BiggerPockets Book Club Real Estate by the Numbers- Part 1

[Alicia Marks]

Welcome to our first ever BiggerPockets bookclub! This will be a chance for us to talk about what inspired us, where we have questions, and how we can become more effective investors. Please note our forum rules (found on the right hand side on desktop) as you engage with one another. We will be focusing on one part of the book per week, with new discussions starting on Fridays. You don't need to answer every question, just some questions you may want to reflect on. Remember there is some bonus content to help you. Info on how to receive it is found on page 29.

This week we are discussing Part 1: Personal and Business Performance

Questions to consider: Do you currently have a personal and professional P&L?

                                         Are your business and personal expenses fully separate, co-mingled, or all together?

                                         How was what you thought your personal P&L would look like vs actual look like?

                                         What do you classify as liquid assets?

                                         How do you currently track business and personal finance? Pen and paper, your own sheets, app?

                                         Do you do a personal balance sheet?

                                         Are there any P&L metrics you include not listed in the book? 

                                         Which P&L metrics do you find most valuable in your business?

                                         When evaluating a property, what factors do you weigh first? Do you have a hard pass if it doesn't meet them, or do you make adjustments and continue to evaluate?

Looking forward to hearing everyone's thoughts!

[Victor Saumarez]

Yes, I separate out real estate investment income and expenses from all other income and expenses. You have to do this for tax filing. I use a spreadsheet and enter monthly amounts that totals net cash flow to year-end. I also use a system to monitor receipts and match them (bank account credits via email alerts) to statements from property managers. A mistake many RE investors make is not keeping accurate records, which can lead to over (or under) estimations of performance. I have a good a idea of my net gains since they are pretty consistent even in tough times.

Liquid assets are items that can be quickly converted to cash. This would include cash held in a checking account, stocks, ETFs, and Treasuries. 

I do keep a sort of balance sheet, but since I have no liabilities, it’s more a net worth calculation.

There is no one entry that is more useful than the other in P&L. It is only an opinion, as they say. A CEO once asked his CPA how much profit he made. The CPA replied, “How much do you want?” This is largely due to the accrual convention.

When evaluating an RE investment, the first factors are rent-to-price ie cap rate, condition of property, rent market eg location, are rents softening?, RE cycle. My benchmark is a 5% cap rate, called the ‘normal’ rate as it held up for 30 years a couple of decades ago. With repressed rates, an investor may consider any return that outperforms fixed income markets, whether investment-grade corporate debt, or risk free securities. However, RE investors should note than RE is high risk and is rated by some sources as just below derivatives (the highest) in terms of risk. This is because RE tends to be highly leveraged. It’s best not to bend your risk criteria to meet your goals. Always er on the side of caution. The best way to secure high returns is seek value. It is the best volatility and market drawdown hedge.

I’m not sure what “book” is being referred to here. Are we allowed to reference books we have authored?