Guest Post By Carter Froelich, CPA
Let me begin by saying how grateful and humble I am to have been selected by Personal Real Estate Investor Magazine to provide on-going articles in relation to real estate finance and investment analysis. It is my intention to provide information which will be not only informative but also will be able to be utilized immediately by the reader in their day-to-day real estate investment activities. Over the course of the next issues I will be providing articles relate to: (i) preparing real estate cash flow analysis; (ii) explaining various financial return metrics and why they are important; (iii) providing tips on how to secure financing when traditional lending sources are not available; (iv) how to estimate market values; (iv) how to become a bank to assist others in purchasing property in addition to other relevant real estate investing topics. With that serving as a brief introduction, let’s discuss why it is so important to be financial literate and have a basic understanding of cash flow analysis.
Financial Literacy and Cash Flow Analysis
You can make a lot of money by investing in real estate. You can also lose a lot of money investing in real estate. There is a right way to invest in real estate and there is a wrong way to invest in real estate. It is my intention to provide you with information related to the right way to invest in real estate.
Investing in real estate is a numbers game and I do mean that you have to know to the numbers. If you are not interested in learning the numbers, and there a lot of them, you may as well stop reading and find another investment vehicle to get to where you want to go (if you can find one as powerful as real estate investing).
Numbers are at the heart at of real estate investing and connect to the four critical elements that surround income property investments which I refer to as the four basic returns of real estate investing which include:
- Cash Flow
- Loan Amortization
- Tax Benefits /Tax Shelter
If you are to be successful in real estate you have know numbers in relation to the market in which you are investing. These numbers include: sale prices, rental comparables, days on market, capitalization rates, vacancy rates, rental concessions, average expenses per square foot, expense ratios, property tax rates, insurance rates, loan terms, loan origination costs, interest rates, amortization tables, depreciation rules, recapture provisions, ordinary income tax rates, capital gains tax rates, as well as passive loss rules just to name a few.
I have been involved in the analysis of real estate investments for over 25 years, I am a certified public accountant and a former state certified general real estate appraiser, I have managed an office of a national real estate consulting firm for the last 17 years and have developed the web based real estate investment software called The Property Ledger™ which is designed to assist real estate investors evaluate prospective real estate deals and track the growth of their investment portfolio over time. During this time I have run across investors many who have neither had a working knowledge of the “numbers” nor an understanding of how to evaluate a potential real estate transaction. While some of these individuals have managed to hold on to some portion of their net worth, the great majority have not and would be great case studies as to what not to do in relation to real estate investing.
It is my goal and solemn wish to make sure that you are not one of these case studies but rather a successful real estate investor who is knowledgeable of their local market and of real estate cash flow analysis. When you know how to crunch the numbers your chances of success are greatly improved and you will have the ability to be reasonably certain of the outcome of your real estate investments and the resulting investment returns. Try and say this about the stock market (i.e. GM, Enron, Lehman Brothers). Once you begin the learning process and begin to run the numbers you will see how easy this process can be. While the process may be easy, it will take a commitment on your part to learn the aspects of your particular market, understand the basics related to the tax implications of real estate investing and yes, crunch the numbers.
Crunching the numbers can take many forms from something as basic as a piece of paper and a pencil, a real estate financial spreadsheet application or a sophisticated financial software program like The Property Ledger™. Whatever tool you decide to use, you have to make the decision to “decide” that whatever it takes, you will stay the course to become financial literate as it relates to real estate cash flow analysis. In our next issue we will begin to get into the basics of cash flow analysis.
Carter Froelich, CPA is the founder of The Property Ledger™ a web based real estate investment software. To get a free 30 day trial of The Property Ledger™ see the web site at www.thepropertyledger.com.