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 · 914 ratings  · 29 reviews

Start your review of What Every Existent Manor Investor Needs to Know about Greenbacks Catamenia...and 36 Other Key Fiscal Measures

Why did I give this 4 stars? Considering Part 1, "How To Analyze a Potential Real Estate Bargain", was fantastic -- it gets 5 stars. However, Office 2, "37 Calculations Every Real Estate Investor Needs To Know", only gets three stars.

The volume opens by presenting a fairly comprehensive framework for measuring existent estate returns every bit coming from one of four mechanisms: cash catamenia, appreciation, loan amortization, and a tax shelter. Then information technology goes through and describes each of these one by one, including metrics fo

Why did I give this 4 stars? Because Part i, "How To Analyze a Potential Real Estate Deal", was fantastic -- information technology gets 5 stars. However, Part ii, "37 Calculations Every Real Estate Investor Needs To Know", only gets 3 stars.

The book opens past presenting a fairly comprehensive framework for measuring real estate returns every bit coming from one of four mechanisms: cash period, appreciation, loan amortization, and a revenue enhancement shelter. Then it goes through and describes each of these one by one, including metrics for measuring returns with the pros and cons of each metric. It wasn't paw-wavey in whatsoever way regarding the basic math or calculations involved, which was wonderfully refreshing. It fifty-fifty described discount rates, discounted greenbacks menstruum assay, net present value, and the different IRR calculations extremely well. I have a much more intuitive understanding of how these calculations now, along with their pros, cons, and alternatives. However, it was quite repetitive (particularly Function ii) and not very thoroughly edited. So while information technology was a very quick read, only the first part was really enjoyable.

I wish that the authors would've connected Role 1 with a chip more than framework around evaluating backdrop. For example, "We typically use the ii% and 50% rules [which weren't really covered] for a brief glance, then estimate potential returns using simple estimates of Maintenance, Vacancy, Utilities, and PITI, and if everything still looks good we build a Annual Property Operating Data for line-detail comparison of Operating Expenses to similar properties."

Anyhow, I'd still highly recommend this volume to whatever investors who aren't familiar with all of these calculations, in particular discounted greenbacks flow analysis and comparing properties' operating expenses by comparison each expenses percentage of GOI. Bully suggestions.

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the important points to non in this volume are:
1) few simple definitions like GRM (gross rent multiplier)
Realistically, you would probably be surprised (and suspicious) to
see a GRM below 4 and aghast to see 1 college than 10.
GRM= selling price/gross income
two) capitalization charge per unit which is nil simply Internet operating income/purchase price.
its null but affectively yield.
3) present value analysis of NOI will requite render on
real estate investment with out affects of financing and taxes.
NOI is nil the important points to non in this volume are:
ane) few simple definitions similar GRM (gross rent multiplier)
Realistically, y'all would probably be surprised (and suspicious) to
meet a GRM below 4 and aghast to see 1 higher than 10.
GRM= selling price/gross income
2) capitalization rate which is nothing just Cyberspace operating income/purchase price.
its goose egg but affectively yield.
iii) present value analysis of NOI will give render on
real estate investment with out affects of financing and taxes.
NOI is nothing but yearly rent -operating expenses like belongings tax,
common maitenance, insurance etc.
iv) nowadays value analysis of greenbacks flows volition give return
taking into account financing and taxes.
cash flows will be caluclated after subtracting EMIs from NOI.
greenbacks flow = yearly hire - operating expenses - EMI
============
Keep in mind, if you finance the property, you have less cash flow
because you have to pay debt service; and you have less sale proceeds
because you lot have to pay off the mortgage. It makes sense that when yous
discount these smaller cash flows, you go an amount that equates to your
cash outlay, which itself is also less than the total property value in a leveraged
investment.
============
How much fourth dimension you should hold property? caluclate IRR for one twelvemonth, 2 year, 3 year etc.
The yr where IRR peaks , you should consider selling it and then.

First 100 pages worth reading. residuum of it just definition of various terms. In summary
this volume reinforces the fact that uppercase value of whatever nugget (in this case real estate) is nothing but sum of future cash flows discounted back to present.

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Jun 09, 2010 Steve rated it really liked it

Gallinelli is quick and to the point virtually what actually matters in investing, i.e. getting a return on your money. He has a light and joking mode that I enjoyed.

Mar 20, 2008 Rich Urban rated it information technology was amazing

Tiresome every bit all hell unless yous're a math junkie. However, information technology contains great formulas for real estate investors. I keep it on hand every bit a reference manual. Deadening as all hell unless you're a math junkie. Even so, it contains swell formulas for real manor investors. I keep it on paw as a reference transmission. ...more

My kind of volume. Very practical.

May 19, 2017 Devin rated information technology really liked it

I found this to be an good reference for normally used real estate definitions and concepts. There were some terms I had come across for a while now, and was non entirely certain what they meant or fully entailed. This book filled a lot of knowledge gaps.
Unfortunately, though, it is very technical and frankly, boring. There are many examples used to illustrate the terms and concepts, unremarkably involving math and sometimes complex equations. These were, for me, incomprehensible and not worth my time I found this to be an good reference for commonly used real estate definitions and concepts. There were some terms I had come up beyond for a while now, and was not entirely certain what they meant or fully entailed. This book filled a lot of cognition gaps.
Unfortunately, though, information technology is very technical and bluntly, boring. There are many examples used to illustrate the terms and concepts, usually involving math and sometimes complex equations. These were, for me, incomprehensible and not worth my time trying to brand sense of them. Virtually of these particularly intricate equations were intended to exist done with a spreadsheet or computer program, and so without access to that when I was reading, I just opted to move on.
I would recommend it to newbie investors and to those who take a belongings or 2 and desire know more about their returns. This book will help you lot learn the lingo and talk existent estate.

Notes"
At that place are 4 Basic Investment returns in real estate (xvii):
ane.Greenbacks Menstruation
2. Appreciation
iii. Loan Amortization
4. Tax Shelter

If you inherit tenants, enquire nigh rental rates and how long each lease runs? (iv) Most gas, electrical, and h2o companies volition give you usage information if you call.

Income-and-expense statement for real is usually called the "annual property operating data (APOD)(10).

Gross Scheduled Income- total almanac rent value of all units in the holding. This amount includes the actual rent generated past occupied units, as well every bit the potential rent from vacant units; sometimes chosen potential gross income (111-112).
Gross Schedule Income (for a given yr)=Total hire payable for that year nether existing contracts for occupied space +Total potential hire (at market rates) for vacant spaces

Vacancy Allowance- gauge of the corporeality of potential income that will be lost due to vacancy; expressed as a per centum of the gross scheduled income; too known equally a "vacancy and credit loss"
In the absence of usable marketplace information, many investors like to use a vacancy allowance in the range of iii% to 6% (11). If you don't feel some vacancy, you're just not charging enough.
Vacancy and Credit Loss (in dollars)= Gross Scheduled Income Ten Estimated % Vacancy and Credit Loss
(114)

Gross Operating Income (GOI)- The amount you actually collect; as well called effective gross income
GOI=Gross Scheduled Income -Vacancy and Credit Loss

Operating expenses- items such as property insurance and taxes, repairs, utilities, and management fees; costs that are necessary to keep the revenue stream flowing. Mortgage payments and depreciation are not considered operating expenses, nor are capital improvements

Net Operating Income (NOI)- Gross operating income minus the operating expenses (Upper-case letter expenditures and mortgage payments not included)
NOI= GOI-Operating Expenses
NOI=Value X Cap Charge per unit

You can make up one's mind how big a bite each expense takes out of your income past computing the percent of GOI that each expense represents. You accomplish this by dividing each expense past the GOI and multiplying the effect past 100 (12).

PV=Nowadays Value
FV=Time to come Value (29)

It's mutual practise when evaluating a property to annualize the cash flows (40).

The typical amortized mortgage is structured as something chosen an ordinary annuity. That's a serial of regular, equal amounts disbursed at the cease of each payment catamenia. Four variables are involved in whatsoever mortgage adding: the principal amount, the periodic interest charge per unit, the number of payment periods, and the payment amount(44).

*Mortgage Constant-Multiply the full dollar amount of the mortgage by this factor to calculate the monthly payment (Run across Appendix sheets) (44-45)

Internet Income-What is left over later expenses are deducted from revenue (49)

To be considered a real manor operating expense, an item must exist necessary to maintain a slice of a property and to ensure its power to go on to produce income (fifty). NOI is essential to agreement the market place value of a piece of income-producing existent estate.

At that place are 2 elements to a property's value equation: The NOI and the cap rate (51). The NOI represents a return on the buy price of the holding, and the cap rate is the rate of that render. Hence, a belongings with a $1,000,000 purchase cost and a $100,000 NOI has a x% cap charge per unit. Appraisers, brokers, and independent services can provide yous with the typical cap rate for a particular type of belongings in a given location (76). The downside of the cap charge per unit is that information technology looks at the property at a point in time (usually the current year), without regard to the property'south expected functioning over your entire holding flow.
PV=NOI/Cap Rate

Whenever you're considering purchasing an income property recite this: "If it's not worth selling, then information technology's not worth buying." (62)

*Cap Rate- the charge per unit at which you disbelieve time to come income to determine its nowadays value (128); A higher cap charge per unit yields a lower approximate of value. A lower cap rate yields a higher approximate of value (64). Because if the property generates a certain number of dollars of income (the NOI), the less yous pay for the property, the higher the rate of render on your investment will be. The more you pay, the less the rate of return.
Cap Rate=NOI/Value
Value=NOI/Cap Charge per unit

Payback Period- length of fourth dimension required to recover your initial cash investment (71). To attain a quick payback, your property must have a strong positive cash flow. The sooner you lot get your investment back, the sooner you can begin to "make" coin (72).

Cash-on-Cash return- Cash flow (usually before taxes) from a item year of a holding's performance and compare it to the cash you invested to purchase that belongings. You express the result equally a percentage, so if y'all have a $10,000 greenbacks flow this year from a property in which you initially invested $100,000 of your own cash, you would accept a ten% cash-on-cash return. It considers a property's performance over simply a unmarried year.
Greenbacks-on-Cash Return= Greenbacks Period before Taxes/Cash Investment

Gross Rent Multiplier (GRM)- Method of estimating or expressing a property's value as a multiple of its gross rental income (73); a technique that looks at comparable income-producing backdrop and establishes a typical income multiplier.
GRM=Market Value/Gross Scheduled Income (almanac)

Debt Coverage Ratio- ratio between the almanac net operating income and the almanac debt service
Debt Coverage Ratio= NOI/Annual Debt Service (74)

Opportunity cost- If yous receive a dollar today, you lot tin invest information technology and earn some return during the next year. If you lot receive the dollar a year from now instead, that delay has cost you the opportunity to invest, and hence, has cost y'all the render that the opportunity represents (77).

Unproblematic Interest-Method of computing interest where y'all apply the interest rate only to the original chief amount (93).
Interest=Principal X Rate 10 Time
Total corporeality later interest= Principal X [1 + (Rat X Time)]

Compound Interest-Method of computing interest where you apply the interest rate to the original principal and also to all accumulated interest (96).

Taxable Income-The amount which yous must pay Federal income revenue enhancement (138). It is Not your total rental income, not your income after operating expenses (i.e., NOI), and non your cash catamenia.

"Yous're more likely to come across surprise expenses than surprise income, so be realistic when forecasting the cash flow from a property you plan to purchase (151).

Cost, Income, and Expenses per Unit of measurement-Property's toll, gross scheduled income, or total operating expenses and carve up information technology by the number of rental unit of measurement (185). For example, if a building has 20 rental units and is offering $400,000, then it's price is $twenty,000 per unit of measurement. Those who utilize this technique usually exercise so just with residential properties (flat complexes) because the units in such properties tend to be more uniform in their power to generate revenue. You normally rent commercial property by the foursquare pes, and so "per unit" specifications are mostly meaningless.
Price per unit=Price/Number of units
Income per unit of measurement=Gross Scheduled Income/number of rental units
Expenses per unit of measurement=Operating Expenses/Number of rental units

Price per square human foot= Price/Gross Edifice Surface area or Net Rental-able Area
Income per foursquare pes=Gross Scheduled Income/Gross Building Area or Net Rental-able Area
Expenses per square foot=Operating Expenses/Gross Building Expanse or Net Rent-able Expanse
(188)

Operating Expense Ratio-Ratio of private operating expenses or of total operating expenses to the gross operating income (192); tells y'all how the money you spend to operate the building relates to the money y'all receive.
Operating Expense Ratio=Operating Expense/Gross Operating Income
Ex. (193):
Property Taxes=$12,500 17.86%
Repairs and Maintenance=viii,500 12.14%
Utilities= four,500 six.43%
GOI= 70,000

Annual Debt Service (ADS) (197)- The total of mortgage payments for the year. If y'all make monthly mortgage payments, then the ADS equals that monthly payment times 12.
Almanac Debt Service= Monthly Mortgage Payments X 12

Debt Coverage Ratio (DCR)-Ratio between the property'due south cyberspace operating Income for the yr and the Annual Debt Service (ADS)(196). If your NOI and ADS are exactly the aforementioned (say $1,000), then the ratio is 10,000 divided by 10,000 or exactly 1.000. A DCR of 1.00 implies you lot accept exactly enough net income from the property to make your mortgage payments; not a nickel more or less. If your DCR is less than 1.00, it means the property does non generate enough income to pay the mortgage. If your DCR is greater than 1.00 and so the holding does generate enough, with some left over. When y'all attempt to finance a property, that lender will examine the DCR to see if the property can await to generate enough cash to cover its mortgage payments. You lot tin be certain that "just enough" (i.east., 100) is non good enough. The lender wants to be sure that at that place is a margin for mistake, and so both the electric current DCR and its future projections must be higher than 1.00. Most lenders await for a DCR of at least 1.xx (198).
Debt Coverage Ratio=Annual NOI/Annual Debt Service

Break-Even Ratio= (Debt Service +Operating Expenses)/Gross Operating Income
Benchmark oft used by lenders when underwriting commercial mortgages (200). Its purpose is to gauge how vulnerable a property is to defaulting on its debt should rental income decline. Most lenders expect for a BER of 85% or less (201).

Render on Equity (ROE) is expressed as a per centum and typically is calculated for the first year but (203).
Return on Equity=Greenbacks Flow after Taxes/Initial Greenbacks Investment

Loan-to-Value Ratio (LTV)- Ratio between the full amount of a belongings'south mortgage financing and the belongings's appraised value or selling price, whichever is less; It is expressed as a pct(206). If you were to purchase a home equally a personal residence, the maximum LTV (i.e., the most the bank would lend you lot) would typically exist 80% for a conventional mortgage. To put information technology another way, you could borrow 80% of the value or purchase price. The more of your ain coin you lot have tied up in this property, the less likely you are to give the property back to the banking concern (207).
Loan-to-value Ratio=Loan Amount/Bottom of Property's Appraised Value or Actual Selling Price

Points- fees that you pay to the mortgage lender equally a premium for making the loan. They represent a form of prepaid interest on the loan. 1 point equals 1% of the mortgage loan amount (211).
1 Betoken (in dollars)= Mortgage Loan Corporeality/100
Dollars Amount of Points Paid=Mortgage Loan Amount Ten No. Points/100

Airship Payment- A mortgage then that your monthly payment is based on a term of 15 years or more, merely when the full residual comes due much earlier, mayhap in five to 10 years. Hence, the final payment y'all make "balloons" to include the entire loan balance at that time (218).

Belongings Taxes=Assessed Value 10 Tax Rate
Appraised Value=Assessed Value/Assessment Ratio
If you require a new property cess, use it to calculate the appraised value so that you an begin to make a sentence as to whether you think your belongings has been assessed fairly and whether or not you lot should appeal the cess. Keep in heed it is not enough to exist satisfied that the assessment suggests a reasonable property value. It's more than important that your calculation is in line with other comparable properties (232-233).

Adjust Basis- the original toll of an asset such as existent estate, plus majuscule improvements and costs of sale, less accumulated depreciation (235).

Depreciation (as well called "toll recovery") is the amount of the tax deduction that a property owner may have each year until he or she has written off the unabridged depreciable asset. With real estate, yous treat the physical structures (called "improvements") as your depreciable assets, simply non he land. Therefore, in that location is no depreciation allowance for the value of the country (238). The exact corporeality of your depreciation deduction each twelvemonth is adamant by the asset's "useful life" as specified in the tax code. The useful lufe for tax purposes is not necessarily the aforementioned as the actual concrete life expectancy of a particular nugget. "As of this writing, the useful life for residential holding is 27.5 years, and for nonresidential, 39 years."

Gain on Sale (or simply "Gain")- taxable profit that you make when you lot sell an income-holding investment. "Nether electric current rules, if you accept held the belongings for more than 12 months, then the proceeds is a capital proceeds, which means that least some of it will be taxed at a rate that is lower than what you pay on ordinary income." (242)

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January thirty, 2022 Mengyu Gao rated it it was amazing

Very comprehensive for beginners, and a good refresher for intermediate investors as well. The section on how "depreciation is a tax write off, and also an expense" and "compare the expense percentages" aren't mentioned often elsewhere. Very comprehensive for beginners, and a adept refresher for intermediate investors besides. The section on how "depreciation is a revenue enhancement write off, and also an expense" and "compare the expense percentages" aren't mentioned often elsewhere. ...more

I rarely don't finish books. Only I couldn't on this one. The INFORMATION is great, the delivery is awful. I only made it a quarter of the manner through, the rambling and random examples are more text volume than helpful. I would enjoy a cliff notes version of this book. I rarely don't finish books. But I couldn't on this one. The Data is smashing, the commitment is awful. I but made information technology a quarter of the manner through, the rambling and random examples are more text book than helpful. I would enjoy a cliff notes version of this book. ...more

My merely issue with this book is in that location a few sections that are out if guild from the author's original manuscript. He will mention a department he says you already covered merely it turns out it's a few sections later. Nonetheless a bang-up volume despite that. My merely issue with this volume is there a few sections that are out if order from the author's original manuscript. He will mention a section he says you already covered but it turns out it'due south a few sections later. Still a cracking volume despite that. ...more

April 05, 2020 Bao Chung rated it really liked it

Took a while to get into, but gives y'all the vocabulary needed when researching real estate deals.

Despite the terrible shouting embrace, this is an incredibly useful resource if you intend to go some nuts in real estate math.

Nov xx, 2019 Eric rated information technology it was ok

I did not finish since it goes into many details if you lot already are an investor. Once I brainstorm investing, I may go back and reference this volume.

So many great methods to use in the realestate business

This is my existent estate investor bible.

Apr thirteen, 2014 Matt Zimmerman rated it it was amazing

Recommends it for: anyone thinking of buying holding every bit an investment

Should I buy it or non? Since buying property is likely the largest purchase that most people ever brand, how tin can you beget not to go educated? If yous are buying for investment purposes, this book will requite yous the tools to clarify your return on investment. Of course, ultimately you are forced to brand assumptions about the market that are just that - assumptions, merely tools provided here are clearly based in common sense, and a lot of the power of the tools is in comparative analysis. Mr. Galli Should I buy it or non? Since buying property is probable the largest purchase that most people ever make, how can you beget not to get educated? If yous are buying for investment purposes, this volume will give you the tools to clarify your return on investment. Of course, ultimately you are forced to make assumptions about the market that are just that - assumptions, but tools provided here are clearly based in common sense, and a lot of the power of the tools is in comparative analysis. Mr. Gallinelli walks you through and explains how all the analysis is done, then at the end of the books sends you lot to his website to buy his programed excel spreadsheet that does it all for you. The thing is, if y'all practice arrive to the end of the book (I did, but not without starting over a few times on some chapters, and sometimes having to go back farther in the book to brand sure I had a amend understanding of the basics) so you volition want to know the numbers before you lot make investment decisions. Damn, he succeeded in selling me a $400 spreadsheet. Nice work Frank.

So after re reading my review I sound a trivial too much like I know what I'm talking virtually - I don't. I'thousand a novice at this. I go the math, I'm a successful small-scale concern owner, just no real manor experience.

...more than

This is a very specific kind of book for a very specific kind of reader. Information technology came highly recommended from a community of real estate investors, though I acknowledge to non grasping many of the calculations in it. I think you have to work daily with financial spreadsheets to exist able to capeesh the advantage that one return on investment calculation has over another. For me, it was informative as a reference but non game-irresolute. I will still rely on my bookkeeper and financial advisor to help me wit This is a very specific kind of book for a very specific kind of reader. It came highly recommended from a community of real estate investors, though I admit to not grasping many of the calculations in it. I think y'all have to piece of work daily with financial spreadsheets to be able to capeesh the advantage that one return on investment calculation has over another. For me, information technology was informative as a reference but not game-irresolute. I volition nevertheless rely on my bookkeeper and financial advisor to help me with greenbacks flow indicators.

Bated from the number-crunching content though, I tin can confirm that the writing mode is fairly easy to take in and the chapters are well laid out in such a mode that information technology is a unproblematic matter of finding the particular calculation you lot want and applying it. In that location are enough examples in the text to make it appetising, although I would personally have enjoyed more than real-life anecdotes. Stories ever liven upwardly a how-to book and would have been peculiarly interesting given that the material is for people who buy fixed belongings to rehab, sell or rent to tenants. No shortage of entertaining tales there!

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Financial analysis 101. The book is not dumped downward. The concepts transfer to stock analysis as well.

Sep 08, 2006 Douglas rated it it was amazing

Recommends information technology for: Real Manor Investors

A peachy book well-nigh reading and understanding the P/L or operating statements of income producing properties. Its great to read to master the fundamentals.

May nineteen, 2013 John rated information technology liked information technology

Skilful 50,000 pes level overview of real manor investing. A good place to start, only does not go into the detail necessary for you to start.

Excellent book, extremely thorough!

...will be reading it once again every bit I put the principals to employ.

Lots of great formulas

Nice book, I certain it volition help me out in the future. I recommend this to an realtor or any one interested in real manor.

Feb 26, 2014 Chris rated it actually liked it

Useful introduction to financial concepts and handy reference fabric for diverse profitability and expense metrics.

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