What Every Real Estate Investor Needs to Know about Cash Flow... And 36 Other Key Financial Measures

by Frank Gallinelli

Real estate financial calculations made easy Every real estate investor needs to know how to calculate cash flow, long-term gain, net operating income, and a few other basic financial formulas. What Every Real Estate Investor Needs to Know About Cash Flow . . . is a guide to the 36 most essential calculations that answer such crucial questions as "What is this building really worth today?" "What kind of cash flow can I expect?" "Is this property a good investment?" and "How do I calculate my return?" For beginning investors, real estate veterans, commercial brokers, and sellers as well as buyers, this handy reference is a must-have for anyone who wants to make sound decisions based on accurate calculations

Genres: Business, Finance, Nonfiction, Personal Finance, Money, Economics, Reference

261 pages, Paperback

First published November 25, 2003

About the author

First, the professional side: I am the author of "What Every Real Estate Investor Needs to Know About Cash Flow...," now in its third edition. It is actually about a lot more than just cash flow. It provides readers with a basic grasp of how income property investments really work and serves as a handbook for understanding essential financial measures related to real estate investing. I have a second book, "Insider Secrets to Financing Your Real Estate Investments," which was released in December 2004. In 2008 I released "Mastering Real Estate Investment," a sequel of sorts to the "Cash Flow" book.
Readers of my books have often asked if I planned to give any classes on this material, so at last I released an online video course, "Mastering Real Estate Investing." You can find a complete outline of the course content at learn.realdata.com
My company's website, realdata.com, has a strong educational component and I write a series of articles about real estate investment and development for that site. Speaking of education, I also served for 15 years as Adjunct Assistant Professor in Columbia University's Master of Science in Real Estate Development program, teaching real estate finance.
I founded RealData in 1981 to provide usable, affordable software for investors and developers who weren't necessarily proficient with computers. Most of our products perform pro-forma analyses that range from basic to quite sophisticated. Besides information about this software, my company's site offers a variety of resources that you should find useful if you're interested in real estate investing or development.
On the personal side: I started off life in Hoboken, NJ, home of the other Frank -- the one who could sing. We moved to Connecticut when I was about six and that's where I've lived ever since. I graduated from Yale in 1968 and then taught English and math for several years in New Haven. That might explain why I've written books with a lot of formulas and no split infinitives. I received a graduate degree in education, then left the classroom to go into real estate, became an investor, and the rest, to coin a cliche, is history.
My wife Jean and I have been married for more than 50 years. We have a son who taught for 13 years in China and Korea. He is now back in the states with his wife and daughter, living just a healthy bike ride away. We're fortunate to have our daughter, son-in-law, and grandson also living within jogging distance.
My CV notwithstanding, I always wanted to be a writer, although the great American novel was really what I had in mind. Nonetheless, I'm very grateful for the opportunity to be launched into print. And maybe that novel is still lurking somewhere.

Reviews

[Paul Schmidt · Rating 5 out of 5]

Summary:
This is likely the best real estate book that I have come across. Many of the other books talk about the soft-skills or general tips to keep in mind, but this book provided me with the confidence to start actively analyzing deals by providing me with the calculations (and their uses, strengths, and weaknesses) for acquiring deals. Some key, consolidated themes include:
- Information is a valuable commodity, so you shouldn't expect that it'll simply fall into your lap without some effort on your part.
- Always keep in mind the time value of money by calculating the PV (by discounting) and FV (by calculating added interest).
- Since you'll eventually need to sell, it pays to run tomorrow's numbers today.
- IRR is one of the more useful measures because of its sensitivity to both the timing and the magnitude of cash flows. Since it provides annual breakdowns, it can say: “Don’t be fooled by the fact that you show cash flow increases every year. You made your biggest impact in the first three years. That’s when you should consider cashing out and doing this all over again somewhere else.”
- There is no silver bullet formula; it helps to have a toolkit.
- Do your reps by practicing your analysis on case studies in order to avoid making mistakes on the battleground.
- Apart from verifying the information you've been given is correct, be sure to look for the information that is missing in the first place.
- Look out for your lender too and be aware of his/her preferred DCR .
- You may properly envision the conjoining of risk and reward as a law of nature. If this investment presents a lower risk than other property types, then you should expect that it will also offer a lower return.

Main Highlights:
- You understand that every income property has the potential to provide you with as many as four different returns: cash flow, appreciation, loan amortization, and tax shelter. Cash flow is the money you have left after paying all your bills; appreciation is the growth in equity caused by an increase in the property’s value; amortization represents the growth in equity caused by the gradual paydown of your mortgage; and tax shelter signifies the property’s ability to shield from taxation some of its own income and perhaps even income from other investments.
- In general, however, revenue—particularly net revenue (after operating expenses)—drives the value of income property. We’re returning to one of our basic principles here, that real estate investors really buy the property’s income stream.
- Information is a valuable commodity; you shouldn’t start off with any illusions that good information will fall into your lap without some effort on your part.
- For the type of financial forecasting you’ll learn to perform, it’s very valuable to know what the typical capitalization rate is for a particular kind of property in a particular geographic area.
- The time value of money plays a critical role when you consider just how valuable your property’s cash flows really are. Timing is everything.
- Cash you receive sooner is more valuable than cash you receive later because the sooner you have it, the sooner you can put it to work earning more cash.
- Rule of Thumb: Recite this mantra whenever you consider purchasing an income property: If it’s not worth selling, then it’s not worth buying.
- The world may not be perfect, but at least it’s flat—as in “level playing field.” You can reasonably assume that if you would scrutinize a property’s income, operating expenses, financing, and various measures of return before you purchase, then tomorrow some equally astute investor will apply a similarly jaundiced eye to your numbers when you choose to sell. It pays, therefore, to run tomorrow’s numbers today and to see just what this investment will look like to a future buyer.
- IRR packs more analytical power than most other measures of investment quality you have seen so far, primarily because of its sensitivity to both the timing and the magnitude of cash flows. Now is when you can really start having some fun with the numbers and using their power to guide you to good investment decisions.
- Rule of Thumb: When you make your forecasts for a property, don’t just run the numbers for a single holding period (for example, five years, as in our case study). Run as many different holding periods as you can, and then look to see if there is one year where the IRR peaks. If so, this is the year you should consider selling to maximize your return. If there is no definitive peak, but rather a period of years where the IRR is more or less the same, that means there is no optimum sale year, and you can sell whenever it suits you.
- the IRR is capable of delivering a very powerful and perhaps surprising message: “Don’t be fooled by the fact that you show cash flow increases every year. You made your biggest impact in the first three years. That’s when you should consider cashing out and doing this all over again somewhere else.”
- Now that you’ve mastered cash flow and resale and IRR, you don’t have to look just for an optimum holding period. What happens to your IRR if you take a bigger mortgage and use less cash? What happens if you do the opposite? What if you spend money for improvements that allow you to raise rents—will that boost your return or reduce it?
- Perhaps you’re evaluating a single property. Clearly, a capital accumulation comparison isn’t necessary. Maybe you expect that property to enjoy robust positive cash flows. In that case, internal rate of return should do nicely. Or possibly the property will have some negative cash flows, and you would be best served by MIRR. The smart investor will understand all these techniques, consider them all, and use the one (or several) that seems best suited to the actual investment decision at hand. After all, you wouldn’t keep just one kind of screwdriver or one size wrench in your basement toolbox. Do no less with your investments.
- Real-life experience always makes the best teacher, but you can also get a head start on the learning process with some guided practice using what we might call “unreal estate”—made-up case studies that allow you to work through common investment scenarios as if you were a participant in an actual transaction.
- Let’s start by looking at that skeleton you called an APOD. You’ve made what is one of the most common mistakes committed by beginning (and sometimes even by more experienced) investors: You’ve focused on verifying and analyzing the information you’ve been provided, but you haven’t thought about the information that might be missing. All the data you have in hand is indeed factually correct, but the story doesn’t end there. You’ve made the erroneous and potentially damaging assumption that the seller or the seller’s representative has told you everything you really need to know. As you will see in a moment, that can be an expensive mistake.
- The debt coverage ratio (DCR) often doesn’t get the amount of attention from investors that it deserves, but here again you’re looking at positive news. Remember that the lender was requiring at least a 1.20 DCR in order to underwrite the mortgage.
- Likelihood of lower return. You may properly envision the conjoining of risk and reward as a law of nature. If this investment presents a lower risk than other property types, then you should expect that it will also offer a lower return.

Highlights (excluding the Metrics highlights at the end):
- You can download any of the Excel files shown at http://www.realdata.com/book
- The key concepts underlying most real estate calculations are explained in depth in Part I, but Part II is designed as a reference guide and frequently repeats capsule summaries of the ideas elaborated in detail in Part I.
- In real estate investing, the profits and gains that are lost by the envelope scratchers accrue to those who take the time to do the math.
- four basic returns:  1.  Cash flow  2.  Appreciation  3.  Loan amortization  4.  Tax shelter
- Not all properties generate a meaningful cash flow, however, and for those that don’t, the next most important of the four basic returns is appreciation.
- In general, however, revenue—particularly net revenue (after operating expenses)—drives the value of income property. We’re returning to one of our basic principles here, that real estate investors really buy the property’s income stream.
- Amortization is the liquidation of this debt by the application of installment payments over time (for the Latin scholars, think of “ad” [toward] and “mort-” [death]—killing off the loan).
- Debt Service (i.e., total mortgage payment)      less Interest Paid      = Amortization
- Tax Shelters: (1) The first of these deductions is for mortgage interest. (2) The second source of tax shelter is through the depreciation deduction, which is now called cost recovery in the tax code as of this writing, but is still usually called depreciation by real flesh-and-blood investors.
- You understand that every income property has the potential to provide you with as many as four different returns: cash flow, appreciation, loan amortization, and tax shelter. Cash flow is the money you have left after paying all your bills; appreciation is the growth in equity caused by an increase in the property’s value; amortization represents the growth in equity caused by the gradual paydown of your mortgage; and tax shelter signifies the property’s ability to shield from taxation some of its own income and perhaps even income from other investments.
- Information is a valuable commodity; you shouldn’t start off with any illusions that good information will fall into your lap without some effort on your part.
- As we will emphasize throughout this book, you are not really buying a physical property so much as you are buying its income stream.
- Recite the Representations About the Leases and the Schedule of Rent Income in the Offer to Purchase: "but put into the offer to purchase something along the lines of “The Seller warrants and represents that as of the date of this agreement, the leases are for [such and such amounts] and the expiration dates and renewal options are [whatever].” Then ask the lawyer about adding, “and that these warranties will survive the delivery of the deed.” The first part means the seller swears to tell nothing but the truth, and the second part means that he or she is not off the hook if you discover the lie after you complete the purchase."
- Data seldom tell you enough by themselves, however, to lead you to a decision about buying or selling.
- For the type of financial forecasting you’ll learn to perform, it’s very valuable to know what the typical capitalization rate is for a particular kind of property in a particular geographic area.
- In the absence of usable market data, many investors like to use a vacancy allowance in the range of 3 to 6%.
- Conventional wisdom also has it that a property whose actual vacancy history is close to zero has probably been rented at less than market rates. In other words, if you don’t experience some vacancy, you’re just not charging enough.
- The APOD is not just a source of answers about an investment property, but rather the source of the most important questions.
- Also, you should always verify heating and other utility costs by contacting the utility suppliers directly.
- The time value of money plays a critical role when you consider just how valuable your property’s cash flows really are. Timing is everything.
- Cash you receive sooner is more valuable than cash you receive later because the sooner you have it, the sooner you can put it to work earning more cash.
- “What is this property really worth?” It may be argued that value, like beauty, is in the eye of the beholder. This argument tends to ring true in regard to single-family homes, where conventional wisdom has always held that a house is worth what someone is willing to pay for it. Income-producing property, however, is different. Value is determined by the numbers.
- To be considered a real estate operating expense, an item must be necessary to maintain a piece of a property and to ensure its ability to continue to produce income. Loan payments, depreciation, and capital expenditures are not considered operating expenses.
- For example, utilities, supplies, snow removal, and property management are all operating expenses. Repairs and maintenance are operating expenses, but improvements and additions are not—they are capital expenditures.
- there are two elements to a property’s value equation: the NOI and the cap rate (universal shorthand for capitalization rate). The NOI represents a return on the purchase price of the property, and the cap rate is the rate of that return. Hence, a property with a $1,000,000 purchase price and a $100,000 NOI has a 10% capitalization rate. However, the investor will purchase that property for $1,000,000 only if he or she judges 10% to be a satisfactory rate of return.
- In short, the NOI expresses an objective measure of a property’s income stream, while the required capitalization rate is the investor’s subjective estimate of how well his or her capital must perform.
- NOI is the starting point of our discussion here. Once you know the property’s NOI, you branch off in one direction to figure its taxable income and in another to figure its cash flow.
- A positive cash flow is important to all investors and essential to some. Is CFAT, then, the end of your continuing saga of investment analysis? Not at all. Next, you’ll look at the ultimate resale of your property and at how value impacts the overall quality of your investment.
- One topic that sometimes gets less attention than it deserves from beginning real estate investors, however, is resale. That’s fine; may all your plans go without a hitch. But what if you need to sell this property next year? What if a better opportunity comes along in five years, and you want to cash out?
- Rule of Thumb: Recite this mantra whenever you consider purchasing an income property: If it’s not worth selling, then it’s not worth buying.
- The world may not be perfect, but at least it’s flat—as in “level playing field.” You can reasonably assume that if you would scrutinize a property’s income, operating expenses, financing, and various measures of return before you purchase, then tomorrow some equally astute investor will apply a similarly jaundiced eye to your numbers when you choose to sell. It pays, therefore, to run tomorrow’s numbers today and to see just what this investment will look like to a future buyer.
- Rule of Thumb: If you’re the buyer, you generally prefer to capitalize the current year’s NOI when you estimate what a property is worth. If you’re the seller, you typically prefer to capitalize your estimate of the coming year’s NOI.
- When you use a cap rate to forecast a property’s value at some point in the future, the first judgment you must make is

[Cody Ray · Rating 4 out of 5]

Why did I give this 4 stars? Because Part 1, "How To Analyze a Potential Real Estate Deal", was fantastic -- it gets 5 stars. However, Part 2, "37 Calculations Every Real Estate Investor Needs To Know", only gets 3 stars.

The book opens by presenting a fairly comprehensive framework for measuring real estate returns as coming from one of four mechanisms: cash flow, appreciation, loan amortization, and a tax 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 hand-wavey in any way regarding the basic math or calculations involved, which was wonderfully refreshing. It even described discount rates, discounted cash flow analysis, 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 Part 2) and not very thoroughly edited. So while it was a very quick read, only the first part was really enjoyable.

I wish that the authors would've continued Part 1 with a bit more framework around evaluating properties. For example, "We typically use the 2% and 50% rules [which weren't actually covered] for a cursory 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-item comparison of Operating Expenses to similar properties."

Anyway, I'd still highly recommend this book to any investors who aren't familiar with all of these calculations, in particular discounted cash flow analysis and comparing properties' operating expenses by comparing each expenses percentage of GOI. Great suggestions.

[Daniel · Rating 4 out of 5]

I had always wondered how to analyze a real estate investment. I think this book helped me learn how to do that. I enjoyed the chapters in the second part of the book with a separate chapter for each calculation. Its hard for me to remember what some calculations mean but, I will keep trying to learn. I enjoyed reading this book.

[Rich Urban · Rating 5 out of 5]

Boring as all hell unless you're a math junkie. However, it contains great formulas for real estate investors. I keep it on hand as a reference manual.

[Steve · Rating 4 out of 5]

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

[Jacob · Rating 5 out of 5]

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

[Stephanie Brady · Rating 5 out of 5]

Excellent resource

After reading this book you will probably know more about the math behind investment real estate than most brokers. Good luck

[Chad Carson · Rating 5 out of 5]

Very thorough book on real estate deal analysis. I have it on my shelve as a reference manual. Must read.

[Joseph · Rating 4 out of 5]

My kind of book. Very practical.

[Cynthia · Rating 4 out of 5]

The calculations actually were somewhat understandable, and I understand how taxes kinda work with real estate investing

[Devin · Rating 4 out of 5]

I found this to be an good reference for commonly used real estate definitions and concepts. There were some terms I had come across for a while now, and was not entirely sure 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, usually involving math and sometimes complex equations. These were, for me, incomprehensible and not worth my time trying to make sense of them. Most of these particularly intricate equations were intended to be done with a spreadsheet or computer program, 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 have a property or two and want know more about their returns. This book will help you learn the lingo and talk real estate.

Notes"
There are 4 Basic Investment returns in real estate (xvii):
1.Cash Flow
2. Appreciation
3. Loan Amortization
4. Tax Shelter

If you inherit tenants, ask about rental rates and how long each lease runs? (4) Most gas, electric, and water companies will give you usage information if you call.

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

Gross Scheduled Income- total annual rent value of all units in the property. This amount includes the actual rent generated by occupied units, as well as the potential rent from vacant units; sometimes called potential gross income (111-112).
Gross Schedule Income (for a given year)=Total rent payable for that year under existing contracts for occupied space +Total potential rent (at market rates) for vacant spaces

Vacancy Allowance- estimate of the amount of potential income that will be lost due to vacancy; expressed as a percentage of the gross scheduled income; also known as a "vacancy and credit loss"
In the absence of usable market data, many investors like to use a vacancy allowance in the range of 3% to 6% (11). If you don't experience some vacancy, you're just not charging enough.
Vacancy and Credit Loss (in dollars)= Gross Scheduled Income X Estimated % Vacancy and Credit Loss
(114)

Gross Operating Income (GOI)- The amount you actually collect; also 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 (Capital expenditures and mortgage payments not included)
NOI= GOI-Operating Expenses
NOI=Value X Cap Rate

You can determine how big a bite each expense takes out of your income by computing the percentage of GOI that each expense represents. You accomplish this by dividing each expense by the GOI and multiplying the result by 100 (12).

PV=Present Value
FV=Future Value (29)

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

The typical amortized mortgage is structured as something called an ordinary annuity. That's a series of regular, equal amounts disbursed at the end of each payment period. Four variables are involved in any mortgage calculation: the principal amount, the periodic interest rate, the number of payment periods, and the payment amount(44).

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

Net Income-What is left over after expenses are deducted from revenue (49)

To be considered a real estate operating expense, an item must be necessary to maintain a piece of a property and to ensure its ability to continue to produce income (50). NOI is essential to understanding the market value of a piece of income-producing real estate.

There are two elements to a property's value equation: The NOI and the cap rate (51). The NOI represents a return on the purchase price of the property, and the cap rate is the rate of that return. Hence, a property with a $1,000,000 purchase price and a $100,000 NOI has a 10% cap rate. Appraisers, brokers, and independent services can provide you with the typical cap rate for a particular type of property in a given location (76). The downside of the cap rate is that it looks at the property at a point in time (usually the current year), without regard to the property's expected performance over your entire holding period.
PV=NOI/Cap Rate

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

*Cap Rate- the rate at which you discount future income to determine its present value (128); A higher cap rate yields a lower estimate of value. A lower cap rate yields a higher estimate of value (64). Because if the property generates a certain number of dollars of income (the NOI), the less you pay for the property, the higher the rate of return on your investment will be. The more you pay, the less the rate of return.
Cap Rate=NOI/Value
Value=NOI/Cap Rate

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

Cash-on-Cash return- Cash flow (usually before taxes) from a particular year of a property's operation and compare it to the cash you invested to purchase that property. You express the result as a percentage, so if you have a $10,000 cash flow this year from a property in which you initially invested $100,000 of your own cash, you would have a 10% cash-on-cash return. It considers a property's performance over just a single year.
Cash-on-Cash Return= Cash Flow 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 properties and establishes a typical income multiplier.
GRM=Market Value/Gross Scheduled Income (annual)

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

Opportunity cost- If you receive a dollar today, you can invest it and earn some return during the next year. If you receive the dollar a year from now instead, that delay has cost you the opportunity to invest, and hence, has cost you the return that the opportunity represents (77).

Simple Interest-Method of computing interest where you apply the interest rate only to the original principal amount (93).
Interest=Principal X Rate X Time
Total amount after 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 you must pay Federal income tax (138). It is NOT your total rental income, not your income after operating expenses (i.e., NOI), and not your cash flow.

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

Price, Income, and Expenses per Unit-Property's price, gross scheduled income, or total operating expenses and divide it by the number of rental unit (185). For example, if a building has 20 rental units and is offer $400,000, then it's price is $20,000 per unit. Those who use this technique usually do so only with residential properties (apartment complexes) because the units in such properties tend to be more uniform in their ability to generate revenue. You commonly rent commercial property by the square foot, and so "per unit" specifications are generally meaningless.
Price per unit=Price/Number of units
Income per unit=Gross Scheduled Income/number of rental units
Expenses per unit=Operating Expenses/Number of rental units

Price per square foot= Price/Gross Building Area or Net Rental-able Area
Income per square foot=Gross Scheduled Income/Gross Building Area or Net Rental-able Area
Expenses per square foot=Operating Expenses/Gross Building Area or Net Rent-able Area
(188)

Operating Expense Ratio-Ratio of individual operating expenses or of total operating expenses to the gross operating income (192); tells you how the money you spend to operate the building relates to the money you receive.
Operating Expense Ratio=Operating Expense/Gross Operating Income
Ex. (193):
Property Taxes=$12,500 17.86%
Repairs and Maintenance=8,500 12.14%
Utilities= 4,500 6.43%
GOI= 70,000

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

Debt Coverage Ratio (DCR)-Ratio between the property's net operating Income for the year and the Annual Debt Service (ADS)(196). If your NOI and ADS are exactly the same (say $1,000), then the ratio is 10,000 divided by 10,000 or exactly 1.000. A DCR of 1.00 implies you have 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 not generate enough income to pay the mortgage. If your DCR is greater than 1.00 then the property does generate enough, with some left over. When you try to finance a property, that lender will examine the DCR to see if the property can expect to generate enough cash to cover its mortgage payments. You can be certain that "just enough" (i.e., 100) is not good enough. The lender wants to be sure that there is a margin for error, so both the current DCR and its future projections must be higher than 1.00. Most lenders look for a DCR of at least 1.20 (198).
Debt Coverage Ratio=Annual NOI/Annual Debt Service

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

Return on Equity (ROE) is expressed as a percentage and typically is calculated for the first year only (203).
Return on Equity=Cash Flow after Taxes/Initial Cash Investment

Loan-to-Value Ratio (LTV)- Ratio between the total amount of a property's mortgage financing and the property's appraised value or selling price, whichever is less; It is expressed as a percentage(206). If you were to purchase a home as a personal residence, the maximum LTV (i.e., the most the bank would lend you) would typically be 80% for a conventional mortgage. To put it another way, you could borrow 80% of the value or purchase price. The more of your own money you have tied up in this property, the less likely you are to give the property back to the bank (207).
Loan-to-value Ratio=Loan Amount/Lesser of Property's Appraised Value or Actual Selling Price

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

Balloon Payment- A mortgage so that your monthly payment is based on a term of 15 years or more, but when the full balance comes due much earlier, perhaps in 5 to 10 years. Hence, the last payment you make "balloons" to include the entire loan balance at that time (218).

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

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

Depreciation (also called "cost recovery") is the amount of the tax deduction that a property owner may take each year until he or she has written off the entire depreciable asset. With real estate, you treat the physical structures (called "improvements") as your depreciable assets, but not he land. Therefore, there is no depreciation allowance for the value of the land (238). The exact amount of your depreciation deduction each year is determined by the asset's "useful life" as specified in the tax code. The useful lufe for tax purposes is not necessarily the same as the actual physical life expectancy of a particular asset. "As of this writing, the useful life for residential property is 27.5 years, and for nonresidential, 39 years."

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

[Morganjason · Rating 5 out of 5]

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[Ryan Stewart · Rating 5 out of 5]

This book was a great beginning book for real estate investing, this book will give you a solid foundation of what you need to know. It is very well written and has multiple examples for each concept, so you can start to understand the language and how everything works together. It is mostly looking at the concepts from the point of view of a buyer but this was the most impactful book I’ve read all summer.

[Corina Eufinger · Rating 5 out of 5]

My only issue with this book 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's a few sections later. Still a great book despite that.

[Kasey Gordon · Rating 2 out of 5]

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

[Mengyu Gao · Rating 5 out of 5]

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.

[Luke · Rating 4 out of 5]

A book for nerds

[Eric · Rating 2 out of 5]

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

[Abdalrahman Alsaleh · Rating 4 out of 5]

So many great methods to use in the realestate business

[Paul · Rating 5 out of 5]

Outstanding

[Bao Chung · Rating 4 out of 5]

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

[Martha]

too much information

[Popeye DeFrancis · Rating 5 out of 5]

This is my real estate investor bible.

[Gregory Brokaw · Rating 5 out of 5]

Despite the terrible shouting cover, this is an incredibly useful resource if you intend to get some basics in real estate math.

[John · Rating 5 out of 5]

Great book for the math behind real estate investing. Definitely a book to keep on the shelf as a reference.

[Mrmalibu · Rating 4 out of 5]

Hard book to understand. Multiple rereads are required.

[Mike Parsons · Rating 5 out of 5]

Informative book

Lots of great formulas to help you in your pursuit of how to discern if an investment is right for you and if it makes sense.

[Tom Kimbrell · Rating 4 out of 5]

Very informative but also very dense.

[Michael Benevento · Rating 4 out of 5]

This book is definitely a great reference for commonly used real estate definitions & concepts.

[Mathias · Rating 2 out of 5]

Nej tack men lärde mig att göra bra research när man ska köpa bostad