All Forum Posts by: Frank Gallinelli

Many thanks for the warm welcome I received at the Alabama Center for Real Estate Transformative Tuesday. It was an honor to be invited as their guest presenter.

Special thanks to Grayson Glaze, CRE, CCIM, CPM, JD for inviting me to speak about my collaboration with Alabama Center for Real Estate to make my educational materials available to UA's 800+ real estate students; to Jack Kobus, president of the Student Real Estate Investment Fund for hosting this event; and to the many students who attended. I enjoyed meeting you and was truly impressed by your dedication to learning about real estate investment and development in depth.

Congratulations to the four students who have already completed the course and received their certificates at the event! 

Hi @David Sienema -

Thanks for your kind words about my book — and sorry if my answer cast more shadows than light on your question. Permit me to try again.

I’m not suggesting that the process of discounted cash flow analysis implies that you actually receive future earnings in hand today. Rather, the DCF is a process you can use to estimate the value of an asset and potentially compare it to a competing opportunity.

Think of it this way: The stream of future cash flows is an asset, same as any other tangible asset you might buy, like a Tesla or a Rembrandt. How do you decide how much you are willing to pay for it? Fortunately, it’s a bit more straightforward with a piece of income-producing real estate than it is with an Old Master. The asset you’re buying is a series of future cash flows — including the proceeds of the resale at the end of your holding period, which is your final cash flow in this series — but the value to you is not the sum of their face values. Rather, it’s the sum of their discounted values, discounted at rate that you would consider to be a suitable rate of return for a successful investment.

So if you calculate that the discounted value of the projected future cash flows from this property — say each value is discounted at 10% per year — equals $20,000, then you would be willing to spend $20,000 to purchase that asset because you would then expect to get a 10% return on your investment.

It doesn’t mean that purchasing the property is going to put $20k in your hand today, day one. It does suggest that you have cash available today to invest, presumably $20k (remember, investing means you have skin in the game), and you expect to receive an income stream in return for that investment at a rate of return acceptable to you.

In short, the DCF process is a method of valuation, and it’s a decision-making process. Is the discounted income stream going to be worth the price you pay for it? If not, DCF is telling you that you would probably want to take your money elsewhere.

Best,

Frank

Hi @David Sienema -

Greetings here from the perpetrator of the book that you’ve been reading. Without getting too deep into the math weeds, permit to elaborate.

As you know, when you consider purchasing an investment property, you are really purchasing a future income stream, with each bit of income occurring at a different point in the future and in a different amount. Your first, and most logical concern will be, how much is that future stream of income worth (in other words, how much should I pay for it) if I expect to make an x% profit for my trouble?

It’s not really worth the total face amount of those future income events (let’s call them by their proper name — cash flows). It’s worth less than that because if you had received all of that money at once, today, then you could have gone out and invested it all and made more money with it. But you didn’t get it all today, so that’s the reason for discounting the value of each of the expected future cash flows — and indeed that’s why this process has always been called “discounted cash flow analysis.” A return deferred is a return less valuable.

BTW, you’re on to something when you point out that you couldn’t necessarily reinvest a small cash flow at the same rate as what the overall property earns. That’s why there is a reinvestment rate variable for those who use Modified Internal Rate of Return as part of their investment analysis. But that’s a chapter for another day ;)

Best regards,

Frank G

@Florent Breton The honor is mine, knowing someone actually reads my books and finds them helpful. Thanks. Feel free to ask me a question any time (preferably one I can answer).

@Florent Breton I don't believe I had a specific example showing the affect of a refinance on IRR in my book, but Nick B.is correct. IRR is all about finding the unique discount rate that takes into account the timing and amount of ALL of the cash flows. The refi not only introduces into the income stream a particular cash flow at a particular time, but it necessarily affects post-refi cash flow amounts by changing what would have been the debt service and proceeds of sale if the IRR had not occurred. In short, the re-fi alters the timing and amount of cash flows, and therefore alters the IRR.

 Thanks, @Ken V.. Appreciate the feedback, and glad you found the software valuable. 

Thanks for the kind words, Amber. Glad you liked it. 

—Frank

Hi Jessica,

Just to clarify... We do have one program that we call a calculator; it's a toolkit of simple functions like loan amortization schedule, income multiplier, six functions of $1, etc. The rest of our programs are fairly comprehensive and sophisticated applications for income-property analysis (express and pro editions) and development projects (Commercial/Industrial and On Schedule). These program are built on top of Excel so that you have a familiar environment to work in, but they are not simply spreadsheets. Hidden below each is a substantial amount of programming code to automate functions that you would not normally find in a spreadsheet, functions like report generation, configuration options, database functions, etc.

Feel free to contact me offline if you need more info.

Best,

Frank

Maintenance and repairs are part of the cost of doing business -- and indeed are part of the deal even if you own a single family home with no tenants. If you're living in the multi, you should have a pretty good handle on things and can anticipate most routine maintenance issues. 

Once you buy your multi, you might start off by finding a good plumbing and heating outfit, and hire them to do a seasonal maintenance check of your heating system and water heaters. Then if you have an urgent problem -- plumbing or heating -- you have someone you can call. Most repairs other than no heat or a broken pipe are usually less urgent, so a good handyman should fit the bill.  Most multi-families are in a neighborhood of similar properties, so you can probably get recommendations from nearby owners as to whom they use for repairs.

I agree entirely. In fact, back almost 45 years ago we sold our little single-family cape cod and bought a 3-family, which we lived in for a number of years. It's a good way to learn some landlording and property management skills, too.