The Complete Guide to Real Estate Finance for Investment Properties

Book Preface

As investors continue to migrate from the stock market to the real estate market, the need for sound financial analysis of incomeproducing properties is greater than ever. Just as buying high-flying stocks with no regard to intrinsic values resulted in hundreds of thousands of investors losing their life savings, so will buying real estate with reckless disregard to property values result in a similar outcome. While an abundance of books have been written on how to buy and sell houses, the market is virtually devoid of any works that specifically address the topic of the principles of valuation as they apply to real estate. Notable exceptions include more expensive titles such as Real Estate Finance and Investments by Brueggeman and Fisher, with a list price of $125, and Commercial Real Estate Analysis and Investments by Geltner, boasting a list price of $114. The Complete Guide to Real Estate Finance for Investment Properties: How to Analyze Any Single Family, Multifamily, or Commercial Property focuses on the concepts of financial analysis as they pertain to real estate and is intended to help fill the void that currently exists regarding this subject. This represents a marked contrast from the works previously referred to in three primary ways. First of all, the other works are much more expensive. Second, they have been written to appeal to a different audience in that they are written in a textbook format with both the student and the professional in mind. Finally, the other works deal with advanced theoretical principles of finance, which are of little value to the investor who most likely has no background in finance. The Complete Guide to Real Estate Finance for Investment Properties, on the other hand, is designed to appeal to those individuals who are actively investing in income-producing properties, as well as to those who desire to invest in them. Furthermore, those same individuals who are now investors will at some point have a need to divest themselves of their holdings. Whether an investor is buying or selling, the basis for all decisions must be founded on the fundamental principles of finance as they apply to real estate valuations. The failure to understand these key principles will almost certainly result in the failure of the individual investor. At a minimum, it will place him or her at a competitive disadvantage among those who do understand them. Recall the myriad of investors who bought stocks for no other reason than that they received a so-called hot tip from a friend or coworker—and who later collectively lost billions of dollars.

A similar outcome is almost certain for those individuals investing in real estate who fail to exercise sound valuation principles and act on nothing more than the advice of someone who has no business giving advice, such as a broker with a supposedly hot tip. The Complete Guide to Real Estate Finance for Investment Properties is further intended to take the theories of real estate finance discussed in other books and demonstrate how they can be used in real-world situations. In other words,it is the practical application of these theories that really matters to investors. An in-depth examination of several case studies will provide the learning platform necessary for investors to make the transition from the theory of real estate finance to its practical application. Investor comprehension will be further augmented through the use of several proprietary financial models developed by me for the sole purpose of making sound investment decisions. Now that I have established what this book isabout,I’ll take a brief moment to establish what it is not about. The term finance as used throughout this book is generally intended to refer to principles of financial analysis and not to debt instruments such as loans or mortgages that are used for financing real estate. This is not a book about

■ Real Estate Finance for Investment Properties  creative methods of borrowing money or structuring nothing-down deals. Hundreds of those types of books are already available,including a few of my own. My purpose in specifically defining what this book is not about stems from the misleading titles of some currently very popular real estate books that contain the word finance in their titles. Perhaps the phrase “real estate finance”means creative borrowing techniques to the authors who wrote them, but to professionals schooled in the principles of finance, the phrase encompasses a completely different body of knowledge. This is not to say, however, that financing mechanisms are not discussed in this book, for they certainly are. Debt and equity instruments are discussed out of necessity, as their respective costs must be properly understood for the purpose of measuring returns and values,as well as evaluating the implications of using different types of financial instruments for different types of transactions.