Brooklyn investing

[Account Closed]

Good morning everyone! As a new investor I'm looking for my first deal in a high priced market, Brooklyn NY. I initially wanted to invest in rentals, but an agent told me doing a flip would be the better move. What are you guys opinion on this topic? 

Thank you!

[Eric A.]

My opinion is that unless you are willing to push into less safe/established areas you won't be able to find positive cash flow in Brooklyn. Most investors here are in for the appreciation play and therefore cash flow doesn't really exist.

I think the best strategy is to find an off-market or distressed property and rehab it, then either flip or rent out (if it cash flows).

[Account Closed]

Thank you @Eric A. that's exactly what the agent said. So now I know my next route. I really want to own a rental though. What would be the best market closest to NYC that has multi's with positive cashflow?

[Anthony Perez]

Are you employed? Buy a two or three family in ENY with an FHA loan and rent out all the units you'll break even but ten years down the line the house will be worth double.

[Eric A.]

What Anthony Perez says is likely true. The question is do you want to live in East New York (I personally wouldn't) and do you want to live under the same roof as your tenants (I'm not sure).

[Shawn Ackerman]

@Account Closed Brooklyn NY is a great market to break into.  Although competitive, with the right relationships you will do well.  As a native Brooklynite I park my money in the Mid-West as the Brooklyn market will require,(in my opinion) a minimum 350k liquid to get started.  Best of luck to you my friend.  God speed!

[Eric A.]

Shawn Ackerman what Midwest cities do you like the best and why?

S.L. White I've heard good things about Yonkers for cash flow, although I don't have first hand experience myself there.

[Shawn Ackerman]

Hey @Eric A. My rental portfolio is in Milwaukee WI.  the reasons are simple.

1. Very landlord friendly (easy eviction)

2. Purchase price vs. rental income around 2.5% - 4% 

3. Low taxes = more cash flow

4. Cap rates 16% +

5. Population density

And the list goes on......The drawbacks of my market is the appreciation.  Chances are whatever you buy the property for is what you will sell it for.  

[Account Closed]

@Anthony Perez Yes I'm employed. The FHA Loan in ENY sounds practical, but @Eric A. Has a point. I wouldn't mind living with tenants but Yonkers seems like a better deal being that it's close to the city and is a less expensive market. @Shawn Ackerman I totally agree with you and I feel that's my biggest boulder to move. Although I can do it myself with much effort. I rather partner with someone whereas we can both benefit and make raising capital easier. 

Thank you guys for your input. If anyone is willing to partner I'm open to ideas as long as it's logical. I'm not asking for a handout. I'm asking for an opportunity.

[Steve Walczak]

Anthony Perez you might be right, as far as the appreciation is concern. Problem with your strategy is that FHA loans are for primary residence only, and East New York is not a place you would like to move in. Buying it and renting 100% sounds OK but then with different financing model than FHA loan.

[Llewelyn A.]

Hi All. I am a Brooklyn Investor for 2 decades and have kept all the properties that I have bought except for 1 sale I did in 2013. I own 6 buildings now, various neighborhoods like Bed-Stuy, Clinton Hill, Windsor Terrace, and Ditmas Park.

I really feel the need to point out that it's not really the PROPERTY that Cashflows....... it's the INVESTOR.

Let's look at a hypothetical scenario so I can explain this better.

There is a property for Sale, 100 Main Street in Brooklyn.

Buyer A has LOTS of Money and can buy 100 Main Street all cash.

If Buyer A buys it all Cash, the Property will cashflow approximately $1k per month.

Buyer B, has some money, but not enough for all cash. However, Buyer B puts down 50% of the Purchase Price and Mortgages the property with an LTV of 50%. Under this scenario, Buyer B breaks Even, neither cashflowing nor losing cashflow.

Buyer C doesn't have anything more than 5% and must borrow 95% for the Mortgage. Under this circumstance, the Property will be fully Negative Cashflow for a long time until the Rent catches up in years to come.

The lesson here is that really..... if the Property has the Characteristics of "Cashflowing," then how do you explain that it Cashflows for Buyer A but not for Buyer C?

The answer should be obvious that it's NOT the Property that Cashflows..... It's the Investor that fully determines if an Investment Cashflows or NOT.

BTW, Buyer C may actually have the greatest ROI (Return on Investment).

But I will wait until another post to explain why since it will be a very lengthy explanation.

I hope the Readers of this post can gleam something from this post.

Thanks for reading,

Investor Llew

[Peter Lampione]

Hi Llew

I'm new to this and obviously will defer to your experience, but I have been running numbers up and down to practice evaluating properties, and the one thing I have seen is that even if the expenses decrease (because of a lack of mortgage), the numerator increases (i.e. the amount you have invested in the property) so the numbers don't vary hugely as you go from 50% to 100% with a 5% mortgage.

For example a property that rents for $2,000 monthly with a purchase value of $200,000, using the 50% rule, will cash flow at just over 5.1% with 50% down and will cash flow at 5.9% with 100% down. Obviously there is a point at which it has negative cashflow if you don't put enough down (in this example it's 6% down that tips over into the negative), but the difference in CoC ROI stays within a pretty small range as you get to higher investment amounts. This math works even if you multiple the numbers to $20,000 monthly rent on a $2,000,000 property value.

This to me seems to be the reason for saying a property cashflows. Am I missing something?

[Llewelyn A.]

@Peter Lampione

I decided to create a simple spreadsheet which has the following:

50% RULE - Make the Expenses to be 50% of the Gross Revenues collect. Assume $2k in Rental Income. Therefore, you can use 50% of the Gross Revenues to determine your Rough Expenses, excluding Debt Service.

Purchase Price: $200k

Mortgage Terms:

- Principal Amount will Vary depending on the Down Payment

- Term: 30 year or 360 months

- Rate: 5% Fixed

Payment will be calculated automatically by the Spreadsheet.

Here is the results for BUYER A - the All Cash Buyer:

Here is the Results of BUYER B: The 50% Mortgage Buyer:

Here is the Results of BUYER C: The 95% Mortgage BUYER or 5% Down BUYER:

You can clearly see that:

Buyer A is Cashflowing with $1k per month.

Buyer B is Cashflowing with $463 per month

Buyer C is NEGATIVE Cashflowing with NEGATIVE $20 per month.

So............ unless my calculations are off somewhere, maybe someone can check, to say that an Investment Property is somehow Cashflowing is NOT correct.

It's the BUYER that Cashflows.

Now, take into consideration that one of the Buyers that needs a Mortgage (B or C) has really bad Credit. His Rate jumps to 12% instead of 5%. The Spreadsheet looks like this:

NOW what do you think?

Buyer B with Good Credit can cashflow the property and make $463 per month.

BUT, if BUYER B has bad Credit and his Rate is really bad, say 12%, he is worse off than Buyer C with good Credit but finances 95% of the Property versus only 50% by BUYER B!

For all the readers of this post... You should really be very skilled at Excel and know how to analyze all the rules. But more so... understand how to Analyze all kinds of calculations and one that I really use extensively is the Internal Rate of Return (IRR).

Let me know if any of my numbers are incorrect and I can re-post with correct numbers.

Investor Llew

[Peter Lampione]

Hi Llew. Thanks for your response. I think your spreadsheet shows the same results as my calculations. The difference between CoC between the 0% down case (5.71 CoC) and the 50% down case (5.01 CoC) is less than 1% according to your spreadsheets. This is the exact result I had found too. The dollar amount of cash flow is obviously very different, but as a percentage of what you invested it doesn't seem to be that different. I guess that metric is useful to me because I am looking at the opportunity cost of the money I invest (in that I would have to take it out of stock market investments to use cash to buy a property) so the difference in returns between borrowing and not borrowing is significant. I am using an ultra-conservative appreciation rate (basically 0) when I calculate the final ROI, but holding a property for 30 years still gives me a nice ROI. It's the Cash of Cash return that concerns me because the numbers don't jump that much when you get to the range of investing between 30% to 100% down for most properties, and it seems hard to find a property that gets anywhere close to a 10% CoC.

[Eric A.]

Llewelyn Adal your analysis seems correct, but I think you're missing the point. Most people don't have 200k lying around to buy a property all cash (that number jumps to $1mm+ when you're talking about Brooklyn). When I say it's next to impossible to "cash flow positively" in Brooklyn I mean with a 20% down payment which is the most common down payment and therefore the benchmark for all property analysis for mere mortals (in my eyes at least).

Most folks on this site are looking to take advantage of leverage to turbocharge their returns. If I had a million dollars cash lying around I could think of a lot better things to do with it than invest in 3-4% cap rate NYC multi families with no leverage. Tax free municipal bonds come to mind, where you don't have to worry about property management or landlording.

[Peter Lampione]

Yeah, we are exploring REI for cash flow purposes, not investment. We are looking to generate an income stream and hope to so so by leveraging, and are definitely looking for CoC returns higher than 10% which is a very tall order in the NYC/Long Island area.

[Llewelyn A.]

Let me Elaborate a little bit.

We can all say that NYC, in certain neighborhoods, will have high appreciation. If we take a hypothetical scenario of buying a $1 Million property in one of those places, we may see that the property 10 years later may be worth $2 Million. It's very possible.

The ROI for this calculation would be as follows:

Notice that the ROI for this Investment is 100%

However, let's assume we really don't have the Cash to buy this investment. So what we do is we start to ask 4 other Investors to join us.

If we think about it, if a Single Investor buys the property and then sells it and makes 100%, then having 5 Investors, well... what ROI would that return?

Here is the expanded 5 Partner Spreadsheet:

You will notice that all Buyers will put in 20% each of the $1 Million Investment. That's $200k each. Then, when the property is sold, they each get back $400k or a $200k profit. The results is...... 100% EACH BUYER!

This is how the Stock Market works as well. Basically, you calculate the ROI for the ENTIRE Investment and EACH BUYER/PARTNER will make exactly the same ROI.

Here is a Spreadsheet using a Mortgage of 80% LTV.

Notice how the Buyers will make 308% ROI!

Also Notice that instead of putting down $200k each, only $50k each is needed and that's very doable.

This is JUST on Appreciation. And it's quite doable in NYC.

Now, we didn't calculate the Cashflows and add that to the Equation. But that's going to be a long calculation... and again, I cannot say it LOUD Enough....... do not just take CURRENT Cashflows into the equation. You may be missing the really good deals if that's what you do.

So the real issue here isn't that you can't Afford NYC.

The real issue here is WHY CAN'T YOU FIND TRUSTWORTHY Partners to help each other mutually get wealthy? Why is Investing and Financials Taboo with Friends and Family, Colleagues and people whom you know? Is it them? OR is it you? This all require introspection. 

The Answer to that, again, lays in the INVESTOR, not the INVESTMENT.

If you are not networking with the right people, not talking to your friends and family about Investing, Credit Scores, Mortgage Qualifications, Taxes, etc...... then you MUST DO IT ALONE.

AND THAT IS WHY most people will not, or cannot buy in places like NYC and receive such rewards.

The readers of this post should take away from this that it's important to do Calculations, to fully understand the Math... to visualize what can be done.... TOGETHER... and not just alone.

BTW, you can imagine how detailed you can get with these spreadsheet. If you add in Appreciation, Cashflows, Mortgage Reductions, Rent and Expenses and their increases over time, Tax benefits or costs, etc. It will give you a much fuller picture. 

Investor Llew