I lost my job too! Is my portfolio big enough to take the leap?

[Amit Kal]

Pardon me in advance that this is a bit long-winded, but you can get a "too long; didn't read" summary down at the bottom. So I've been working 18 years now. All of those years were in fairly well jobs, but it is here in New York City, so my living costs were definitely higher. Two weeks ago the company I was working for the past three years had major layoffs and I was affected. I'm getting a decent severance package so I have about six months to figure things out. I've been investing in real estate for the past six years not including my primary residence. I'm also married and have two kids and no consumer debt. Just something to think about because the kids obviously are not cheap. Wife is a teacher so she is not killing it by any means. My portion of our monthly expenses are about $7000. This includes the nanny who we pay about $2000/month all in (food, train fare, etc). That's probably the one expense I can easily cut if I had to become a stay at home dad. But if I become a stay at home it would severely limit my options as well. So while I am enjoying this time off, I am going to get my real estate license within the next 45 days. I am also closing on a duplex, all-cash (in Nashville), and including repairs it will cost me $190k and bring in $2100/month rents (net monthly cash-flow of $1200). I'll add my sister to this deed, and hoping to refinance back out my money once the seasoning period is over which will drop the monthly cash-flows to ($400). I also own a six unit building in NYC (purchased in 2011), now worth maybe $1.5m, $250k mortgage left and brings in about $9k in gross rents. The ROI on this building might not be the best but it is in New York City and my mom lives there so she doesn't pay rent; selling this one is not option. I am also 50% owner on 8 other units in Nashville which bring in about $10k/month in gross rents. Each of these were purchased with 20-30% down and were bought over the last 2 years. As you can see, despite having a full-time job, I really tried to ramp up my real estate investing over the last several years. I probably have about $1.5 million worth of equity in my real estate investments, not including my primary residence since that does not bring in any income. These real estate investments probably kick off about $3k-$4k a month in net cash-flow EBITDA. So if I don't go back to a full-time professional job, what should I do? At this point I am in a favorable position of having a track record and quite a number of folks that are eager to invest alongside me. This gives me the opportunity to continue getting conventional loans by partnering up with folks that have W2 jobs and low debt to income. I probably have about $200k to allocate to additional deals if I have no other income coming in, which gives me runway for another 2-4 deals at 25% down + rehab costs. Commercial real estate interests me and I was recently involved in negotiating a 25 year lease for 30,000 ft.² at the nonprofit that I serve on the board of. I'm not as interested in the grind of residential sales/rentals. I have some contacts with big landlords in the commercial space who would probably give me a crack if I want to make go of it. So BP community, if you were in my position and at this juncture in your life, what would you do? TL;DR - got laid off. Have a accumulated $1.5 million in net real estate assets. They cash-flow about $3-$4k/month. I have monthly expenses of about $7k/month. Should I make the leap into RE or go back to a 8-6 corporate gig making six figures?

[Llewelyn A.]

@Amit Kal

I have 2 decades of Investing in Brooklyn, currently own 7 Multi-Family properties in various neighborhoods including Ditmas Park, Clinton Hill, and Bed-Stuy. Each one currently has multiple Partners and each are multi-Million Dollar properties.

I would say that I was in your position about 12 years ago. I had 3 Investment Properties and had left my job in 2004, mainly because I didn't need to work again with those already owned Investments.

However, I made plans to quit my Corporate Job and decided to pay off one of my Investment Properties in order to increase the Cashflow to make sure I have my cost of living expenses covered.

Hopefully all of your 1st Mortgages are Fixed Rate so that they won't get killed should Rates continue to spike. 

Obviously, there are actually 2 things which can reduce your Cashflow, which you need to live on if you quit your Job. 

The 1st is the Rents loss or reduction combined with increasing Property Expenses. While NYC rents hardly EVER go down and only for a short period of time during extreme crisis, even in severe economic strife, you need to understand that other Investment properties outside of Major Metro areas may not fair as well. As I have mentioned many times in my previous posts, despite the fact that an Investment Property may give you cashflow, that's not guaranteed in the future. But the more you invest in areas where there is evidence of stable cashflow and demonstrates a resilience to rental losses or reductions over a LONG HISTORY, the more likely you will continue to not suffer rental losses during economic downturns.

Same with Expenses. NYC has a CAP on Property Taxes, especially for certain Residential Properties. You need to know what is the history of Expenses and can they spike. I know of Investors who invested outside of NYC and in various areas such as Jersey City and Philly, where their property taxes went up hugely. Typically, in NYC, you can see multi-million dollar 3 and 4 Family properties where the Property Tax are around $5k to 10k at most! Crazy, but that's NYC.

So imagine that if Rents are suffering via an economic crisis AND Property Expenses go up, that Cashflow can dry up. AND again...... one reason why NYC properties don't really get affected is because of all the protections that we have including Property Tax Caps and consistent rent rolls that keeps you from becoming in crisis yourself.

When I was in your position, I had no other investments but in NYC... Brooklyn specifically. So it was not worrisome for me at all, even during the financial crisis which really devastated a lot of RE Investors who were in the wrong place at the wrong time.

Now, once you get a handle on all of the above, you are absolutely right. You need to partner with people who will fulfill a specific role.

Since you have management skills and vast experience as well as Capital, you bring a lot to the table. Even more, because your time is now free to conduct such work, those who invest with you can be assured that you have the time to take care of things such as hiring Contractors and doing Quality Assurance that the work is being performed correctly. 

Equally, you need to recruit the correct partners which will need your skill set and bring something to the Table that you need.

What you need is the Partner(s) who will be able to get reasonable cheap 30 year fixed residential mortgages. That person(s) is your Golden Egg.

However, you must do your due diligence on that person to make sure he's not a rotten egg.

I recommend that you perform the same kinds of checks that a Mortgage Bank performs... Income over 2 years, Debt to Income Calculations, Job stability AND Credit Score checks, where the Credit Score MUST BE A FICO score. FICO is used in 80% of all banks. So your potential Partner will need to bring all of these as their qualifications.

Once that occurs, you can use some of the mortgage techniques for both of you to buy the target Investment / Owner Occupied Property which can include the Partner as your Owner Occupied Home Owner and you as the non-Occupied Co-Borrower.

Your Partner should be someone who is willing to also live in the property for at least a Year to fulfill the requirements of the loan.

There also needs to be some sort of Partnership Agreement... but you seem to have things like this in place for your other properties since they also are owned with additional Partners.

There is a lot to consider and it looks like you know what you are doing or if not, you will be able to research what you need and make it happen in a correct way with some of what I suggested.

Unfortunately, I am involved in a lot of different business other than RE which allows me only some time to post.

I also want to comment on those who are suggesting that low cashflow must be a low ROI. Please read my previous posts. There are at least 4 ways of making money in RE. You can read a book called "What Every Real Estate Investor needs to know about Cashflow" by Frank Gallinelli. It explains it quite well.

However, if you happen to read my previous posts, you will see despite I have low Cashflow in comparison to the multi-million dollar Values of the properties, the calculated overall Return is over 35% per year for every single year that the Investments are owned (in terms of Simple Interest Calcs) and about 25% Internal Rate of Return.

Unfortunately, the vast majority of people seem to not understand these 4 ways of making money, which include: Cashflow, Appreciation, Mortgage Reduction and Tax savings.

To take an example, if you buy an Investment where your Mortgage is $1 Million AND a 30 year Fixed and you are breaking even in cashflow, this means that your tenants are paying for the Mortgage to be reduced to ZERO in 30 years.

So, if you take $1 Million and divided it by 30 years, you get $33,333 per YEAR. With ZERO Cashflow, you are still making $33k per Year. Own 3 of these kinds of properties and you are making $100k per year.

Now, if you are in NYC with this kind of property, not only will you make the $33k per year in Mortgage Reduction, but you will see Appreciation and your Cashflow will grow as the Rents rise and your expenses are Capped with both Fixed Rate Mortgages and NYC's policy.

Imagine just how much money you can make given this kind of environment.

The readers of this post really should understand that Cashflow is just ONE strategy. For the most part, it seems from these posts, the overall IRR for Cashflow and hardly any appreciation is lower than properties with initial ZERO cashflow but high Apprecation where the Cashflow grows over time. However, this is just my opinion from 2 decades of Investing in NYC. The reader should do their own due diligence.

Investor Llew