All Forum Posts by: Llewelyn A.

@Daniel C.

In 2004, I bought a similar property like the one you are describing.

However, at the time, Clinton Hill was the similar to what Bed-Stuy was about 5 years ago.

In your case, the property is $1.25 Million now.

In my case, it was $890k and cashflow broke even.

Fast forward to today.

I cashflow $3k per month.

The property is worth around $3 Million.

I have been investing in Brooklyn for 20 years and now have 6 multi-Family including 2 in Bed-Stuy.

If the above example is too long for you, then I'll give you another example.

In 2014, I bought a 4 Story, 3 Family building on Hancock for $900k.

Put in $300k of renovations.

Today, it cashflows $1.5k and the building is worth $1.8 Million.

People tend to do Cashflow analysis as if the Cashflow that you get today will always be the cashflow you get for the rest of the Investment's life.

In NYC, that kind of logic will prevent you from buying Great Properties which will not only give you fantastic appreciation, but will give you a ton of cashflow in the future.

That being said, as @Richard M. mentions, it's about block by block in Bed-Stuy. Obviously, stay away from problem housing complexes and various homeless shelters strewn out all over and try to get closer to the Subway, particularly the A-Train at Nostrand.

Unfortunately, most of those properties will be hitting the $2 Million mark for a 3 Family.

I also want to point out that no matter which year of my 2 decades of Investing here in Brooklyn, I have been told by MANY Investors that NYC is too EXPENSIVE. FOR EVERY SINGLE YEAR I INVESTED. I heard it all the time... "What are you crazy for paying that amount?!"

I would not have become so wealthy had I listened to them.

There is a difference in buying in NYC as opposed to buying in Reading, PA or Buffalo.

You just have to understand those differences.

I also believe that you cannot use ordinary rules like the 1% or 2% rules. They won't work in NYC.

You have to look for Future type calculations like Internal Rate of Return (IRR), Future Value, Discounted Cashflows, Rental and Expense Growth, etc.

All of my investments have done incredibly well and all in Brooklyn.

I know what you are saying.... past results is not indicative of future results. And that's very true.

I should add that I'm in contract to buy another 3 Family. This one in Ditmas Park. But I will by the next one in Bed-Stuy again. My rents have been moving up incredibly well there so I see better potential.

So yeah, I'm buying more at these prices despite all the people here and everywhere else telling me "How crazy you are to buy a 3 Family for $2 Million."

That $2 Million property will be $3 Million in less than 10 years, and I'm betting my money on it.

So yes, I'm putting my money where my mouth is.

Investor Llew

I own several multi-Family buildings which contains around 21 Apts.

I don't allow the tenants to first use a Pest Control as the first line of defense.

What I do is get a Contractor to Close up the holes first.

Then I give the tenants an electronic device which zaps the critters dead when they enter into the trap. The one I use is called a Rat Zapper linked here: The Rat Zapper

That particular Trap works so well, that it normally takes care of the rodent problems as long as the tenants do not mind getting rid of the dead mouse.

I usually never have to go to the next step which would be to hire an exterminator. I only do that if someone tends to panic but it's more psychological.

Anyway, you can read the reviews yourself and determine what you want to do.

However, this is the least expensive way to start and it allows you to progressively manage the situation until you would have to go on to something more expensive.

Maybe others who have used a device like the Rat Zapper I linked can verify it's effectiveness. However, for me and my tenants, it does a good job.

Investor Llew

@Amit M. Hi Amit... yes, that's exactly the way I think.

If you locked in your long term fixed rate mortgage as the Borrower, the Bank loses because you are paying the bank back in Cheapened, Devalued Money at the same fixed rate. In my case, all my rates are around 4% 30 year fixed. I have some small amounts in Variable HELOCs, but those are really insignificant compared to the 1st Mortgages.

What many Investors in RE fail to realize is how Bonds work. Basically, if you buy a Bond at a particular rate, say 4% yield at say, $1000... it will be worth much less when the Rates go up. As Rates double to 8%, the Value of the Bond won't sell for more than $500 which is half the Bond Value at the time of Purchase.

Banks are the same way when they lend money. They are basically creating an Amortized Bond. Basically, as the Interest Rates go up, the Bank loses Money because at the Higher Rates in terms of Interest from CURRENT Mortgages that are created when the Higher Rates are in effect. The Bank will make more money at that time. Therefore, if they try to sell the Notes of those lower interest Fixed rate loans which were created and locked in years before the Hyper-Inflation, they will get less than the remaining Balance of the Mortgage of that Note. 

The Bank's Loss is really the Fixed Rate Mortgage Borrower's Gain.

Of course the Bank will not lose any Value from the Mortgage Note if it is a Variable Mortgage where the rates move in line with the Interest Rates. So the Investor who takes out a Variable Interest Rate Mortgage only loses because he has to pay a higher Interest Rate to the Bank, reducing his own cashflow from the Investment Property.

When hyper-inflation happens, it usually is driven by Wage Inflation and causes a spiral of upward Price movements. So Employees ask for an increase in their Salary. Then the Landlord knows the Tenants who are the Employees are making more in salary which creates demand pressure for apts. The Landlord then raises the rents, other prices like food will go up, then the Employee will ask for a higher raise because all the prices have moved up and therefore the Employee didn't benefit from the first set of Raises. This cycle then repeats and it spins out of control.

You can see how a Landlord with a Fix Rate Mortgage can take clear advantage of this hyper-inflation spiral. The Employee/Tenant will wind up paying more rent but the Landlord with the fix rate Mortgage is paying the same in Mortgage Interest. It's a win for that Landlord.

I have seen so many Real Estate institutions promoting things like borrowing from Other People's Money (OPM) rather than getting your own 30 year fixed rate mortgages that I'm afraid that most of those Investors will be shaken out by the hyper-inflation, if it happens, and probably will.

The great thing about Fix Rates Mortgages is that you can also refinance them should the rates drop.

While using these 30 Year Fixed Rate Mortgages can be initially expensive, I look at them as Insurance that protects your Investments far into the future.

Anyway, this is just my opinion.

Investor Llew

Hi @Ryland Taniguchi

I completely agree with you in regards to Financial IQ and it's so difficult for newbie investors to learn it and even be able to utilize it.

I guess I'm incredibly biased from some of my experience in Teaching and Lecturing Real Estate.

I remember very crystal clear when I was Lecturing a group of Investors of all levels, but mostly new Investors, before the Crisis.

It was held in Manhattan. There were probably 200 people and mostly everyone was from the Triboro Area and a significant amount of them from NYC.

When I am Lecturing a group where I am knowledgeable about the Audience's whereabouts, in this case, I guessed that most of them lived in NYC.

I normally ask the question: Who owns their apt or house in NYC?

In this particular Lecture, I would say there were approximately 30 people who raised their hands. I then asked, how many of you that owned your own place, even if it's not an investment, had made $25k or More. All of them keep their hands raised. $50k or more... All had their hands raised. $100k or more.... half kept their hands raised.... $200k or more... a few did.

I did this to let the see that you should least CONSIDER investing in NYC where 100% of total strangers who bought in NYC and attended that Lecture were profitable.

The reason why I brought that up was because this group had a few Individuals that were also going to Lecture and conduct Bus Trips to Detroit in order to buy properties there..... BEFORE THE CITY WENT Bankrupt.

What was even worse was that most of the NYC owners, who were not really Investors, were there specifically to buy Out of State in Detroit where the Cashflow was good.

I was basically ignored as it seemed that once newbie Investors had something in their minds, someone like me just got "Lucky" since you cannot buy Cashflowing properties in NYC. I was just "Lucky" to have made money from those Investments... in fact, all the owners were Lucky as well.

Again, fast forward to today..... Detroit fwent Bankrupt. Really, I didn't have the heart to try to find out what happened to them.

But I certainly wish them the best of Luck.

In regards to the large National debt, yes, I agree that there maybe a period where we could experience Hyper Inflation. I'm not sure a future administration may help solve the issues. I'm preparing for this inevitability.

In times of high inflation, my idea is to have long term fix rate mortgages, 30 years if possible. So even if the Rate moves up dramatically, and we have seen it in the 80s where we had double digit rates, this will definitely put a strain on anyone with Variable Rates versus fixed.

What I have been contemplating is that most newbie Investors maybe using Variable Rates to increase the Cashflow versus fixed Rate mortgages. That might be a problem, depending on if the NOI can move up along with the Rates.

My preference is to fix the Rates just in case.

Let me know your thoughts.

Investor Llew

@Ryland Taniguchi Thank you Ryland for your feedback. It's really such a benefit to have someone of your knowledge and experience.

I also wanted to comment on the point that I went through 2 catastrophes in the NYC Real Estate Market.

2001 - the destruction of World Trade Centers.

2007 - 2008 - The Meltdown of the Financial Centers where Ground Zero was Wall Street.

These 2 catastrophes did not cause much if any slow down in the wealth building potential of NYC Real Estate for me despite owning several multi-family investments.

There are various hedges that a big Metropolis like NYC offers.

Detroit, being a one Industry Town (Automotive), follows the same risks that Billy Joel's "Allentown" lyrics speak about when the Steel company closed down.

NYC has so many Industries, even when one, such as the Financial Crisis causes a Great Recession, even that did not lay waste the Real Estate that was bought correctly (in otherwords, soundly leveraged with reasonable loan terms and equity cushion and in good locations to protect against loss of rents, etc.)

In 2005, I started a program to teach Real Estate because I felt that the Market was getting way over heated when I saw very sophisticated leverage being used by very non-sophisticated people who would not otherwise have qualified for their loans. It seemed inevitable that we would head into a Crisis, but I had no idea it would have been so devastating.

I found that most of the people whom I was trying to educate to protect themselves by buying Quality properties in Quality locations where in a downturn you can still find renters and can still hold onto it's value, did not wish to go through the education I offered for free. 

I managed to have a set of students who did not have ANY experience or knowledge, and they went through a rigorous program in about 6 months to a year.

One Student was so successful, she made $2 Million in unrealized profits. Others were also successful to lesser degrees.

The program was highly successful by the time I quit teaching in 2013 and there was only ONE student out of the set of around 30 students who failed to do well. 

That student continued to buy into the normal beginner model despite learning the more sophisticated calculations from me. He wound up buying a potential Cashflowing property in Staten Island in a very poor location. He was mislead by the Real Estate Sales Agents without doing his homework and found himself unable to finance needed renovations to even try to find renters for Section 8 Housing.... IN NYC where it is in HUGE demand. He failed not because of the education I was trying to impart to him, but because of his own enthusiasm and lack of discipline to fully assess the scenario. He also failed to bring the deal to me before he bought it so I could give him my opinion.

Either case, to get back on topic... yes, I do believe everyone should take a hedged portfolio approach to Real Estate Investing.

I also believe that some Cities, like NYC, have built in Hedges, which helped me do more than survived 2 Major catastrophes. 

I want to re-emphasize that there are MicroMarkets here in NYC. Not every neighborhood is a Hedge. That was one reason why I pointed out the Only one student's failure.

I also have a Partner, Marshall, that has a tendency towards being "Cheap." Before Marshall and I met, he had bought a Coop in the Bronx, in a location called East Parkchester around 2006 and paid around $72k.

Unfortunately for him, he did not understand what is the difference between a Coop and a Condo and did not understand why Investors like me would pay 10 times more for a particular location.

Fast forward to today. That same Coop suffered through the Financial Crisis. The Management of the Coop increased restrictions to prevent buyers from being risky and the Banks increased their Standards.

Marshall's $72k Purchased Coop is not even worth $60k today. Further, he cannot even rent because the Coop Board has prevented it.

During the same time, a property I bought in Brooklyn's Clinton Hill moved up from $1.2 Million to $2.5 Million.

So, even within a big Metropolitan City like NYC...... there are areas that will offer hedges and others that offer very little hedges.

I don't want the readers of my post to discount any of the things you are doing, especially for a beginner. However, there are things that I feel that even a beginner should learn. The more you learn, the more you can avoid life devastating Mistakes. The less Mistakes you make, the more likely you will succeed.

Investor Llew 

I'd like to chime in on investing in Hot Areas. I have 2 Decades of experience in the Hottest City currently, Brooklyn, NY.

First, if I used the 1% or 2% rules, I would never have bought here. Those rules are really for Cashflowing properties, not really properties which will take time to Cashflow as the Rent and Value appreciates.

Second, to invest in a Hot Area, you will need a different kind of Analysis. One that is much more extensive. I have seen some of it done here, and there is a really good analytical tool that BP offers called the BRRRR Calculator.

Unfortunately, the BRRRR Calculator hides all the Calculations from you which is why it's easy to use, but then you really don't learn anything other than using the Calculator and hoping that the numbers are correct.

FORTUNATELY, I'm an expert in these calculations and I have been utilizing it for the last 15 years in my own Investment Property Purchases in Brooklyn.

The bottom line of the BRRRR Calculator is that it calculates your Internal Rate of Return (IRR) for the next 30 years.

Why is this the most important Calculation you will need to know? Because it helps you to Drive your Investment Vehicle by looking through the windshield.

Here is the Analogy.

Treat every Investment like a Vehicle. So we call it an Investment Vehicle.

You are Driving your Investment Vehicle like you drive your Car.

If you only look at the Rear View Mirror and NEVER through the Windshield... you have a good potential to Crash your Vehicle.

If you only look at the Side View Mirror and NEVER through the Windshield... you have a good potential to Crash your Vehicle.

If you ALWAYS look through the Windshield and occasionally through the Side View and Rear View Mirror... you have the BEST chance to succeed. 

Let's define the 3 ways you can look.

The first is the Rear View Mirror. This represents the Past. That's the History of the Investment Property which would include past Sales Data, past Rents, past Renovations, past Economics of the Area, etc.

The second is the Side View. This represents the Current situation. This is exactly your 1% and 2% rules, your Cap Rate, your Cash on Cash Return, etc.

The third, AND MOST Important..... is the Windshield. This is the FUTURE. It forces you to think of things like "What will be the future worth of my Investment Property in the future?" That question implies the following:

- What will the Future Rents and Future Expenses be? 

- What are the Economic Factors that will be affecting my Investment?

- What can will the Appreciation Rate?

The Calculations you would use here is Discounted Cashflow, Rate of Returns (RoR), Internal Rate of Return (IRR), Appreciation Rate, Future Value, Present Value, etc.

Many beginning Investors are taught only about Rules for the Current View, the Side View of your Investment Vehicle. Hardly is there a mentioning of the Windshield view, the Future View. In fact, you are generally told you cannot depend on the Future like Appreciation.

HOWEVER, that is FAR from the truth and it's critical that you think of the Future.

Let's say you bought your Investment Property in Detroit in the year 2000. The only View you had for this Investment Vehicle was the Side View, the Current situation. You calculated the 1%, the 2%, the Cap Rate, etc. It meets your entire Criteria. You then purchase your Investment Vehicle.

Years later, what was a good Investment Vehicle, was laid wasted because it went over a cliff. The reason why was because you did not look through the Windshield of your Investment Vehicle to see the warning signs that the Bridge was out. You did not notice that you should have taken a different route.

The interpretation of this is that what you should have paid attention to when you bought your Investment Property was the Big Three Domestic Automotive companies that 90% of the Economics of Detroit was dependent on. Had you followed their economics, you would have seen the warning signs and veered off in a different direction.

ANYWAY.... I'm trying to make this short, but it seems I cannot really write a posting short these days!

To invest in a Hot Area like Brooklyn, NY.... you cannot use just the Side View which is the Cash on Cash Return, the Current Cap Rate, etc. You need to anticipate the rising rents and expenses, the migration of people, the potential for good and bad economics, otherwise, it doesn't make sense at all.

The BRRRR Calculator gives you some of that. However, I did not subscribe to it to see if it had the things I normally use.

For instance, NYC will have a vastly different appreciation rate than nationally. In an area that conforms to National Averages, you will use somethings like 3% to 5%. NYC, depending on the area and the local economics of the neighborhood, it can be something like 7% to 15%.

An example would be a property that I purchased in 2014 for $900k. I put in approximately $300k for renovations, but this year, 2016, it was valued at $1.85 Million. This was the Bed-Stuy neighborhood which is a highly Gentrifying neighborhood.

Another example, in 1999 I bought a 2 Family house for $140k. in 2013, I sold it for $675k. There was no significant Renovations. Rents in that property tripled. If you calculated the appreciation rate, it was 11.89% per year for 14 years. Some would call that amazing... but it's fairly typical in the last 2 decades all over Brooklyn and NYC in general. I'm sure it was even better in many places in SF as well. This property was a negative cashflow in 1999.... but by 2013, I was Cashflowing more than $2k per month.

If you applied the Side View rules to any of my several Investment Properties.... or should I say, Investment Vehicles...... you would never have invested in them.

Now, YEARS later.... decades later I should say.... I am reaping the rewards of looking through the Windshield while I have seen lots of other Investment Vehicles which crashed during the financial crisis.

The theme here is to understand as much of the more sophisticated calculations and how to apply it to your potential investments. If you do, you will begin to see that you should not exclude ANY place.... whether your Goal is Cashflow, Appreciation or Both.

I hope the readers of this post can be inspired to learn beyond simple rule of thumb calculations.

Investor Llew

Hi Mike,

I believe what you can do is have your partner become the Non-Occupying Co-Borrower.

A Non-Occupying Co-Borrower is someone who helps you qualify for the Mortgage, but because they are not occupying the property with you, can increase your ability to qualify, including with Sourced Funds.

Call up your bank and explain the situation with them. However, make sure you mention that your partner will not occupy the building with you.

Make sure you understand the concept.

Google "Non-Occupying Co-Borrower" and "Non-Occupant Co-Borrower."

The trick here is that the Non-Occupying Co-Borrower must be a relative, but in some cases, a good friend or partner with history will also qualify.

Investor Llew

There is actually a real issue that is not just perception.

Please see my previous post (Sorry, don't know how to link my previous post from a different forum).

Originally posted by @Llewelyn Adal:

I am a NYC Landlord (6 buildings, over 20+ apts) and expanding.

In NYC, AirBnB actually started in the Bed-Stuy neighborhood in Brooklyn, where I have 2 properties I owned since 2014. It started well before that.

Interestingly, Bed-Stuy used to be a very high crime, poor neighborhood. It's still like that in several pockets but the Gentrification of Bed-Stuy has improved it considerably.

It's obvious that when a neighborhood improves which also improves the amenities in that neighborhood such as higher quality foods at a higher price, restaurants and cafes, etc., the overall economics improves.

The cheaper stores like Family Dollar, cheaper supermarkets and Corner Delis begin to disappear. Lower priced restaurants like McDonalds, KFC, etc. get replaced with more upscale Sushi, French and higher priced Artisanal Gourmet restaurants.

It also causes Crime to decrease, which also adds increasing demand to live in the neighborhood.

This is a great boon to Owners of the Housing stock as the changing landscape increases the value of their rentals and causes sky high appreciation. In 2 years since owning my Bed-Stuy building, it has increased in value by approximately 50% or more.

However, for those that have lived in the neighborhood as Renters, particularly non-Rent Stabilized apts, for a long time and have not improved their personal economics to the same degree of the neighborhood, this really presents a problem.

They basically get completely priced out of the market.

Even for those that hold on to their rent protected apartments, and there are a LOT of those kinds of apartments, their rents are much lower than the current Market Value, BUT they find themselves with very few options for lower priced necessities like Food and Pharmaceuticals.

For the non-Rent protected Apts, having the option of AirBnB, allows the Renter to be able to stay in their apt, even if they couldn't afford it because generally, you can make as much money for the entire month's rent in probably a week or two.

For the savvy Renter, he starts to look at his apartment not as a place to settle down and call home, but as a place where he can improve his economics. And why not? We all want to improve our economics.

HOWEVER, this then presents a problem. Landlords noticed that for certain apartments, especially those with multiple bedrooms (ie. not Studios), have become in HIGH demand. The savvy Renter can now make a lot of money from those extra bedrooms.

Furthermore, some Landlords then see that it may be more lucrative to just do AirBnB rentals and forget about renting to locals. The Landlord could make more money and not have to worry about doing an eviction, especially in a very Tenant Friendly place like NYC.

The phenomenon is really a self-feeding upward swing. Tourists comes into the neighborhood, spending more money in the neighborhood, driving the need for more upscale amenities, driving up the desirability and ultimately, driving up Apartment Rental prices.

The Rent Protected Renter who had lived in the neighborhood whose personal economics had not kept pace with the skyrocketing upward swing of the Economics of the neighborhood..... well, he's out in the cold, only thankful that his shelter is protected, but angry at the issues that left him in such a circumstance.

It's a movement that I don't think anyone in the circumstances of the Rent Protected Renter can easily fix. It's also a very big problem for local Renters who must rent non-Rent Protected Apts which are disappearing because of the phenomenon.

Those that own or become AirBnB entrepreneurs have no incentive to fix this problem.

However, because there are a LARGE amount of Rent Protected Renters and Market Renters, they can only fight back by using their Voting power. Thus, the push back against AirBnB.

Of course, this is my personal observation.

Also, I want to state that I have not nor intend to use any of my apartments for AirBnB until this fight is over and I know exactly what I can do an cannot do. It's a big mess right now to know what's legal or not.

Investor Llew

@Mike Dymski Yes, absolutely Correct after thinking about it. The Appraiser appraises within a Range and also protects his job by not going too far from that Range.

HOWEVER, the interesting thing is that the Appraiser does NOT appraise for you, the Buyer. It's for the Bank who is loaning the money for the purchase on your behalf. The Bank, while doesn't choose the Appraiser directly anymore these days for Conventional loans (probably the Bank has a better leeway for choosing an Appraiser when it comes to Portfolio loans, etc.) because of the perceived collusion between Bank and Appraiser in the Financial Crisis, still depends on the Appraisal in order to make the decision to lend so that it fits within their required LTV.

This presents real problems.

First, the Buyer generally pays for the Appraisal. If the Buyer pays but the Bank is the one that needs it, this gives a false sense that the Appraiser works for the Buyer. Really, the Bank should pay for the Appraiser.

Second, because the Appraiser actually works for the Bank, the Appraiser has no incentive to honestly and accurately evaluate the Market Value of the Property beyond the Purchase Price.

This means that if you wanted to do a Re-Fi or to tell the Bank that you are buying a property at a lower LTV and therefore qualify for a better Rate, you are out of luck.

The system works unfavorable to Buyers. If we had the real appraisal and the Market Price, then the loan terms would be more accurate and you would have better Investors and Buyers because they would have the incentive to buy properties undervalue if merely for better Loan Terms, which can affect the Investment substantially in the Long Term.

@Mark - Yeah, Just read your post right after I posted this. It's frustrating but unfortunately, no way to change the system. Banks and Appraisers don't even want to make the adjustments when you give them legitimate Comps.

Anyway, this is just a bit of Venting at the system.

@Mike Dymski  In my experience in regards to Appraisals and Purchase Price, the funny part about Market Value and Purchase Price at the time when the property is actually purchased, almost ALL of my Appraisals come in about the exact same price.

Part of this is that the Appraiser demands the Contract and knows full well the negotiated price. He is obviously biased at that time.

What is even worse is that Appraisals can be so incorrect that it defies logic. Here is an example of one done on a RE-Appraisal of one of my properties for a RE-Finance, NOT A PURCHASE.

Just recently, I have a property that should have Appraised for over $2 Million. However, the Sales Comp that was used had egregious errors to be used as Comps.

For instance, while the Sale Price of on Comp was only $1.2 Million, the Mortgage that was taken out on the property was approximately $1.8 Million. This is an obvious error either during recording of the deed or that it was an non-Arms length deal where the Buyer received a large Equity Value as part of the transaction.

The other two Comps were equally as bad.

 Maybe it's just NYC fast moving Gentrification... I'm not 100% sure why Appraisers cannot seem to give a good Appraisal except when they have the Contract and it seems to me that they purposefully try to make the Market Value exactly as the Purchase price.

Honestly, if the Appraiser never knows the Contract Price, then he can do a more independent analysis.

Obviously, if the Appraisals come in at the same as the Purchase Price, which implies that the PP is the Market Price, the Cap Rate and the Un-Leveraged ROI are pretty much the same value.

I'll be curious to know if others have experienced if their Appraisals are coming out with the same Value as the negotiated Price upon purchase.

Also, what about the Appraisal Price for a Re-Fi. Do they come up inaccurate for others as well?