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

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 of: Discounted cash flow Cash-on-cash return Net operating income Capitalization rate Gross rent multiplier Net present value Payback period Mortgage amortization And many more Terms of Use 5 Want to learn more? 6 Contents 10 Preface 14 Downloadable Forms and Excel Templates in This Book 15 Introduction 18 The Four Ways to Make Money in Real Estate 18 What Do Successful Investors Really Buy? 19 How You Make Money in Real Estate: The Four Basic Investment Returns 20 Summary 27 Part I How to Analyze a Potential Real Estate Deal 30 Chapter 1 Do Your Homework: How to Gather the Data Needed to Make an Investment Decision 32 Property-Related Data 33 Ask to See the Leases 33 Look at the Property Tax Bill 33 Spot-check Utility Bills 33 Ask to See the Appropriate Sections of the Seller’s Tax Return 34 Recite the Representations about the Leases and the Schedule of Rent Income in the Offer to Purchase 34 Market-Related Data 35 Investigate Comparable Sales 35 Look for Lease Rates and Operating Expense Data 36 Find Out about Local Capitalization Rates 36 Chapter 2 Financial Detective Work Before You Buy: Finding the Truth Behind What the Seller Is Telling You 38 Basic Definitions 39 Analyzing Similar Properties 41 Comparing Expense Ratios 45 The Annual Property Operating Data Form 48 Chapter 3 How the "Time Value of Money" Should Influence Your Real Estate Investing Decisions 56 Real Estate Applications 57 Using Excel to Make Real Estate Calculations 59 What Every Investor Needs to Know About Cash Flow: Calculating the Present Value 63 Evaluating Leases 68 Mortgage Calculations 73 Chapter 4 How to Estimate What an Income Property Is Really Worth 78 Cash Flow and Taxable Income 81 Taxable Income or Loss 81 Cash Flow before Taxes 83 Cash Flow after Taxes 85 A Case Study 85 Resale—How to Forecast the Appreciation Potential for a Property 91 Chapter 5 Measuring the Return on a Real Estate Investment 100 Payback Period, Cash-on-Cash Return, Gross Rent Multiplier, Debt Coverage Ratio 100 Capitalization Rate 104 Discounted Cash Flow 105 Internal Rate of Return 109 Part II Thirty-Seven Calculations Every Real Estate Investor Needs to Know 120 Chapter 6 Calculation 1: Simple Interest 122 What It Means 122 How to Calculate 122 Example 122 Test Your Understanding 124 Chapter 7 Calculation 2: Compound Interest 125 What It Means 125 How to Calculate 125 Example 128 Test Your Understanding 129 Chapter 8 Calculation 3: Rule of 72s 131 What It Means 131 How to Calculate 131 Example 131 Test Your Understanding 132 Chapter 9 Calculation 4: Present Value of a Future Cash Flow 133 What It Means 133 How to Calculate 134 Example 134 Test Your Understanding 135 Chapter 10 Calculation 5: Gross Rent Multiplier 137 What It Means 137 How to Calculate 138 Example 138 Test Your Understanding 138 Chapter 11 Calculation 6: Gross Scheduled Income (Potential Gross Income) 140 What It Means 140 How to Calculate 140 Example 141 Test Your Understanding 141 Chapter 12 Calculation 7: Vacancy and Credit Loss 143 What It Means 143 How to Calculate 144 Example 144 Test Your Understanding 145 Chapter 13 Calculation 8: Gross Operating Income (Effective Gross Income) 147 What It Means 147 How to Calculate 147 Example 148 Test Your Understanding 148 Chapter 14 Calculation 9: Net Operating Income 151 What It Means 151 How to Calculate 152 Example 152 Test Your Understanding 154 Chapter 15 Calculation 10: Capitalization Rate 157 What It Means 157 How to Calculate 158 Example 158 Test Your Understanding 159 Chapter 16 Calculation 11: Net Income Multiplier 163 What It Means 163 How to Calculate 163 Example 164 Test Your Understanding 164 Chapter 17 Calculation 12: Taxable Income 167 What It Means 167 How to Calculate 168 Example 170 Test Your Understanding 174 Chapter 18 Calculation 13: Cash Flow 178 What It Means 178 How to Calculate 178 Example 179 Test Your Understanding 182 Chapter 19 Calculation 14: Cash-on-Cash Return 184 What It Means 184 How to Calculate 184 Example 185 Test Your Understanding 186 Chapter 20 Calculation 15: Sale Proceeds 189 What It Means 189 How to Calculate 189 Example 190 Test Your Understanding 192 Chapter 21 Calculation 16: Discounted Cash Flow 194 What It Means 194 How to Calculate 195 Example 196 Test Your Understanding 198 Chapter 22 Calculation 17: Net Present Value 200 What It Means 200 How to Calculate 201 Example 202 Test Your Understanding 203 Chapter 23 Calculation 18: Profitability Index 206 What It Means 206 How to Calculate 207 Example 207 Test Your Understanding 207 Chapter 24 Calculation 19: Internal Rate of Return 209 What It Means 209 How to Calculate 210 Example 210 Test Your Understanding 212 Chapter 25 Calculation 20: Price, Income, and Expenses per Unit 214 What It Means 214 How to Calculate 215 Example 215 Test Your Understanding 215 Chapter 26 Calculation 21: Price, Income, and Expenses per Square Foot 217 What It Means 217 How to Calculate 218 Example 218 Test Your Understanding 219 Chapter 27 Calculation 22: Operating Expense Ratio 221 What It Means 221 How to Calculate 221 Example 222 Test Your Understanding 223 Chapter 28 Calculation 23: Debt Coverage Ratio 225 What It Means 225 How to Calculate 226 Example 226 Test Your Understanding 227 Chapter 29 Calculation 24: Break-Even Ratio 229 What It Means 229 How to Calculate 229 Example 230 Test Your Understanding 230 Chapter 30 Calculation 25: Return on Equity 232 What It Means 232 How to Calculate 232 Example 233 Test Your Understanding 234 Chapter 31 Calculation 26: Loan-to-Value Ratio 235 What It Means 235 How to Calculate 237 Example 237 Test Your Understanding 239 Chapter 32 Calculation 27: Points 240 What It Means 240 How to Calculate 241 Example 241 Test Your Understanding 242 Chapter 33 Calculation 28: Mortgage Payment/Mortgage Constant 243 What It Means 243 How to Calculate 244 Example 245 Test Your Understanding 245 Chapter 34 Calculation 29: Principal Balance/Balloon Payment 247 What It Means 247 How to Calculate 247 Example 250 Test Your Understanding 250 Chapter 35 Calculation 30: Principal and Interest per Period 252 What It Means 252 How to Calculate 253 Example 254 Test Your Understanding 254 Chapter 36 Calculation 31: Maximum Loan Amount 256 What It Means 256 How to Calculate 257 Example 258 Test Your Understanding 258 Chapter 37 Calculation 32: Assessed Value, Property Taxes, and Value Indicated by Assessment 260 What It Means 260 How to Calculate 261 Example 261 Test Your Understanding 263 Chapter 38 Calculation 33: Adjusted Basis 264 What It Means 264 How to Calculate 264 Example 265 Test Your Understanding 265 Chapter 39 Calculation 34: Depreciation 267 What It Means 267 How to Calculate 268 Example 268 Test Your Understanding 269 Chapter 40 Calculation 35: Gain on Sale 271 What It Means 271 How to Calculate 271 Example 272 Test Your Understanding 272 Chapter 41 Calculation 36: Land Measurements 274 What It Means 274 How to Calculate 275 Example 276 Test Your Understanding 276 Chapter 42 Calculation 37: Building Measurements—Gross Building Area, Usable Square Footage, Rentable Square Footage, Loss Ratio, Net Rentable Area 278 What It Means 278 How to Calculate 280 Example 280 Test Your Understanding 281 Appendix 282 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 34 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 of: Discounted cash flow Cash-on-cash return Net operating income Capitalization rate Gross rent multiplier Net present value Payback period Mortgage amortization And many more