All Forum Posts by: Frank Gallinelli

from the horse's mouth...

@Lucas Mills

Q1: I should have opted for clarity instead of sound bite. What I meant is that one will usually buy a 2-4 family property at a price that is based on comparable sales (similar to single family) rather than being based on the value of the income stream (specifically, the NOI).

Q2: I've also spent those same 40 years writing and teaching about that topic. If I get too specific (and rhapsodic) here about that and about my CV, I'll probably end up breaking forum rules against self-promotion. But feel free to contact me directly if you're so inclined.

Best,

Frank

@James 

@James Masotti  Hmmmm.... thanks, I'll pass that along. My long-time editor had just left while I was doing this last edition, and perhaps her replacement wasn't as experienced and didn't know about this way of overcoming the problem.

@James Masotti Actually, McGraw-Hill told me at one point that they were going to do an audio version of the third edition of my cash flow book. After a while, they realized that there was no way anyone could recite the pro formas I display as examples so they ditched that plan. I have done a pretty extensive video course, however, with my very own dulcet tones as the voiceover--- you could listen in the car, but only if you promise you won't look at your smartphone's screen while you're driving 😲  -- or maybe take the train instead?

Hey Cary-- thanks for the kind words!!

Frank

Point well taken… but there is more to consider.

I agree that Excel is the ideal platform for analyzing and projecting income-property performance. That’s why we’ve used it as the basis of our software since Excel was launched in 1984 (and before that, we used its predecessor MultiPlan). It provides an intuitive interface and a powerful calculation engine, which would be very costly for us to duplicate.

But to make a tool that is both powerful and usable means we have to do a lot more that is not visible to the user as part of the familiar Excel skin. My company's Excel-based REIA program uses well over 10,000 lines of VBA code that is hidden from the user, but which provides functionality like custom menus and toolbars, data-input wizards, report customization, etc. And we use dozens of hidden worksheets to do things like formatting reports on the fly, maintaining database info, or performing calculations that are too complex or too cumbersome to include on visible sheets. So it may seem counterintuitive, but we do a lot of complicated stuff in the background to make it simple and easy for the user working in Excel's foreground.

And of course there is the issue of reliability. Who of us (myself included) hasn’t put together a quick spreadsheet only to discover — sometimes a little later than we would like — that a typo in a formula has led to unintended results? While nothing is perfect, our models have undergone 34 years of improvement and refinement, so we’re pretty confident that they’re reliable.

So yes, Excel is the essential ingredient, but I would submit that there is indeed a difference between a basic Excel spreadsheet and an Excel-based program like ours.

FYI -- In addition to the $495 Professional Edition that Michael mentioned, my company realdata.com offers a $159 Express Edition which is geared more toward multi-family property. It includes a both a year-by-year mode (10 years); and a month-by-month mode (24 months) designed with re-habbers in mind. Also has a Quick Analysis mode for back-of-the-envelope first pass. It does not have the 20-year commercial lease analysis and partnership analysis available in the Pro Edition, as well as some other more advanced features. Hope this clarifies.

@David Jiang  No problem. Ask any time

@David Jiang  Expense reimbursements should always be shown as a revenue item, not (as some folks try to do) as a negative expense. A proper presentation shows the full expense amounts under "operating expenses."

Keep in mind also that the reimbursement may not be for the full amount of a given expense. In some situations, the tenants may be obligated to reimburse for the expense over a base amount. This is not uncommon with property taxes, where there may occur what is called an "expense stop" -- i.e., an amount up to which the landlord will pay (in this case, the property taxes as they were in the base year), and the tenant then reimburses the amount of increase in the expense over that base year amount.

Vacancy should definitely affect your projected revenue for reimbursement. Clearly, if there is no tenant in place, there is no one other than the owner to pay the expense.

The way to parse this all is is like this:

Gross Scheduled Base Rent

plus Scheduled Expense Reimbursements

= Total Gross Scheduled Income (this is the total you would expect if no loss from vacancy)

less Vacancy Allowance (typically as a percentage of total gross)

= Gross Operating Income

less Operating Expenses

= Net Operating Income

By applying the vacancy allowance to the total of the base rent plus reimbursements, you automatically account for the impact of vacancy on those reimbursements.

I have to thank you for asking this questions, because I needed a reminder to finish a two-part article on this topic. Part one is here -- but I got so wrapped up in completing a new online course on income-property analysis (it would be bad form to link to it here, but ask me by direct message if you want to find it) that I never wrote Part 2.

Hope this helps.

Frank

Thanks @Mindy Jensen and @Jonna Weber.  I'm not sure who is more surprised -- McGraw-Hill or me -- that the previous editions have sold over 100k copies. Just goes to prove there is no accounting for taste. When they asked me to do a third edition, they wanted me to talk about whatever might be new and fashionable in real estate, but I said no. I told them if anything has made the book hang in over time, it is because I stick to concepts that don't change, boom or bust. I guess we'll find out soon enough if I was right about that.

Thanks again.

Best,

Frank

Pleased to announce that McGraw-Hill just released 3rd edition of my book “What Every Real Estate Investor Needs to Know About Cash Flow" is.gd/6Tt0ew

Includes new case studies about apartment, mixed-use, and triple-net lease properties.