- Paperback: 320 pages
- Publisher: McGraw-Hill Education; 2nd edition (September 29, 2008)
- Language: English
- ISBN-10: 0071603271
- ISBN-13: 978-0071603270
- Product Dimensions: 6.1 x 0.8 x 9 inches
- Shipping Weight: 1.2 pounds
- Average Customer Review: 177 customer reviews
- Amazon Best Sellers Rank: #297,396 in Books (See Top 100 in Books)
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What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures 2nd Edition
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From the Author
Can a book filled with numbers possibly be exciting? If youre truly interested in real estate investing then you must first realize that investing in income properties is all about the numbers. Its about discounted cash flow and rates of return and net operating income and cap rates. If you understand how these and other key concepts work, then youre on your way to success and thats exciting.
I also believe you'll find the presentation of this material entertaining. I sought to write this in a way that would make it accessible to beginners and professionals alike.
I present more than three dozen key concepts and calculations. The book is peppered with "Rules of Thumb" that you can use as benchmarks when you evaluate potential investment properties. I also provide numerous examples and sample problems that you can use to check your understanding. As you progress youll learn how to read a propertys vital signs and how to put financial concepts to work for successful investing in real estate.
As important as these financial measures are, some can be tedious to perform manually. For those I show you how to use simple spreadsheet models to accomplish those tasks. I also provide you with a link to a special website we created where readers of the book can download many of these models as well as other valuable tools.
I hope that you'll find many good ideas here and that you'll use what you learn to help you make solid investment choices.
From the Inside Flap
An arsenal of powerful calculations that can the difference between winning and losing the real estate investment game
Real estate investing is a numbers game, and the only way to win is by understanding the numbers. "What is a property really worth? How do I determine a buildings value based on current rents? How much will I make if I hold onto a building for five, ten, fifteen years?" Real estate investment pro Frank Gallinelli arms you with 37 basic formulas for calculating these and other critical aspects of real estate investments, including:
Discounted Cash Flow
Net Present Value
Debt Coverage Ratio
Gross Operating Income
Net Operating Income
Internal Rate of Return
Return on Equity
And Many More
You dont have to be a rocket scientist to use the formulas in this book. For each formula, Gallinelli clearly explains why its important, how to calculate it, and provides examples and sample problems to help you master it. On a companion website, he supplies useful forms and spreadsheet templates that simplify many of the calculations.
With this handy reference, youll quickly master the financial formulas you need to be a winner in the real estate investment game.
Top customer reviews
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 last of all, I feel his book is skewed a bit toward multi-unit investments rather than single-family residential properties I'm interested in. For example, he recommends a vacancy allowance of 3-6%. However, for a a single-family dwelling, if you budget only one month's vacancy, you get 1/12 or 8.3%. So, if you blindly use his vacancy allowance, you'll overestimate your gross operating income (gross rental receipts).
However, for the price you pay for a used book on Amazon, I got more than my money's worth, and I won't be selling this one any time soon. Although I've given a few criticisms here, I think this is quite and excellent book, and I recommend it quite highly. I therefore gave it five stars.