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 to  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. The book’s basic formulas will help you measure critical aspects of real estate investment, including:

•            Discounted Cash Flow

•            Net Operating Income

•            Net Present Value

•            Internal Rate of Return

•            Capitalization Rate

•            Profitability Index

•            Cash-on-Cash Return

•            Return on Equity

Frank Gallinello is founder and President of RealData, Inc, the real estate industry’s leading investment software firm. He is also Adjunct Assistant Professor for Columbia University’s Master of Science in Real Estate Development program.

Contents

Part I

How to Analyse a Potential Real Estate Deal.

1            Do your Homework: How to gather the data needed to make an investment

Decision

                        Property-related data

                                    Ask to see the leases

                                    Look at the property tax bill

Spot-check utility bills

Ask to see the appropriate sections of the seller’s tax return

Recite the representation about the leases and the schedule of rent income in the offer to purchase.

Market-related data

            Investigate comparable sales

            Look for lease rates and operating expense data

            Find out about local Capitalization Rates

2            Financial Detective Work Before You Buy: Finding the Truth Behind What the Seller Is Telling You

Basic Definitions

Analysing similar properties

            Comparing expense ratios

The Annual Property Operating Data form

3            How the “Time Value of Money” Should Influence Your Real Estate Investing Decision

Real Estate Applications

Using excel to make real estate calculations

What every investor needs to know about cash flow: Calculating the present value

4            How to Estimate What an Income Property IS Really Worth

Cash flow and taxable income

Taxable income or loss

Cash flow before taxes

Cash flow after taxes

A case study

Resale – How to forecast the appreciation potential for a property

5            Measuring the Return on a Real Estate Investment

Payback period, cash-on-cash return

            Gross rent multiplier, Debt coverage ratio

Capitalization rate

Derived capitalization rate

Discounted cash flow

Internal rate of return

Financial management rate of return and modified internal rate of return

Capital accumulation comparison

Part II

Thirty-Seven Calculations Every Real Estate Investor Needs to Know

6            Calculation 1: Simple Interest

7            Calculation 2: Compound Interest

8            Calculation 3: Rule of 72s

9            Calculation 4: Present Value of a Future Cash Flow

10            Calculation 5: Gross Rent Multiplier

11            Calculation 6: Gross Scheduled Income (Potential Gross Income)

12            Calculation 7: Vacancy and Credit Loss

13            Calculation 8: Gross Operating Income (Effective Gross Income)

14            Calculation 9: Net Operating Income

15            Calculation 10: Capitalization Rate

16            Calculation 11: Net Income Multiplier

17            Calculation 12: Taxable Income

18            Calculation 13: Cash Flow

19            Calculation 14: Cash-on-Cash Return

20            Calculation 15: Sale Proceeds

21            Calculation 16: Discounted Cash Flow

22            Calculation 17: Net Present Value

23            Calculation 18: Profitability Index

24            Calculation 19: Internal Rate of Return

25            Calculation 20: Price, Income, and Expenses per Unit

26            Calculation 21: Price, Income, and Expenses per Square Foot

27            Calculation 22: Operating Expense ratio

28            Calculation 23: Debt Coverage ratio

29            Calculation 24: Break-Evan Ratio

30            Calculation 25:Return on Equity

31            Calculation 26: Loan-to-Value Ratio

32            Calculation 27: Points

33            Calculation 28: Mortgage Payment/Mortgage Constant

34            Calculation 29: Principle Balance/ Balloon Payment

35            Calculation 30: Principle and Interest per Period

36            Calculation 31: Maximum Loan Amount

37            Calculation 32: Assess Value, Property Taxes, and Value Indicated by Assessment

38            Calculation 33: Adjusted Basis

39            Calculation 34: Depreciation

40            Calculation 35: Gain on Sale

41            Calculation 36: Land Measurements

42            Calculation 37: Building Measurements –

Gross Building Area, Usable Square Footage, Rentable Square Footage, Loss Ratio, Net Rentable Area