Real Estate Investment Blog

From time to time I teach a series of continuing education classes for Connecticut brokers and agents.  The courses are entitled “Understanding Real Estate Investments” — there is a Level 1 (introductory) and Level 2 (intermediate), each for 3 credit hours as electives. I’ll be doing so again from late March to mid-May, 2010.

Something I often hear is, “Oh, I’m a residential agent so I guess that’s not for me.” Of course I have just the opposite in mind. The residential agent or broker is the ideal candidate for these classes. 

To explain why, I’d like to share a few observations I make to my students before I get into the meat and potatoes of my classes’ subject matter: What are these courses about? Why do I teach them?  And, why should you even care?

What are the courses about?

In the first class, I talk about how an investment property differs from a single-family personal residence. In particular, I discuss how the approach to value is different. I review some of the specialized vocabulary of investing and I talk about how you go about projecting your cash flow. I focus a good deal on a topic that almost everyone should understand better than they do: the time value of money.

In my intermediate class I cover financing and underwriting for investment property. I also discuss how to use various rate of return metrics like present value and IRR to judge how well you’re doing (or not) and I spend some time actually analyzing a property to show how you might identify the good, the questionable, and the real deal-killers.

Why do I teach this?

I’ve been in the real estate software business for nearly 30 years and have dealt with a lot of investors and developers in that time.  Most, as you might expect, have been quite knowledgeable, including many that I would describe either as seasoned veterans or remarkably astute beginners.

But then there are the other folks. They are the ones who have charged ahead boldly, sometimes armed with millions of dollars of other people’s money (i.e., money from partners, not just banks) and entirely unencumbered by much understanding of the financial dynamics of the deal they’re trying to put together. It has been my encounters with such would-be investors that launched me on my mission to attempt to promote financial literacy, in particular among real estate investors. I began that mission innocently enough by writing some articles, then a few books; then on to teaching real estate finance at Columbia and now to continuing ed in Connecticut.

Why do you care? 

Back to my original thesis: You are a residential agent or broker and I’m urging you to learn just a little about cash flows and cap rates and rates of return.  Why? I think there are at least two good reasons: one professional, the other personal.

In a previous life (think early Carter administration), I was both a residential and commercial sales manager. I lived right on the DMZ that separates those two specialties. In general, specialization is a good thing  –  I don’t recommend visiting your dentist for by-pass surgery — but in real estate brokerage it can lead to a kind of entrenched sales-prevention mindset.

Most if not all investors live in houses or condos of some sort, so sooner or later almost every investor will do business with a residential agent. If you are that agent and you understand the financial basics of investing, you can accomplish several worthwhile objectives.

 * You can burnish your personal credibility as a real estate professional; you understand not just your residential client/propspect’s lifestyle goals but also his or her business goals.  That becomes clear when you discuss both residential and investment  real estate intelligently.

 * If that person ypu encounter is also a propect for a commercial listing or sale, you can refer the prospect to the appropriate commercial specialist without your having to drop off the radar.  You are knowledgable enough to deserve at least a seat at the table, and you can keep on eye open to be sure your referral is being handled well.

Finally, on the personal level, why shouldn’t you participate in real estate investing?  Property is your business. You already know a great deal about neighborhoods, local employment trends, sources of financing from your residential activity.  Add to that an understanding of how to parse the data from potential rental property investments and you’ve written the resume of a successful investor.

To get the details about my upcoming classes — dates and times, locations –  and to enroll, go to our website at http://www.realdata.com/ce

If you’re trying to finance or refinance a piece of commercial real estate, then we urge you to check out this new article: Commercial Real Estate Financing: What to Do Now

We interviewed George Blackburne of C-loans to ask him what investors should be doing in today’s market to secure that commercial loan, and he had what we thought were a few surprising answers.

You can find the article by going to the “Learn” page of our website.

We would to hear from you on this subject, so tell us about what you’re encountering as you try to find financing in the current market.

To my surprise and delight, when I opened my Twitter account this morning (twitter.com/fgallinelli) I found news of one of my books making the 12/31/09 best seller list at Realtor® Magazine.  There will be no living with me today!

What Every Real Estate Investor Needs to Know About Cash Flow… was released by McGraw-Hill six years ago, and in a second edition last fall.  It covers what I believe are the key concepts and calculations that every real estate investor ought to understand when making a decision to buy or sell.

I tried to make the book accessible and useful to beginners, students, and experienced investors alike.  It works well for me when I teach my continuing ed classes and my grad-school course in real estate finance at Columbia.  I hope it has been or can be helpful to you as well.

Many thanks to Realtor® Mag for the plug!

Frank Gallinelli

P.S. Speaking of plugs, I have a sequel: Mastering Real Estate Investment

We’re excited to announce the release today of a new software product, Real Estate Investment Analysis Express Edition.

We designed REIA Express with several audiences in mind. Perhaps you are…

– a broker who needs to create presentations for potential sellers or buyers;

– an investor who deals with residential or small- to medium-sized commercial properties;

– a person who is new to real estate investing, or a student in the fields of real estate development or finance;

– someone whose specialty is to buy, rehab, and then re-sell property for a profit.

If any of these describe your situation, then the Express Edition of REIA may be just the ticket for you. It has new capabilities and features, and offers presentations that can be customized with your company logo and property pictures. Get more info on the Express product page.

For a limited time, we’ll include a software CD with every order over $50 and send it to you via USPS First Class shipping at no charge. Just place your shipped order and select “Free First Class Shipping” as your delivery option during checkout. Purchasing your software for download? You can still get a free CD – just email us after placing the order.

- Applies to U.S. and Canada addresses only.
- Total of items ordered must be greater than $50.
- Does not apply to calculator and e-course.
- Regular fees apply to other shipping methods (i.e., Fedex, Priority Mail)..

My thanks to Entrepreneur Magazine for the interview with me that they published in their July, 2009 issue. The article is titled, “Real Estate’s New Reality,” and you can find it online at http://tinyurl.com/mqbrhv or in their print edition.

My thanks to them also for plugging my latest book, “Mastering Real Estate Investment.”

Our big news today is about a major upgrade to one of our top software apps. Since 1983 income-property developers have been using “CID” to help them with project cost analyses and budget pro formas for build-and-hold as well as build-and-sell scenarios.

So — if you’re developing an apartment building, shopping center or other commercial property from the ground up — or if you’re renovating or expanding an existing property — take a look at this new version and check out its new features. It can help you plan your project, evaluate its feasibility, solicit partners, and make your case for financing.

You can get all the details here.

I was pleased to see that Commercial Investment Real Estate, the magazine of the CCIM Institute, featured my latest book, Mastering Real Estate Investment in their May/June 2009 issue Buyers Guide (p. 45). The piece is entitled “Beyond the Basics,” and I think they were right on the money, so to speak, when they said that I was “Responding to a call from readers for less theory and more practice…” Thank you, CCIM.

I had the good fortune to attend a real estate conference at my alma mater, Yale University, on April 3, 2009, where I got an opportunity to tour their new state-of-the-green-art building, Kroon Hall.

So-called “green” design and construction of commercial buildings aim to save energy and water, create healthier work environments and reduce the environmental impact of construction.  But does it make economic sense?  Conventional wisdom holds that green design currently adds about 2% to 5% to the cost of new commercial construction, although that premium is likely to decrease as both techniques and material become more mainstream.  The payback period on that investment, however, can be quite quick and the long-term economic benefits significant.  Here’s my short list of bottom-line reasons to go green:

1. Look for tax incentives:  Most states offer some sort of tax incentive to developers of energy-efficient buildings.  Check for the possibility of federal incentives as well.

2. Get a ton of publicity: Ok, maybe you didn’t choose to follow the green-brick road for the fame and glory.  Still, you’re going to want to rent or sell this building and a little profile-raising can go a long way.  One sure way to stand out is by achieving LEED certification for your project.  LEED (Leadership in Energy and Environmental Design) is a rating system developed by the U.S. Green Building Council.  It provides recognized standards for green construction, and four levels of certification — Certified, Silver, Gold, and Platinum — based on design.  Their certification is a mark of distinction worth earning.

3. Find a friendly ear at the bank:  Green construction is “sustainable,” which means it should last longer than your financing, and should give you an edge in attracting and keeping tenants.  In today’s financing markets there are no guarantees, but these are advantages that should work in your favor to find financing and secure the best terms.

4. Reduce demolition and materials costs: If you’re building on a site with existing structures, reuse some of the materials.  You’ll save on the cost of materials, carting and disposal, while at the same time reducing impact on landfills.

5. Reduce construction costs:  Passive solar heat and reduced electric lighting will generally mean you need a smaller HVAC system — less costly to install and to maintain,

6. Reduce heating costs:  Orient the building to take advantage of passive solar heat.  Windows can be recessed or otherwise configured so that they allow full sun to enter in the winter, but are shaded when the sun is higher in summer.

7. Reduce electric costs: Increase natural daylight and thus reduce the number of bulbs and amount of electricity needed to run them.  Add daylight sensors to minimize use when unneeded.  Add photovoltaics to reduce purchased power.

8. Reduce water costs by collecting rainwater and/or recycling “greywater” from dishwashers, clothes washers, etc. and use this for landscape irrigation and toilet flushing.

9. Increase rental revenue and improve tenant retention:  There is evidence to suggest that the healthier environment in green buildings improves worker productivity and reduces absenteeism.  A workplace like that can improve a business’  bottom line and hence is more attractive than a similar but not-so-green space.  Translation: The potential exists for higher rental rates from the green space, and fewer vacancies as well.

10. Increase property value: Increased revenue plus decreased operating expenses equals a higher Net Operating Income — and a higher NOI translates into a greater property value (read my books, do the math).  To sweeten the deal even a bit further, here’s a bit of speculation: Watch for the day when commercial appraisers employ a bonus reduction in cap rate for certified green buildings.

One of the great advantages to using Excel as a development platform for our software products is the ability for you, the user, to make customizations to fit your analysis objectives.  We encourage our customers to add to the software rather than changing formulas so the base product remains unchanged.

It is very easy to add a user worksheet.  All RealData products have an “Add User Worksheet” feature in the RealData menu.  Just add your own worksheet and begin adding your own formulas which link back to our product.

In our Learn section, we have an article on expanding our popular development program, On Schedule, to accommodate long term rental income when analyzing distressed, partially-built development projects such as housing developments and condominium buildings.

Support is included with the purchase of RealData’s products.  If you would like advice on creating your own extension to your copy of our software, open a support ticket or give us a call.