Baker - What Every Real Estate Investor Needs to Know About Cash Flow ... And 36 Other Key Financial Measures, Updated Edition

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For Jean, whose patience made this book possible.

Before you make your next investmentthat is, before you decide whether to use that $20 bill in your wallet to buy this book or to order a pizzait would be a good idea to ask yourself if youre at all serious about wanting to make money investing in real estate.

You can make a lot of money investing in income-producing property. You can also make a little money when, with some better preparation, you could have made a lot. You can even lose money in real estate when, in fact, you could have made, both literally and figuratively, a great deal.

Well-worn clichs assure you, Hey, real estates a no-brainer. After all, theyre not making any more of it. You cant go wrong, right? Wrong.

In real estate, as in life, there is a right way and a wrong way to do most things. If you want to succeed, if you want to make money, then learn to do it the right way. If youd rather depend on luck, buy this book anyway; Ill put a map to a casino in the Appendix.

Real estate investing is a numbers game, and the purpose of this book is to show you how to do the numbers. This task is not difficult, but it is absolutely essential to your success. This book is not about how to make millions while starting off with no money, no credit, and no time. Instead, youll learn here about cash flow, rates of return, property value, financing guidelines, and a few dozen other key measures. With a bit of practice, youll be able to read a propertys vital signs and judge its health as an investment.

I have been involved with income-property investments for more than 40 years. In the early 1980s, I founded a software company, RealData, to produce programs that could help investors and developers evaluate prospective real estate deals. During these four decades, I have talked to a great number of investors and would-be investors, and, amazingly, Ive encountered some who have been completely unburdened by any knowledge whatsoever of how an income-property investment really works. A handful of those people appear somehow to have survived with their net worth intact. Most, however, have turned into material for case studies on how to lose a lot of money.

When you learn how to crunch the numbersa task that youll discover is easier than you imaginedyour chances of success will be vastly improved, and youll have a substantial degree of control over the results of your investments. Try that with the stock market. If you own property already, youll understand it better, and that understanding can translate into real dollars. I once received a reassessment notice for a commercial building I own. Like everyone who receives a new tax bill, I thought it was too high. I prepared a concise, one-page presentation of the propertys net operating income and capitalization ratetopics covered in this bookand showed them to the assessor. He looked at my figures and replied, Someone obviously plugged the wrong cap rate into the formula when they assessed this property. Well correct it. I didnt need to make any emotional appeal for justice, and I didnt get an argument. The numbers told the whole story. Knowing how the numbers work has saved me thousands of dollars per year in taxes on this one property.

Let me say a bit about how this book is organized. The Introduction will lay out the four ways that you make money with real estate. Youll see these four elements manifest themselves throughout the rest of the text. in its entirety, but if you use it strictly as a reference, then take note of cross-reference topics that youll find helpful.

Youll find in both a number of useful forms, as well as spreadsheet templates that you can download from my companys website.

These will simplify many of the calculations in this book. Theyre not fancy, but they get the job done if you need to make a mortgage calculation, figure a propertys appreciation, or fill out an Annual Property Operating Data form.