191: Rental Property Analysis Simplified With Frank Gallinelli

SHOW NOTES FOR EPISODE 191: RENTAL PROPERTY ANALYSIS SIMPLIFIED WITH FRANK GALLINELLI

Outside of an in-depth understanding of your market, thorough property analysis is key to your real estate investing success.  In this episode, Frank Gallinelli, Columbia University professor and author of the best selling book, What Every Real Estate Investor Needs to Know about Cash Flow, clearly explains effective property analysis, as well as identifying which key metrics are most important.

What You Will Learn

• What three key metrics are most important for effective property analysis
• Why cash-on-cash is “over-rated” as an analysis ratio
• Why effective property without proper market analysis can be disastrous
• Two crucial due diligence mistakes many newbie investors make
• Major red flags that can tell you early that it’s not a good deal
• An uncommon real estate niche for the most conservative investors

About Our Guest

Frank Gallinelli

Frank Gallinelli is the author of the best-selling book, What Every Real Estate Investor Needs to Know About Cash Flow…, now in its third edition, as well as other books and numerous articles on real estate investing and finance.

He is a graduate of Yale University with a B.A. in Psychology; and of Southern Connecticut State University with a M.S. in Education.

He serves as Adjunct Assistant Professor of Real Estate Development at Columbia University, where he has taught real estate investment analysis in the graduate school since 2003.

Gallinelli has been involved in real estate for more than 40 years and is the founder and president of RealData, a real estate software firm that has offered analysis tools for investors and developers for over three decades.

More About Frank

• Public school teacher in the 60s-70s in New Haven, Vonnecticut
• Thought he could earn more money in real estate and became an agent
• Later, he became a sales manager for a firm that was one of the first in the CCIM (Certified Commercial Investment Member) movement– had major computer operation that Frank was working in
• Helped out a family business to set up their accounting on a computer (before PCs were popular)
• Bought his first commercial property
• Integrated his computer knowledge with his commercial property knowledge and came up with Real Data Software (1982)
  • Software tools for real estate investors and developers
  • Still active today
  • Merging of real estate analysis with technology
• Became committed to advancing financial literacy for people in real estate
• Starting writing “articles” for his website (called blogs today)
• Frank got a call from an editor at McGraw-Hill to write a book on real estate investing analysis. The best-selling book, What Every Real Estate Investor Needs to Know About Cash Flow, is now in its 3^rd edition
• The book spurred his invitation to be a professor at Columbia University

Real Estate Analysis Key Metrics

• Cash Flow – All the money that comes in minus all the money that goes out. It needs to be positive.
• A lot of beginning investors focus too much on Cash-on-Cash
  • Cash-on-cash return is good for measuring your first year but does not take on the time-value of money – very important for real estate that you usually hold on to over time
• IRR (Internal rate of return) is really your best metrics for real estate over time
  • Many don’t like because you have to “forecast” or fortune telling
  • But Frank says you can analyze buy and hold real estate without looking over time
• Debt Coverage Ratio – Net ratio of net operating income to the annual debt service. Need to have more net income or you won’t be able to pay your mortgage.  This is one of the most important ratios.

Top Property Analysis Mistakes

• Don’t do adequate due diligence on property and especially on the market the property is in
  • A lot of newbies focus most of their due diligence on on getting accurate property tax numbers, financials, lease amounts and dates while overlooking key market info, such as:
    • Prevailing market rents
    • Prevailing capitalization rates (for the type of property you are looking at in that area)
    • Prevailing vacancy
    • What kind of businesses are moving in and moving out
    • You need to know the market is doing before you even start analyzing properties
  • Many newbies don’t know the vocabulary for real estate investing and often use terms incorrectly. Problems with this includes:
    • More deals have been killed because of a failure to communicate than any other thing
    • People use terms that don’t exist
    • Real estate negotiations are serious business and a lot is at stake
    • Learning the vocabulary is not that complicated but very critical
    • He does an orientation lecture at Columbia that lasts 6-7 hours called Real Estate Finance Greatest Hits – covers all vocabulary

Top Real Estate Quick Analysis Red Flags (or Turn-Offs)

• Not having adequate data
  • For example, you are looking at a property in the Northeastern U.S. but the owner hasn’t mentioned “snow removal”
  • Or, owner says there’s no allowance for a property manager
  • Not seeing all the potential operating expenses
• Commercial Leases
  • A local bookstore tenant that has 9 years left on lease but the buyer is missing Amazon “elephant in the room”
  • A restaurant – potential buyer eats at the restaurant owned by a tenant and the food is terrible and the service is worse

Online Real Estate Investing Education

• Over the years, he has refined his teaching
• Turned the instructional model upside down
• He used to tell his students they could use his software on case study assignments
• With Case Studies
  • He tried something different
  • He now says the student has due the financial analysis with an Excel spreadsheet
  • And they have to do their presentation as if they are presenting to a seller (and he wouldn’t tell them how to do it) – like real life
• He combines his “Real Estate Finance Greatest Hits” with the case studies in his new online educational process
• Also lectures, quizzes, sample problems (IRR, present value, etc.)
• You get a digital certificate upon completion

Advice for Old Dawg’s Interested in Real Estate Investing

• Split the difference between being passive and active
• Look at what type of property makes sense as you approach retirement
  • If you are a more conservative investor
    • Consider a triple-net (NNN) lease property – single tenant (for example, free-standing pharmacy)
      • Return not as great at a value add proposition
      • Leased for long term
      • NNN
        • Tenant pays property taxes
        • Tenant pays insurance
        • Tenant pays all maintenance
      • Lower return
      • More secure asset

What’s Ahead for Frank’s Business

• Software Business – keeping on
  • Listening to users to understand customer needs better
  • Upgrading to meet customer needs
  • Income property analysis
  • Developers
• Educational Online Courses
  • Always adding content
  • Recently added content:
    • Partnerships
    • Development analysis

Rap-It-Up

• Favorite real estate book: The Complete Real Estate Encyclopedia by Denise and William O. Evans
• Favorite business book: The Big Short by Michael Lewis
• Most valuable web site for success (other than your own): BiggerPockets.com
• Favorite app: Google Maps
• Favorite quote: “If you don’t know where you’re going, you might end up somewhere else.” – Yogi Bera
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? Spend it on education. Use it to get expert advice to help him out.

Special Offers

• RealData.com/cases
  • Subset of the bigger course (50 lessons)
  • Focuses on case studies
• To get 30% off – use the promo code: DAWG – D-A-W-G
  • Just click on coupon code
  • If you decide to take the bigger course, the payment will apply

How to Reach Frank

• RealData.com
  • Send a support ticket to ask a question
• Find out more about the course at: Learn.RealData.com

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