Category: real estate education

Love Your Hat! What is Your Lender Really Looking at When You Apply for a Commercial Mortgage?

If you’re not an all cash buyer, then when you purchase a piece of income-producing real estate you’ll probably need to secure mortgage financing to complete the deal. It’s essential for you to understand what your lender is looking at when underwriting that loan.

And — If you guessed that he or she is not admiring your millinery —  ok then, stick with me here. I’m going to discuss briefly a couple of key yardsticks.

Of course, this short video blog post is just the tip of the iceberg when it comes to evaluating, financing, and acquiring a successful real estate investment.

For in-depth insight into on all the key metrics and methods, check out https://realestateeducation.net/

And you’ll find the software that will do all the heavy lifting for your analysis and presentation at https://realdata.com

 

Copyright 2021,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Video post: Understanding Net Operating Income, Part 2

In Part 1 this post, we looked at the revenue side of our NOI calculation. Now let’s look at the expense side, and how the end result – the NOI itself, is typically used when evaluating a potential real estate investment. Click the image below.

 

If you missed Part 1, you can watch it here.

Copyright 2021,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Video post: Understanding Net Operating Income, Part 1

One topic that seems to generate a lot of interest and questions among investors I speak with is the subject of net operating income. Those who are new to real estate investing and even those with some experience are often unclear as to exactly what it is, what it means, and how to use it.

To shed some light on this topic, I’m going to try something new here – new for me at least – a video blog post. I’ll try to answer those questions by giving you a basic roadmap of how Net Operating Income is calculated, and how it’s used in real investment situations. So —  here we go with Part 1 of 2. Click the image below.

net operating income

 

Part 2 is now available here.

 

Copyright 2021,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

New content in my online video course

Those of you who are already enrolled in my course, Introduction to Real Estate Investment Analysis, are probably aware that I’ve been regularly adding new content to the course over time.

My most recent addition is a lesson on “Phantom Income.” The lesson discusses how and when it might be possible for your taxable income to outpace your cash flow. Probably something you’d prefer to avoid if you could.

New content like this is always available at no charge to those who are enrolled in the course, but for a limited time this new lesson will be my treat to anyone who would like to view it.

So, even if you’re not already enrolled, just go to the course home page, and scroll down about two-thirds, past my smiling face, until you see the curriculum. You can find the lesson in the middle of the section called Real Estate Pro Formas. Click the Preview button to watch.


In case you missed it, I also added a three-part series this summer called, “Blend and Extend.” 

This is a technique that landlords and tenants have used during difficult times in the past — a technique where a bit of give and take could potentially benefit both parties. A timely topic, I believe, given the upheaval in commercial real estate during the pandemic.

I’m making the first video in the series available as a free preview. Again, go to the curriculum, but this time expand it and scroll to the very bottom to find “Blend and Extend.” That’s where you can preview Part 1.

In the two remaining lesson in this series, I go into more specifics about the ways you might actually run the numbers on a possible lease restructuring to find a scenario acceptable to both sides. I include examples was well as an Excel model that should help you with the calculations.

Since the original release of the course, I’ve added a great deal to my core content, including a series of case study examples, as well as modules on partnerships, development projects, and value-add investments.

But I’m always enthusiastic about broadening the scope of the learning you can derive and the benefits you can reap from the course. Do you have an idea for an additional topic you’d like to see? If so, please pass along your suggestion in the comments section! Thank you.

— Frank G

Copyright 2020,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

“The Top 10 Real Estate Finance Books Every Investor Should Read.”

investment book

I was honored to find that one of my books was featured at the top of a recent article on Motley Fool: “The Top 10 Real Estate Finance Books Every Investor Should Read.” The book, “What Every Real Estate Investor Needs to Know About Cash Flow,” was originally published in 2004, is now in its third edition, and is alive and still doing well —  a surprise certainly to me, and probably to the publisher as well.

I often get asked what accounts for the book’s long-term appeal, and I think there may be two reasons: First, I avoided “topical” or trendy content, preferring to stick with core concepts and math-based metrics don’t change with time. And second because I really dislike the get-rich quick hype that seems to characterize so many real estate books, and so I shunned that, too.

I don’t think they’ll ever make a movie out of it, but I’m satisfied if it has helped some readers make informed and unemotional investment decisions.

You can find the article here.

Are you involved in real estate education?

We’re reaching out to our followers who teach real estate investment, development, or finance to let you know that our Real Estate Investment Analysis course is available for the virtual classroom – now with volume academic pricing.

For more than a decade I’ve devoted much of my professional life to investor education, as a writer, Columbia adjunct professor, and through my company RealData. As you may know, a few years ago I created an online video course, Introduction to Real Estate Investment Analysis. It has grown to include a broad range of topics that are key to understanding how income-producing properties work, and how investors, developers, lenders, and others evaluate their financial dynamics.

With so many schools and colleges now needing to provide good content for a virtual learning environment, we’ve re-deployed the course as a resource that instructors can add to their existing curricula. We now offer volume academic pricing at a significant discount, depending on class size.

For an overview, including access to sample lessons, go to the course home page.  To see a complete course outline, click here.

If you’re involved in real estate or financial education, then I hope that this can help you provide meaningful content to your remote learners. To get a quote for volume licenses for student use or to discuss this further, please email me at education@realdata.com.

— Frank Gallinelli

####

Copyright 2020,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

What Kind of Real Estate Investment Makes Sense for YOU?

If you watch what’s happening with the stock market, you’re probably ready to reach for the Dramamine. It’s like being trapped in a really fast elevator, except the buttons don’t take you where you expect to go. Maybe somebody else is controlling the ride.

You realize that most of the people you see who have achieved genuine financial independence have done so with real estate. Your next step is to figure out how you can do the same.

But… real estate comes in a lot of flavors. There are some fundamental differences among the various types, and you need to understand those differences before you start your investing campaign. One size does not fit all. Let’s look at a few of your options.

 

REIT (Real Estate Investment Trust)

A REIT is fundamentally a stock investment, a lot like the ones you may have decided to put behind you.

If you buy stock in an oil company, you’re investing in a firm that probably owns and operates wells, refineries, and retail distribution.

If you buy stock in a REIT you’re investing in a company that owns and operates real estate, and probably deals with retail customers, aka tenants. Pretty much the same business model, different industry. The advantage here, as with other stocks, is liquidity. Buy today, sell tomorrow. But remember, it’s someone else’s company, and you’re a few layers away from actually investing in real estate.

 

Fix and Flip

This is a situation where you buy a property, fix it up, and sell it for a profit. The plan is for the ARV (After Repair Value) to be greater than the sum of the cost to buy plus the cost to repair. The single-family house is probably the most common fix-and-flip.

Sounds good, and plenty of people have made money doing this, but it’s far from the slam dunk you might see on reality TV. The first challenge is in finding a suitable property—one that you can buy on favorable terms, get financed, improve substantially at a reasonable cost, and sell quickly for a profit.

Where many flippers run off the rails is in underestimating their true costs. Besides the cost to buy and fix-up, you have to carry the property. This means loan payments, property taxes, insurance, and utilities during the fix-up period and also while you’re searching for a buyer. In addition, there may be costs of sale (commission and attorney), as well as taxes on the profit. In many circumstances, your profit might be taxed at ordinary income rates, not as capital gain.

All of these are considerations that a real estate developer might routinely take into account—and indeed, one could argue that a flip is essentially a type of development project—but the budding entrepreneur might not start out with so broad a perspective. And you might not have the infrastructure in place—e.g., access to capital and to contractors—that you need to achieve a suitable profit.

 

Single Family Houses as Rentals

Many first-time investors gravitate toward single-family houses as rental properties.

That choice may be driven more by personal comfort level than by the merits of this approach as an investment strategy. If you have been a residential tenant, then you probably know something about the roles and responsibilities of both tenant and landlord. Even if you don’t know the fine points of leasing and landlording, you understand the basic ground rules and this seems like familiar and comfortable territory.

These are benefits not to be taken lightly, but there are other considerations. Have you made a realistic projection of cash flow? Will your rent revenue be sufficient to cover all of your expenses, including financing? Do you recognize that losing one tenant equates to 100% vacancy? If that occurs, how long can you soldier on without revenue?

Perhaps the most important concept to recognize here is that there is a fundamental difference between a single-family home and a more typical income-property investment. The worth of any investment ought to be related to its ability to produce a return, but generally the value of a single-family home is based on the competitive market for similar properties – in short, comparable sales. So you might be missing out on something here.

Let’s look now at an option that offers what might be the biggest single benefit available to you when you choose real estate as an investment.

 

View a sample lesson from my online video course,
“Introduction to Real Estate Investment Analysis”

 

Income-Producing Property, Buy and Hold

In the spirit of full disclosure, my specialty is income-producing property, particularly what is often called “buy and hold.” It’s what I teach and write about, so now excuse me as I get on my soapbox.

This type of property generally includes non-residential (such as office, retail, mini-storage etc.) and apartment buildings with more than four units, though some investors will include four-unit properties as well.

These properties differ in a very important way from those whose main characteristic is to serve as a personal residence. As I mentioned above, the market value of a personal residence is almost always based on comparable sales. Buyers of single-family homes are essentially purchasing a lifestyle – a location and a physical property that offers a basket of amenities. The market value is based on those factors, so they drive what you’ll typically pay to acquire the home, and the price for which you’ll be able to sell.

The value of a true income-property, however, is based on its ability to generate income. The location and attributes of the physical property are not irrelevant, but they matter only insofar as they affect that ability to generate income. You could have two seemingly identical properties side-by-side. One is managed well and produces a strong net income. One is managed poorly, and has a weak bottom line. Physically similar, but the former will command the higher price.

Why does this matter? Unlike with stocks or with personal-residence real estate, you, the investor, have the opportunity to create value, to create equity. How? By increasing the property’s net income.

My favorite personal war story in this regard is about a property that a friend and I bought many years ago. The units were rented significantly below market, and we purchased it at a small premium over what those rents justified. As leases expired we increased rents substantially, just about doubled the bottom line, then sold the property for twice what we paid.

The key point here is that we didn’t have to rely on the sale prices of comparable properties in the neighborhood to increase in order for the value of our property to rise. We were able to create value proactively by doing a better job of managing. We created equity.

This ability to have such a degree of personal control over the success of your investment is something you find in very few investment vehicles outside of income-producing real estate.

 

The Bottom Line

So what will be your choice, what works best for you?

  • The REIT is certainly easy and liquid, but it is still a stock.
  • The fix-and-flip holds out the possibility of a very big payday, but you need a dependable and capable team that can move quickly; and as with any high upside there is also the greater risk of loss.
  • The single-family rental is an appealing way to break into real estate because of its familiarity, but it’s an investment mainly to the extent that you benefit from external market forces.
  • And then there is my favorite, the buy-and-hold income property. It’s an option that gives you the opportunity to exercise significant personal control over the success of your investment without going into the deep end of the risk pool.

My bias toward the last option notwithstanding, there is no choice that’s right for everyone. Your best decision is an informed decision, and that’s what I hope I’ve helped you reach.

—Frank Gallinelli

 

Ready to learn more about real estate investing? Visit learn.realdata.com

####

Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Find out more at www.realdata.com.

 

Copyright 2018,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Now earn a digital certificate with my video course, “Introduction to Real Estate Investment Analysis”

Professional education is a great thing. And being able to broadcast news of your success makes it even more valuable.

That’s why I’m announcing a new benefit to students who enroll in my course, Introduction to Real Estate Investment Analysis. I’m now awarding a digital Certificate of Achievement and badge to students who successfully complete the course.

Here are some questions you probably want to ask:

What does it cost? For my students: nothing. RealData is picking up the cost of issuing and hosting the certificate.

What do you mean by “digital certificate?” Your certificate will be hosted by Accredible.com, an industry-leading credentialing platform. As you’ll see below, it’s designed so you can share it easily.

Does that mean I don’t get a physical certificate to hang on my office wall? No, you also get a pdf version you can print.

What’s so special about this digitally hosted certificate?  So glad you asked. Here are a few things you couldn’t do with a traditional certificate:

  • You receive a unique url for your Certificate, so you can share it with employers, clients, industry groups, just about anyone.
  • You can share it on any of your social media networks with just a click on a toolbar.

 Your personal certificate page includes a dashboard, as shown at the left. From there you can…

  • Add it to your LinkedIn profile
  • Add it to your email signature
  • Get the code to embed it in your website
  • Email it to anyone
  • Download it as a PDF
  • Download a badge image, which you can attach to your email signature, put on business cards, etc.
  • Add “evidence” to your certificate to increase your credibility — examples of your work, videos about yourself, links to projects you’ve been involved with – and even more

How do I obtain my certificate?Within a few days after you complete the work to earn your certificate, we’ll send you an email with instructions to access it. If you believe you’ve completed the requirements but haven’t heard from us, please contact us at mailto:education@realdata.com

Terms of Use: Please review our common-sense Terms of Use

I believe our online video course provides a solid educational opportunity for those who want to learn about real estate investment and development. I hope this digital certificate will recognize your efforts and will benefit you for devoting the time and effort to pursue that education. I look forward to contacting you when you complete your coursework!

Frank Gallinelli

Learn by Example

I’ve seen a great deal of interest in the real estate investment case studies that are part of my investment analysis video course — so I’ve spun those cases off as a new mini course, one where you can learn by example.

The cases deal with three different property types:

  • apartment building,
  • mixed-use, and
  • triple-net-leased

They’re similar to those I cover in my grad-school course at Columbia, and I’ve designed them with several purposes in mind:

  • To give you practice working through bumper-to-bumper deal analysis. On what terms does each deal make sense to you?
  • To introduce special situations that you need to understand, such as expense recoveries and triple-net leases.
  • To give you an opportunity to put yourself inside the deal as if you were a real participant, to think as an investor thinks — beyond the numbers, beyond the surface data, as if real money were on the table.

Once you’ve learned about deal analysis with this mini course, you’ll probably want to take the complete course, covering detailed real estate investment metrics, partnerships, development, and more. So here’s more good news:

When you upgrade to the bigger course, you’ll get full credit for  this mini course.

Learn more about my case study course

Sharpening Your Pencil – Create Better Analyses With Published Real Estate Data

It’s tempting to rush through a property analysis by simply reviewing the broker’s sell sheet, plugging the data into your favorite software program and printing the results. You’re done, right?

Think again.

We’re not saying the seller isn’t providing accurate income and expense data, but is he or she giving you a complete picture of all the issues? Consider such questions as:

  • What is an appropriate cap rate for the market in which the property is located; and more specifically, what’s the prevailing cap rate for the particular sector, such as multi-family or self-storage?
  • What seems like a realistic assumption for revenue and expense growth over time?
  • How have vacancy rates been trending for the area, and what might those trends say about future leases, renewals, and demand for space?

You’ll probably need to look beyond the owner’s statement to build your best property analysis and thus create your best chance at a successful investment. Thankfully, you can find a number of sources online to help you achieve accuracy, and along with it, some peace of mind.  You can find data on:

  • Metropolitan and submarket area cap rates
  • Average rents by market sector
  • Vacancy rates
  • Number of units available and sold
  • Sales and rental comps
  • Custom reports based on your subject property

The following are some of the best-known sources of data:

 

Zillow

https://www.zillow.com/research/data/

You’re probably already familiar with this site, at least in regard to its home value estimates. The focus here is residential but investors can benefit from their extensive rental information, which is provided by county, metro area, city, zip code, and even neighborhood.  You download data in Excel format. We found their series of 5 to 7 years of data particularly useful for evaluating rental trends.

You can also learn about their methodology here.

 

Reis

https://www.reis.com/

Reis has been a source of commercial real estate data for nearly four decades, and say they are a “…source for property and market intelligence, including vacancy rates, rent levels, cap rates, new construction, rent comparables, sales comparables, valuation estimates, and capital market trends across eight major commercial real estate sectors.

You can get more info about their sales comps and rent comps services, including sample reports. There is also a link on those pages to request a free report.

 

Costar

http://www.costar.com

Really big data commercial real estate here, for owners, brokers, appraisers, lenders, even institutional investors

They say you can search up to 1 million sales records, across all property types at http://www.costar.com/products/costar-comps; or access property-level data, including vacancy, rents, sales comps for multifamily, office, industrial, or retail property at http://www.costar.com/products/costar-market-analytics.

 

Compstak

https://compstak.com/enterprise

Compstak serves up office, retail and industrial lease data for “leading institutional investors, lenders, and owners across the US and UK.”  Subscribe to their entire database or, if you are broker, appraiser or researcher, trade your own data for theirs and gain access to Compstak data for free.

 

Real Capital Analytics

https://www.rcanalytics.com/solutions-for/investors-owners/

From macro trends to extensive data on individual properties, Real Capital Analytics offers data on “$18 trillion of sales, recapitalizations and financings.”  Contact them for pricing.

 

Redfin

https://www.redfin.com/blog/data-center

Redfin is a residential brokerage firm but offers a wide variety of property sales and trend data.  Of particular note is their annual report of the “Hottest Neighborhoods in the US.”

While you may not be an investor in single family homes, consider that the market for your commercial property is linked to the health of the local residential market.

 

LoopNet

http://www.loopnet.com/salescomps/

Gain access to their database of 1.6 million sales listings.  Cost is $175 per month.  They also offer, at no charge, sales and lease trends for hundreds of localities across the US.  See http://www.loopnet.com/markettrends/

 

What data sources do you use? Share your thoughts by commenting below.