Discussion on the IRR here

We can probably explore why we should look at the 6.43% RoR versus the 9.13% IRR. I feel that its just easier to understand the RoR more than the IRR so that people who are not Math whizzes (and unfortunately, RE Investors are generally NOT) can move on with a Calculation that can help them make a decision against all Asset Classes.

Let me know what you think.

Investor Llew

@Matt Finneseth

Hi Matt. I just thought that I would go ahead and build a somewhat sophisticated Spreadsheet to continue your discussion. I will put it into several parts so I can clarify each part.

I thought that I would first Build the Scenario which sort of fits into your comments where you would take $500 of your Cashflow and put it towards your Mortgage. This is what I built for this scenario:

Now, we can refer to Columns and Rows and talk about Numbers which can easily be tweaked.

In this example, we Buy a Property for $100k for a Total Investment after some Renovations of $30k.

It generates $2k month Rents and has $1,064 of Monthly Expenses giving you an NOI of $936.

The Loan is for $80k at 5.125% for 30 year fixed so you are paying $436 per month.

The NOI minus the Debt Service of $436 = $500 EXACTLY.... what a coincidence!

Now, in order to demonstrate the reinvestment into the Mortgage Payment the full Cashflow, I built a fully Amortized Loan with a Pre-Payment of $500 per month:

We can calculate the FULL PAYMENTS by taking the $436 payment x 360 Terms and we get $156,812 which is in Cell P10. That would be IF you did not have ANY Pre-Payments.

Next, we will look at the calculations where we add the Pre-Payments.

In Cell P12, I summed up the entire V column or the Payments. We get $46,608.

Similarly, in Cell P13, I summed up the entire W Column and we get $53,147.

The Total of the Pre-Pays and the Payments AFTER applying the $500 per month Pre-Pays is $99,755. It will also take us only 8.9 Years as calculated in P18.

The Savings is $57,057 by taking the $156,812 of what would have been your full 30 year payments and only paying $99,755 in order to finish the loan in 8.9 Years.

I did it this way so I can show the Readers the calculations. This kind of Math is a GREAT Help.

Once we do this, we need to go a little bit further.

We need to ASSUME that AFTER the loan finishes, 9 Years into the Future, you will Sell the Property and receive a Sales Proceeds:

,

Just to summarize, let's say Matt bought the property in 2017. His initial Investment was $30k.

In 2026, 9 years later, Matt then sells the Property with ZERO appreciation for $100k, the price he bought it.

We can see that his total ROI is 303% in Cell O37. His Simple Average Annual ROI is 34% in Cell O38.

I don't like these Metrics particularly. I prefer the Rate of Return (RoR). His RoR will be 13%, still a really good Investment. (For those who want to see my Discussion on why CoCR should not be used over RoR, see this discussion: Cash on Cash Return versus Rate of Return )

Now this discussion can be continued and you can debate the Numbers by reference on the Spreadsheet snapshots I put in.

However, you can't complain about this Investment. It's a really good strategy if you wanted to Achieve a above 34% Average Annual ROI (or 13% RoR).

Now, if some of you can give us examples where you have done better, that would be helpful.

In my case, I do better but that's because my strategies are for both Cashflow and Appreciation. If you wanted to see how well I have done, then you should add me as your Colleague and then review my posts.

But there was a lot of discussion on the thread. However, I think I needed to clarify it as much as I can. If Matt wants to make some corrections, just add my name to your comment and I'll adjust the spreadsheet numbers and then this discussion can continue with some organization.

Investor Llew

@Edward Yao

Yes, I agree that there are different Risks/Rewards when it comes to different Asset Classes.

And yes, CDs can be thought of as much more safer than REI.

But, if this is the case, you need to be compensated better than the CD would. Which is why there is a comparison.

Today's CD Rates are at 1% for 10 years.

The Example Property has the Equivalent of 6.43% in 10 years.

Is the REI worth the Risk? That's up to the Investor as Risk Tolerance is all individual.

In fact, I know people who would not Invest in a CD but put their money in their Mattress because they fear a Bank Run like what happened in Greece over the Financial Crisis. So we all have different levels of Risk Tolerance.

I also know of a friend of mine who makes a lot of money as a Doctor. We knew each other for the last 30 years.

However, because he never invested, his net worth is FAR below mine.

He regrets it now because he did not follow my RE Investments over the 2 decades but have now come to realize how lucrative it was.

Now he is one of my Partners. Better late than never.

BTW, I don't think that Investors should think of Cashflow as somehow it's always going to be there like a US Treasury Bond. That's not true and the Financial Crisis of 2008 proved that.

There were reasons why a lot of Cashflowing properties suddenly stop cashflowing and most of that had to do with properties that were in areas where Jobs just dried up.

In NYC, jobs can dry up a bit, but if it's drying up a bit here, it's devastating in other places.

NYC Real Estate is like the US Treasury Bond while other places with low income and high crime may certainly not be.

I would not make a statement that just because you received cashflow now means you will receive cashflow later.

Investor Llew

@Edward Yao

Hi Edward.

I appreciate the comment.

I would like to point out that this Rate of Return Calculation:

I think there is some kind of confusion with this Equivalent CD Rate Calculation and your statement "For CDs, you have all interests reinvested in CDs and earn interest. But not so for a RE."

If you look at the above, Row F contains all of the yearly Cashflow of $3,004 per year (or $250 per month) and then accumulates it to a total cashflow collected of $30,041 for the whole 10 years.

There is no Compounding of the Interest here.

You will get the $30,041 for the next 10 years in Cashflow.

Additionally, you will sell the property and get an ADDITIONAL $25,926 because the Mortgage went down from the tenants paying the Mortgage.

So your total that you will receive is $30,041 PLUS $25,926 = $55,926.

This doesn't happen all at once... this happens every month for 10 years you take your $250 per month Cashflow.

So, we know 2 things.

In 2017 you took out of your pocket $30k to invest in the Property you bought for $100k.

In 2026 you sell the property for the SAME PRICE of $100k. NO APPRECIATION.

However, over the life time of the Investment... you TURNED $30k into $55,926.

Given these two things:

2017 - Invested $30k

2016 - Returned $55,926

You can calculate the Rate of Return as 6.43% per year which is calculated in cell K2.

The Chart in Column I to J from 2017 to 2016 just shows you what it would be like as a CD.

Hopefully I explained it better.

Bottom line, the 6.43% has nothing to do with reinvesting the $250 per month. It just boils it down to the Total you have Invested, the Total you collected and what is the Rate of Return over the period of 10 years.

I think where it got confusing to you is Column J which shows a different Interest based on the 6.43% and then reinvested. To take year 2017 for example, $1,930 was made as a result of the 6.43% Annual Interest and then accumulated for the next year calculation.

However, that's a hypothetical reinvestment to arrive at the Equivalent CD.

It is a comparison tool to compare the multiple kinds of asset classes regardless if you took the money on a monthly basis or kept it in. Note that the $1,930 in the hypothetical chart is not the $3,004 actually cashflow.

I see that my lengthy explanation might need further explaining! Sorry about that!

To really hammer in these equivalents, it may be necessary to look at a fantastic book called "What Every Real Estate Investor needs to know about Cashflow...." by Frank Galinelli.

But I'm hoping to show that you don't need to study this for too long to see the Equivalence. But maybe it's too complex. Others can comment.

Investor Llew

@Zachary C.

Hi Zach. I'm not sure WHY so many people who are investing are using such a simple calculation other than it's simple.

Breaking it down like I did above shows how misleading it is.

The Rate of Return can help everyone identify a lot of Great opportunities that are against ALL asset classes.

Even within the same Asset Class, the RoR can identify the best one.

Of course the above is really more of a watered down explanation, but I am trying to understand the logic of not expanding one's mind to look past the CoCR and other simple, non Future type calculations. Things like the GRM, etc. are just not a good indicator of how your Investment may perform except for TODAY.

The reality is that you need to drive your Investment Vehicle like a Car.

If you look ONLY in the Rear View Mirror, you will not see the Obstacle in front of you and will crash your Investment Vehicle. The Rear View Mirror represents Past Data like Historic Sales Prices, previous Rents, etc.

If you look only in the SIDE VIEW, you again will Crash your Investment Vehicle. The Side View are calculations like the GRM, CoCR, etc. They don't have anything to do with the PAST or the Future, only for today.

If you constantly look through the Windshield to see if the road ahead is clear with no Obstacles, then you can drive your Investment Vehicle fast. If there is an Obstacle, you can take a detour. You can even stop and wait. But you will NOT drive off  Cliff like I have seen so many Investors have done in the past.

Anyway, as a very experienced Investor for the Last 2 Decades, who had the opportunity to work for some MAJOR investment firms AND the Federal Reserve Bank early in my Career, that's my advice.

Investor Llew