When I go to the library, I'll usually pick up 5-10 books. I'll thumb through all of them, scan most of them, and read one or two. Every now and then I find one that I actually want to go out and buy to put on my shelf. Frank Gallinelli's What Every Real Estate Investor Needs To Know About Cash Flow (and 36 Other Key Financial Measures) is one such book. It's horribly boring to read straight through, but is absolutely packed with useful information for someone who is a real estate investor, or wants to become one and is a great reference.
In his preface, Mr. Gallinelli says:
Real estate investing is a numbers game and the purpose of this book is to show you how to “do the numbers.” This task is not difficult, but it is absolutely essential to your success. This book is not about how to make millions while starting off with no money, no credit, and no time. Instead, you'll learn here about cash flow, rates of return, property value, financing guidelines, and a few dozen other key measures. With a bit of practice, you'll be able to read a property's vital signs and judge its health as an investment.
Frank Gallinelli
The first 100 pages (5 chapters) aren't too bad to read through and they teach you how to be a successful real estate investor. You learn how to gather the data you need to make an investment decision. He tells you to look at the leases, the utility bills, and certain parts of the seller's tax returns for instance. He also helps you to estimate what an investment property is worth and how to measure your return.
The last 170 pages are composed of 37 different calculations you may need to know to invest in real estate. Some are a bit obscure, such as how to calculate the net rentable area, but most are bread and butter real estate investing calculations such as the capitalization rate and net operating income. Each chapter is a short explanation of why the calculation is important and how it fits in with other calculations, followed by a clear explanation of how to do it and an example or two.
I particularly like how he relates the calculations to each other. For example, he starts with the gross scheduled income-i.e. the amount of income the property would generate if full rent were paid each month. He then shows you how to calculate the vacancy and credit loss (i.e. money you don't get because there are no tenants or the tenants don't pay.) Gross operating income is the gross scheduled income minus the vacancy and credit loss. You then subtract out your operating expenses to get your net operating income (NOI). That's used to determine the capitalization rate (NOI/value of property.) Taxable income is your NOI minus mortgage interest, depreciation, and amortization plus your interest earned. Your cash flow before taxes is your NOI minus debt service and capital additions plus loan proceeds and interest earned. You can subtract your income tax liability from that to get your cash flow after taxes. They're all related and he does a great job taking you step by step through the calculations.
Unlike most books, which consist of just a few concepts with lots of explanation and examples, this book is packed with concepts that you cannot possibly remember after a single read. This is a book you buy to place on your shelf and pull down from time to time to look something up. It's $10-15 well-spent for any real estate investor. Get your copy now on Amazon.
Enjoy your blog and advice. Question about this book, is it geared to residential or commercial real estate investments. Thanks
It absolutely is geared toward both. Most of the concepts discussed are relevant to both types of investing, and several are specific to commercial real estate investments.
I would highly recommend Gary Eldred’s “Value Investing in Real Estate“, particularly for those interesting in learning to identify deeply mispriced bargain properties during a depressed market such as today.
However, I’d also highly recommend thinking twice about the amount of time you want to spend before jumping into life as a landlord. As someone who’s spent time doing both, I’ve found more benefit in spending half an hour reading an annual report more carefully before clicking buy on Etrade, than in spending 10 hours driving between Home Depot and contractor appointments!
It’s always important to run the numbers, but the numbers alone are not enough.
You need to calculate what the hassle of your rental is worth to you. You need think about how much your time dealing with rentals is worth to you.
I have been reluctant to invest in rentals because the actual return is just not good enough for my time. Regardless, these books are worth checking out for someone serious about getting in rentals.
Enjoy your blogs and advice. Nice blog with good information. This book is great for those who are just starting in real estate investing. Some time ago my neighbor recommends me Lee Arnold books for real estate investment and its an awesome book. So I would like to suggest you. And thanks for posting it.