The quick and facile answer, of course, is because we’ve always done it that way. Back in the day, we didn’t have powerful personal computers and sophisticated real estate software, so one might argue that this annual approach is just a holdover from a golden age that has passed us by.

Then again, there may be some wisdom inherent in this approach. To make monthly estimates of future cash flows requires monthly, rather than annual, estimates of income, expenses and debt service. The task is not impossible, but collecting, organizing, and deploying this amount of data will surely take much greater time and effort, presumably up to twelve times as much. And we all know that time is money.

Is it practical to do this, and if so, is it worth the effort?  It’s important to keep in mind that you’re not performing an accounting function but rather making projections about what’s going to happen in the future. It’s often difficult enough to estimate your annual cost for heating fuel or electricity five years hence. Trying to estimate such costs by the month can be even more problematic and time-consuming.

Assuming that someone else hasn’t already closed on this property while you were playing Hamlet, did you in fact gain any additional insight or advantage as a reward for your extra effort?

A monthly projection of future cash flows substantially increases your “degrees of freedom” in making estimates, so the monthly estimates are not only more difficult to make, but they also provide you with many more opportunities to be wrong. To put it another way, you are just as likely to introduce errors in timing as you are to add precision, thus offsetting at least some if not all of the benefit of your considerable extra effort.

Having said all this, it is also true that a dramatic skewing of cash flow toward the beginning of a year could make a noticeable difference in a particular discounted cash flow calculation. One might feel that is justified to handle such an atypical income stream differently.

For what it’s worth, my opinion is that the conventional wisdom here actually makes sense. Forecasting the future is an imperfect art; in most situations, annualizing the net cash flow is a reasonable compromise with reality and a task of more manageable proportions.

Frank Gallinelli

RealData

Many of these changes have implications that are not always obvious to the user and, from our point of view at least, are not always entirely welcome.

This will be the first of what may be several posts on the RealData blog where we try to address what we feel are some of critical changes you need to know about in Excel 2007 so that you can use it successfully.  We’re writing these posts with users of RealData software in mind – particularly users of our more sophisticated Excel-based products like “Real Estate Investment Analysis,” “On Schedule” and “Commercial/Industrial Development” – but we feel strongly that it’s information all Excel users should have.

So – let’s begin with by comparing the file types in the old Excel vs. the new Excel.

How Things Were:  Two Key Facts to Remember

1. If you have used earlier versions of Excel, you probably know that you used workbooks, called .xls files – and templates, called .xlt files.  Workbooks are collections of worksheets, sometimes accompanied by built-in programming code called “macros.”  Templates are a special kind of workbook.  When you launch a template, it leaves the original unchanged and presents you with a new workbook file based on that template.  That way you don’t accidentally overwrite the original.
2. If you used RealData software, or perhaps certain other commercial Excel-based applications, the Excel file included hidden macro code.  You never saw it, but you know it was there because Excel would ask you if you wanted to enable the macros. Such code is typically essential for the functioning of a complex Excel-based program.  For example, our “Real Estate Investment Analysis” uses more than 12,000 lines of such code to provide menus, format reports, add/delete data records, and so on – functions that can’t be accomplished with simple spreadsheet formulas.  If you lose the code, the program will no longer function properly.

How Things Are: The New File Formats and How They’re Different

New to Excel 2007 are the .xlsx, .xlsb and .xlsm formats which Excel refers to as “Excel Workbook,” “Excel Binary Workbook” and “Excel Macro-Enabled Workbook,” respectively.  It’s important to understand the differences among these file types, and which can be used with RealData software products.

Each of these new formats is based on what Microsoft calls an “Open XML File Format.”  Without getting more technical than we need to here, the short version is that one can openly view and read the data from these files and convert them to other formats if necessary.  This ability is part of a trend toward an open and universal standard for documents so that data is not tied to a particular proprietary software product or company.

If you used earlier versions of Excel, then you know you customarily saved your workbook as a .xls file.  Let’s look at each of the new file formats and compare them to that original .xls Excel file format:

1. The .xlsx format is a lot like the old .xls format, but with one key difference:  It intentionally does not support macro code and will remove any macro code from a file that contains it. Remember what we said about RealData software and other products that rely on macros to provide their advanced functionality?  Right.  Without the macros these programs won’t work.  If you open a macro-driven .xls file and save it in the new Excel .xlsx format, the macros will be deleted and the program will no longer work as expected.

Fortunately, if you do try to save a file in this format, you will receive a warning message before the macro code is deleted:

Keep in mind that macros can be used by malefactors to deliver viruses. If you download an Excel file from some source other than a trusted commercial vendor, you run a risk as you would downloading a file from any unfamiliar source.  You’ll want to keep the macro code in a program from a trusted source like RealData, but you should be wary of any file containing macros if it comes from a source with which you’re not familiar and confident.

If you want to be certain to keep the macros intact in your RealData program, the simplest and most certain solution is this: Click “No” and return to the “Save” dialog.  Where you see a pulldown that says “Save as type,” choose “Excel 97-2003 Workbook (.xls).”

2. In contrast, the .xlsb and .xlsm formats do support macro code.  The .xlsb file is a streamlined format intended to speed up the process of opening and saving the file.  Like the .xlsm format, it can save an equivalent Excel workbook in a significantly smaller file size than the traditional .xls format.  The information in each of the cells is saved as plain text (you could view the information in Notepad if you wanted to) but the  macro code is encrypted.

Is it all right for you to save your RealData program as a .xlsb or .xlsm file and save some disk space?  The answer is a resounding maybe.

To re-open one of these files once you’ve saved it as .xlsb or .xlsm, Microsoft requires that you have installed on your computer an antivirus product capable of scanning and reviewing encrypted macro code before the file opens.  If this scan process does not happen, then the macros will be disabled in your software.  If you’re alert, you’ll  know this is so because of an inconspicuous warning message that appears in a horizontal bar above the Excel work area:

Click on “Options” and you should see something like this:

The default choice is “Help protect me….”  If you are confident that this file came from a trusted source, you can choose “Enable this content.”  If the file has a security certificate attached, the details of that certificate will be displayed and you can choose “Trust all documents from this publisher.”  RealData does have a security certificate attached to its program files.

Unfortunately, not all antivirus software is able to scan encrypted macro code. From our own experience we can confirm that Version 8.0 of the AVG  product appears to work without problems ( http://www.avg.com).

If you were getting ready to breathe a sigh of relief, hold it.  What we describe above is how .xlsb and .xlsm are supposed to behave.  Some users, however, have reported to us that, if they see the “macros disabled” message and click the options button, they get only one choice, and it’s not the one they want:

Why does this happen sometimes, but not always?  If we could answer questions like that, we’d be so famous you wouldn’t even be able to talk to us.  Seriously.

Which brings us back to bullet-point #1, worth repeating;

If you want to be certain to keep the macros intact in your RealData program, the simplest and most certain solution is this: Click “No” and return to the “Save” dialog.  Where you see a pulldown that says “Save as type,” choose “Excel 97-2003 Workbook (.xls).”

This should be your choice if you want your analysis to be compatible with both Excel 2007 and other computers which may have an earlier version of Excel installed on them.  RealData software products automatically detect if you are using Excel 2007 and set the default file type to be .xls, although you can override this if you so choose.

The Short Version

1. RealData delivers its macro-powered programs using the Excel 97-2003 file format, i.e., .xls. If you always save your work in that format, you should have no problems with Excel 2007 opening or running the macros in RealData programs.
2. If you save a file in .xlsx format, Excel will strip out all of the macro code and that particular RealData file will no longer function properly.
3. If you save in .xlsb or .xlsm format, then when you re-open the file, Excel will be looking for antivirus software to scan the encrypted macros.  If it doesn’t find it, you will have to instruct Excel to open this content; some users have reported being unable to do so.

Excel Template Formats

As mentioned above, RealData delivers it programs as template (.xlt) files. When you launch a template, it leaves the original unchanged and presents you with a new workbook file based on that template.  That way you don’t accidentally overwrite the original.

Excel 2007 contains two new template file formats, so now there are three flavors:

1. .xltx called “Excel Template”
2. .xltm called “Excel Macro-Enabled Template”
3. .xlt called “Excel 97-2003 Template”

RealData software is currently distributed in .xlt format.  You could convert this file to .xltm and it should work fine on your computer, assuming that you have anti-virus software capable of scanning encrypted macros.

But why tempt fate for no reason? We recommend that you stick with the .xlt format.

Excel 2007 File Icons

Each of the file formats has its own icon.  As you can see from the image below, these icons are very similar in appearance.  The template file types share a common horizontal yellow bar across the top edge.  You may find these images helpful when you try to recognize different Excel file types by their icons.

Stayed tuned to our blog for more about Excel 2007.

realdata.com

All you do is download a questionnaire, fill it in with the particulars about the property you want to evaluate, and email it or fax it back to us. We’ll run your information through the Standard Edition of “Real Estate Investment Analysis” and send the reports back via email.

You can get more details here.

Even if you don’t plan to use the service right now, I’d like to suggest that you download the form. I think you’ll find it to be a helpful guide for collecting data whenever you need to do an investment analysis, whether you’re working with our software or scribbling on the back of an envelope.

And speaking of our newsletter, just one more comment. If you subscribed but haven’t been receiving it, then it’s probably getting stuck in your spam box. It seems to me that spam filters have been getting more aggressive. I know it’s necessary to fight the growing tide, but I’ve been finding more “real” mail getting swept away with the junk.

I would urge that you go to your email program or service and “whitelist” realdata.com. For example, if you’re using Yahoo mail, go to “Options” and add a filter that tells Yahoo to direct anything from realdata.com to your inbox. With Gmail, you go to “Settings” and do the same thing.

That way, our newsletter will reach you. In addition to providing announcements about our products, upgrades, etc., we use the newsletter to tell you when we have new educational content and when we’ve found an online resource that might be valuable to you as as an investor or developer.

If you aren’t already subscribed, you can do so here.

Frank Gallinelli
realdata.com

I thought you might like an opportunity to see some sample chapters from my new book, so I’m making two downloads available.

The first section of the book is devoted to 37 key formulas that every real estate investor should understand and know how to use.  One of the most important of these is capitalization rate. 
Chapter 10 discusses cap rate and gives you several examples that you can work through.

The second part of the book provides case studies where I take you step by step through different kinds of property investments.  In Chapter 38 I discuss using a single-family house as a rental property.  This download is a seven-page excerpt from the chapter, which continues with a thorough discussion of the single-family rental.

I hope you find these samples useful, and welcome your comments.

Frank Gallinelli
realdata.com

I believe serious investors understand that they can succeed in both good economies and in bad. They also know that they may have to adjust their approach to fit the circumstances.   Has anyone seen Warren Buffet hiding under a rock?

Income-producing real estate – that is, rental properties – offer investors an excellent opportunity to build wealth over the long term.  It’s important to understand that the value of a typical income property doesn’t necessarily rise and fall in step with the home market.  Investment properties are bought and sold for their ability to produce net income.  So, if you buy a property at a sensible price relative to its income and you manage it well, you should enjoy a good return over the long term.

Everyone expects their investments to succeed in a hot market, but what about now, when the economy is struggling?  It’s not uncommon to see apartment properties do well at times like this.  When money is tight and it’s difficult for buyers to come up with down payments and to afford mortgage terms, demand for apartments typically rises.

Take a look at the medical office buildings in your market.  Health care doesn’t go out of fashion, and with boomers getting older, there’s a good chance that demand will rise.  Look also at university towns.  The turnover of students and faculty typically translates into high demand.

I’ll say more about these and perhaps some other areas of opportunity in future posts.

And finally, what about that one-armed economist?  Is there a, “…but on the other hand?”  As much as we would like every decision to be unambiguous, all investments involve risk.  Otherwise there would be no reward.  So what are the caution flags?

First, remember that all real estate is local.  Your local job market, for example, may be atypically strong, with new employers moving in; or especially weak, with important job sources shutting down.  View all generalities through the prism of your local market.

Remember that cash is king, especially in a weak economy.  It’s all right to try to acquire a property using as little of your own cash as possible (provided, of course, that the deal works on those terms).  But there’s a big difference between using very little cash and having very little cash.  If you have nothing in reserve to fall back on, the risk of a highly leveraged investment may be greater than you can deal with.

This may not be the time to buy with no cash and flip for a profit tomorrow, but it can be an excellent time to buy for the long term.  Do your homework, run the numbers, and prosper.

And so…  what’s it’s all about?  An why did I think anyone would read it?

I’d probably describe it best as being two books in one.  Quite a few readers of my first book, “What Every Real Estate Investor Needs to Know About Cash Flow…,” told me they wanted to see more examples of the 37 key calculations I discussed there. That’s an entirely reasonable request; most of us learn better from examples.

So, I began with the idea of creating a workbook of sorts.  For each of my 37 metrics I created a series of sample problems that the reader could work through.  And, of course, I provided the step-by-solution for every problem.

I would humbly submit (all right, maybe not so humbly) that this was a good idea, because to master anything you have to roll up your sleeves and get involved with it.  You can’t just read about these concepts, you have to practice them if you expect to internalize them as part of your approach to investing.  And that, by the way, is how “Mastering” got into the title.

It’s one thing to master these concepts, but it’s yet another to understand how to integrate them and apply them — and that’s why I wrote the second part of the book, the case studies.  I took four different type of properties — a single-family rental, a development project, and apartment building, and a commercial property.

What I tried to do here was to take real-life situations, where you have to deal with asking prices that may be realistic or not; where you encounter seller representations that may be accurate or not; where you have to make judgments and forecasts using imperfect current knowledge.

One of my goals in this part of the book was to show you how to play, “What if…” with your forecasts so as to give you a sense of the range of possible outcomes for your investment if things like rent projections, interest rates, resale costs varied.  Also, in a departure from some of my usual topics, I tried to show how to look at a re-hab project — specifically, how to estimate an appropriate price for a property that you plan to re-develop into an income-producing investment.

Part 2 of the book can stand on its own, so if you’re comfortable with concepts like NOI, cap rate, discounted cash flow and IRR, go ahead an read this part first.

You’ll find more about this book, and my others, here.