Boris Smus

interaction engineering

Real Estate and Cash Flow

"What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures, Updated Edition"... What a title!

To be honest, I'm kind of embarrassed to post this here, especially so soon after The New Father. But, I'll admit, I'm a bit spooked by the markets lately. While indexing has worked well so far, it feels risky, and I'd probably be wise to diversify. Hence this book.

The book makes two things crystal clear:

  1. "Investors don’t decide to buy properties; they decide to buy the income streams of the properties."
  2. The importance of discount rate in doing these various calculations, or as the author usually descibes it, "the time value of money". A meta thought about discount rate. It seems to be a proxy for selfishness. In the self-interested case (maximize profit through real estate), you really want a high discount rate, but in the long view, say thinking about climate change, you think of future generations, and have a pretty low discount rate.

Also, I liked the up-front breakdown of all of the ways in which being a landlord may be profitable:

  1. Cash flow: "You expect to collect money, mainly in the form of rent."
  2. Amortization: "You expect to spend money to pay for the operating expenses and the loans against the property."
  3. Tax shelter: "When you’re done for the year, you hope to have a surplus and to keep as much of it as you can in your own pocket and out of the hands of the tax collector."
  4. Appreciation: "Perhaps someday you can also sell the property at a handsome profit."

If I end up attempting to purchase a real estate investment, the book will serve as a good reference for calculating various terms of the industry (eg. APOD, Cap rate, CFAT, etc). Honestly, this is really boring stuff, and pretty straightforward from a calculation perspective. During the case studies especially, the author meticulously grinds through the numbers, and I could feel my eyes glazing over.

Oh, before I end this topic, here is an anti-recommendation to a similarly titled, but much dumber "Rental Property Investing: how to invest in profitable properties to rent and derive maximum profit from them". Complete drivel. Skip it.