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What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures [Paperback]

Frank Gallinelli
4.7 out of 5 stars  See all reviews (3 customer reviews)
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Book Description

Sept. 29 2008

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, including

  • Discounted Cash Flow
  • Net Present Value
  • Capitalization Rate
  • Cash-on-Cash Return
  • Net Operating Income
  • Internal Rate of Return
  • Profitability Index
  • Return on Equity

Frequently Bought Together

What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures + More Than Cashflow: The Real Risks & Rewards of Profitable Real Estate Investing
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Product Details


Product Description

From the Back Cover

An arsenal of powerful calculations that can make the difference between winning and losing the real estate investment game

. .

Real estate investing is a numbers game, and the only way to win it is by mastering the numbers. In this indispensable guide, real estate investment pro Frank Gallinelli shows you how.

. .

What is a property really worth? How do I determine a building's value based on current rents? How much will I make if I hold onto a building for five, ten, fifteen years? Gallinelli arms you with the 36 basic formulas for calculating these and other critical aspects of potential real estate investments, including:

. .
    .
  • Discounted Cash Flow .
  • Net Present Value .
  • Capitalization Rate .
  • Cash-on-Cash Return .
  • Debt Coverage Ratio .
  • Gross Operating Income .
  • Vacancy and Credit Loss .
  • Net Operating Income .
  • Internal Rate of Return .
  • Profitability Index .
  • Return on Equity .
  • Long-Term Gain .
  • Depreciation .
  • Mortgage Constants .
  • And Many More .
. .

You don't have to be a rocket scientist to use the formulas in this book. For each formula, Gallinelli clearly explains its significance for real estate investors, walks you through it, and provides examples and sample problems to help you master it. On a companion website (www.realdata.com) he supplies useful forms and spreadsheet templates that you can use to simplify many of the calculations.

. .

With this handy reference, you'll quickly master the calculations you need to be a winner in the real estate investment game.

. . . . . --This text refers to an out of print or unavailable edition of this title.

About the Author

Frank Gallinelli 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.


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Most helpful customer reviews
2 of 2 people found the following review helpful
5.0 out of 5 stars When you need to understand the "numbers" Jan. 21 2010
Format:Paperback
I've been selling investment real estate for 30 years. There are many "rules of thumb" out there, but practically speaking, most are general guidelines, useful only to the point of getting you to the starting line. This book will help you "run the race". I thought I understood just about every term out there, e.g. cap rate, internal rate of return, etc, but Frank's book cleared up some misnomers I had been working with for years. Many investors are not that interested in "crunching the numbers", but for those who are, and I believe that should be just about everybody who ever thinks about buying real estate for investment purposes, this book will give you a great idea of what numbers are important and what you can leave to your accountant or agent (as long as he/she has read this book). I can only think of one other comparable reference out there and that is a book titled "The Complete Real Estate Cash Flow Analysis Book" by Douglas Rutherford, but I think you can only buy that directly from his web site.
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1 of 1 people found the following review helpful
4.0 out of 5 stars Real Estate Cash Flow Aug. 9 2009
Format:Paperback
Cash flow is only one aspect of evaluating a real estate investment. This book provides many different ways to measure the potential value of any real estate propery.

Although a US-based book, most of the concepts apply to Canada as well (except for tax references). You can also download sample spreadsheets and formulas that you could incorporate into your evaluations. Numbers can be a dry topic, however they are essential to a successful investment and every investor should understand the numbers even if they use an accountant.

I highly recommend this book to any current or future real estate investor.

Ian Folkes
Real Estate Investor
Mississauga, Ontario, Canada
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Format:Paperback
This books does a great job of translating investment decisions into basic criteria everyone can understand. The author also provides free access to spread sheet tools at his web site.
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Most Helpful Customer Reviews on Amazon.com (beta)
Amazon.com: 4.6 out of 5 stars  62 reviews
70 of 70 people found the following review helpful
5.0 out of 5 stars An Enlightening Book about Quantitative Real Estate Analysis May 24 2011
By Amazon Customer - Published on Amazon.com
Format:Paperback|Verified Purchase
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 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.
38 of 42 people found the following review helpful
3.0 out of 5 stars Competent review of the basics of investing Nov. 1 2011
By Ichi - Published on Amazon.com
Format:Paperback|Verified Purchase
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.
26 of 28 people found the following review helpful
4.0 out of 5 stars What Every Real Estate Investor Needs to Know About Cashflow... Jan. 29 2011
By Trevor J. Flannigan - Published on Amazon.com
Format:Paperback|Verified Purchase
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 [...]

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.
20 of 21 people found the following review helpful
5.0 out of 5 stars A must have resource for all real estate investors Feb. 13 2013
By Dan Chamberlain - Published on Amazon.com
Format:Paperback
I am the COO of a small boutique real estate asset management company with ~100M in assets under management. We also do some mentoring and training to help grow our business into additional Metropolitan areas. I personally have read this book multiple times and we buy copies of this book for all of our serious partners to ensure that they "know the language" of the industry....I've bought over 70 copies because it is such a necessary primer.

Unlike residential real estate, commercial real estate is - like it or not - very much about numbers. And it has it's own unique language. Commercial brokers, managers, lenders, etc. will speak in this language. If you do not as well, you will quickly be dismissed and ignored.

This book is a must read for anyone expecting to make any headway in commercial real estate. More than that, it's a "must consume" as you truly need to know these terms, the inter-relationship of these terms, and how they apply specifically to whatever deal you are speak to with a very profound level of fluency.

I can honestly say this is the only book I've ever read in real estate that gives you all the "Commercial Real Estate Language" without any hype to up-sell you to something else and without endless stories of how you can get rich quick.

Commercial real estate can be very lucrative, but it is a "get rich slow" system. It also requires that you start by educating yourself before jumping in.

I would compare it to asking you to go and sell widgets in Japan without knowing any Japanese. How exactly would you pull that off without being ignored, laughed at, or losing a lot of your (or worse your investor's money).

This book is "Commercial Real Estate Language 101". My compliments to Frank Gallinelli for filling this need.
14 of 15 people found the following review helpful
5.0 out of 5 stars The "WINNER"-Hands Down Sept. 12 2012
By J. Newman - Published on Amazon.com
Format:Paperback
I am a commercial real estate attorney.

I am a commercial real estate investor.

I have read many, many real estate books over the last 20 years.

This is the BEST book I have ever seen on "real world" commercial real estate investing. Honestly--- this is what you need to know.

There are lots of books out there that claim to tell you the secret to making millions in real estate. Most of them claim you can do it in your spare time with "no money down". Trust me-- they are all full of bull. If it seems to good to be true-- it usually is. If you think you can get rich investing in real estate in your spare time, with no money down-- you are fooling yourself.

If it was that easy--- everyone would do it. Many people try to invest in real estate and many fail. This book will give you the tools and the knowledge to be one of the small percentage who succeed and even thrive.

It is not easy. This will take time. But you can do this, and understand this, and become a pro.

If you are already a pro-- this book will hone your skills and refresh your memory on what is important.

I would be shocked if this book didn't have a worthwhile lesson for every reader, no matter what their background or experience level.

However-- If you are a beginner, you may need to read this book more than once to have all of the nuggets of wisdom that are in here sink in. But if you do--- you will able to compete with the best of them.....

I have read this book 4 times. It is that good. That informative. And THAT entertaining.

Do you know how many people try to be a landlord and hate it? Most of them.

Why is that?

Because they jumped into a complicated investment without giving it the proper analysis, thought or time.

Now-- this is not brain surgery--- but ANY investment--- (stocks, bonds, real estate etc...) to be successful, requires thoughtful analysis on the front end. This book explains how to properly analyze a real estate investment. This is what all the pros do. This is what the successful guys do. This is what the guys who fail do not know how to do.

And the book is easy to read-- even entertaining. I enjoyed it very much.

Now I am a guy that has been involved with multi-million dollar real estate transactions for 20 years-- and I learned a few things from this book. I do not claim to know it all. (Anyone who says they know it all proves that they do not as soon as they mutter those words!) It also refreshed and reminded me of --and solidified alot of lessons that I learned along the way. And that is worthwhile as well.

But let me be clear--- this is not just a book for the experts-- it is a book that will teach a beginner, advance a professional and remind and refresh Donald Trump of what's really important !!

There is a lot of math involved, but, ....you do not need to be a math wiz..

If you can add, subtract multiply and divide-- you are most of the way there. There are lots of scary formulas.... but, as the author tells you--- that is what calculators and microsoft excel are for. He even gives you access to a website that does most of the calculations for you painlessly.

But beware.....the calculations can be done by machine--- but you still have to understand how to interpret the answers. And you still need to understand what information to "plug" in---, where to find it and why its important. You know the old saying..."Garbage in---Garbage out".

This book expalains all of that-- with wit and wisdom and in a way that makes it fun and understandable.

By the way-- the author has other books out on the subject as well. All of them are good. All of them are worth the read--but this one in particular, to me anyway, is the gem.

Read it. Better yet-- read it twice or three times ( or four times)

This book has the ability to make you a better real estate investor, make you better understand real estate lenders and what they are looking for, and.... I hate to be like the cliche... but this book could, with time and effort on your part.... it could actually make you rich.
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