January 17th, 2013 
admin What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures
Formulas that make the difference between making profits and losing equity The only way to win the real estate investing game is by mastering the numbers. This revised and updated edition of the popular reference shows how to target the best investments in the present market. It answers all your real estate questions, and provides new discussions of capital accumulation and internal rate of return. This book’s basic formulas will help you measure critical aspects of real estate investments, in
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What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures
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An Enlightening Book about Quantitative Real Estate Analysis,
I’m a university business teacher and have an MBA, and I’ve taught a number of introductory courses in business finance, including processes for sizing up general corporate investments. I’m also familiar with methods for valuing stocks and bonds. I’m also a bit new to the United States so the implications of U.S. tax laws aren’t entirely second-nature for me. Before reading this book, I had also purchased a couple small, single family investment properties that have worked out satisfactorily so far, but wanted to refine my approach using terms and methods that are native to the real estate investment industry. As an educator, I not only expect authors to provide information, but also, to help you practice your skills. Therefore, I tend to judge a book by how well it guides me in truly learning and understanding its concepts.
Overall, this book stood up well against my goals and expectations. The author’s methods seemed consistent with general business practices in the various courses I’ve taught, but have been modified to fit the nuances of the real estate investment industry. I picked up a few things as well, mostly surrounding the impact of accounting rules on taxable income and financial ratios that are specific to real estate investments. I also liked how the author wasn’t short on examples of the math in action. Within each chapter there is usually one or two example calculations, and then, at the end of the book, he repeats each calculation or ratio giving it a bit more explanation. He also gives you a problem to solve, with a solution provided at the end of the chapter to check your knowledge. In this end-section of the book, he also provides a bit more detail for each ratio than you find in the body of his work.
I also liked how he appears to have provided some realistic figures in his examples, inadvertently producing some benchmark values for certain key ratios. For example, expected rates of return of 10-12 percent for real estate, debt coverage ratios of 1.2 to 1.3 for most banks, and vacancy allowance rates of 3% to 6% came through consistently. He covers himself by encouraging you to do research to verify these numbers in your specific locality, but they gave me a ballpark figure to which I could compare my own research and make some preliminary judgments.
And, to test my knowledge, I ran the numbers for a real estate investment I was considering using his methods. I did this in a spreadsheet I created from scratch. Then I ran those same numbers through Turbo Tax and compared it to the figures the author would have recommended to forecast the tax liability of the investments. I got the same numbers as the author would have, although I did have to research current rules on real estate investments from the IRS website because some of his tax rules were out of date (because the book was published years ago; I was using the 2003 version and its 2011 now). But the book got me started in figuring out where to look.
However, I felt there were a few ways the book could have been improved. First, I felt he might have talked about the modified internal rate of return (MIRR) for the investment. This measure takes into account the rate at which proceeds from the property are reinvested, which his Internal Rate of Return measure doesn’t account for. The MIRR is therefore more accurate, in my view, producing a lower rate of return that needs to be recognized if you want to hit your investment goals. Second, I thought he could have given a comprehensive example which uses all of the important ratios he describes in the book. He does a good job of describing each ratio in isolation; however, I think it would best to see the important ratios all in one place, their tradeoffs, and an overall interpretation of the investment in terms of net income, cash flow, return, value, debt coverage etcetera. I would have also liked to have seen him analyze two potential properties, and explain which one is the better investment based on the numbers given a fictitious investor’s characteristics such as preference for cashflow versus capital appreciation, etcetera.
I also thought he ducked out of some of the finer points of sizing up a real estate investment, telling you in a few spots to see your accountant about certain issues, such as rules on gains, disposal, depreciation, passive loss rules, etcetera. The reason I bought the book was to help me make these decisions without a high-priced accountant. So, I felt the need to buy a second book after reading this one – one on current real-estate taxation rules. But he did point me in the right direction, and perhaps this expecation was beyond the scope he intended for this book.
Also to fully internalize the ratios, I would have liked to have seen a summary of all the ratios in table format, showing their formula, when you use the ratio, and its general meaning. And…
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|Competent review of the basics of investing,
I have been appraising commercial real estate for 20 years. I buy real estate books all the time to see if I can pick up new ideas or see some insightful advice. This book is like many others in the same segment that re-state the formulas investors use to analyze property. It won’t tell someone where to look for a deal or how to negotiate the best price possible though. it won’t give you a good look at the impact of finance or taxes for someone looking to buy and flip a home versus buy, renovate and rent or just buy and hold. This book is a decent look at the language of real estate investing. It IS useful in the respect that any attempt to buy, finance or invest will require a person to at least have a familiarity with these terms and formulas.
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|What Every Real Estate Investor Needs to Know About Cashflow…,
The book I read this week was What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli. I feel I have gone back in time… sitting in the University library stewing over an accounting book. If I were reading an accounting book for this blog, I wouldn’t even know what to tell you without risk of having you pass out due to boredom half-way through my first sentence. This will not be a long post because I will not be going in to detail on how to calculate a present value or future value formula. I will not be computing simple or compound interest and I certainly won’t be laying out a amortization table. If that’s something you are interested in learning you can buy an old accounting book on amazon for pennies (literally).
There is no doubt that the formulas and knowledge in this book have a purpose. Even though computer programs can compute the majority of these formulas it is nice to know what is really happening and what it means. For instance, you don’t need to know how to do your own taxes and create a maximum refund, but you should know the skeleton of what your tax pro is going to be doing for you and what formulas are used. For real estate, pretty much every computation that you’ll ever have to do can be done in Microsoft Excel. The more familiar you are with setting up an excel formula, the easier it will be to complete your pro forma.
The author has a website that has almost every formula you’ll ever need. It makes a great reference when you are making your own formulas. Here is where you can find them http://www.realdata.com/book/download.html
The biggest eye-opener for me from this book were the 4 different means of making money from a real estate investment. I never thought of two of the ideas as means for making money, but they really are. I always combined appreciation and, what he calls, loan amortization in one over-arching field called equity, but it makes sense to separate the two because they can’t be calculated with a single formula and can value independently of each other. The obvious ways to create money are through cash flow and appreciation. The two less looked at are loan amortization and tax shelter.
Cash Flow: This is a obvious function of real estate. The fruits of your labors…. the money left over from your rent payments after mortgage, taxes, maintenance, property management etc. This is the key to any investment property.
Appreciation: More often than not, real estate will increase in value over time. The difference in the building price between now and 5 years from now is the appreciation on that property. It can be due to several factors including: inflation, developing area, better school systems, crime rates and more.
Loan Amortization: With your investment property, the tenants will be paying off your mortgage payment and you interest payments associated with your mortgage. That means that they are helping you buy the property. So, if you originally have equity equal to your down-payment, in 5 years your equity will be much more than that because your tenants have been adding to that.
Tax Shelter: This is a means of making money through net profits. You don’t directly receive any money when using an investment property as a tax shelter, but you will be paying less taxes than you normally would so you indirectly have more money in your pocket. With current regulation you have several methods of cutting back taxes with real estate. A couple include depreciation and interest. Depreciation is a funny one because even though your property is appreciating in value, you can write off the wear and tear over a certain amount of time. And you can write of the interest paid on the mortgage, which is actually being paid by your tenants.
This book will stay on my book shelf as a good reference because it has plenty of formulas that might be nice to consult someday (if there is a blackout and I can’t use a computer). The first chapter when the author explains evaluating properties is very helpful and a lot of the commentary about the other calculations are helpful because you can get into the mind of the seller and ensure you aren’t getting “taken.” I think this book could be helpful for any soon-to-be investment property investor. If you have any questions on the book don’t hesitate to ask. I would be more than happy to help anyone that wants it.
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