What Every Real Estate Investor Needs to Know About Cash Flow

"What Every Real Estate Investor Needs to Know About Cash Flow" By Frank Gallinelli


Frank Gallineli's book "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures" is highly technical, but very interesting. I found it helped me by explaining the math behind the deals in plain English.


The book is divided into two parts. The first part covers the basics of real estate investing and an introduction to the concepts that need to be understood. The second part covers individual calculations such as compound interest, cash-on-cash return, and internal rate of return. It is best kept as a reference, so my notes are limited:


How to make money in Real Estate:

* Cash Flow - also called "net spendable cash", this is the left over money each month after all of your bills are paid.

* Appreciation - the growth in the value of the property over time.

* Loan Amortization - each payment made on a loan comes from rental income. It includes principle and interest. The pay down of the principle adds more value to your net worth. Amortization is the liquidation of debt through installment payments.

* Tax Shelter - deductions such as mortgage interest and depreciation can shield income from other sources against taxation.


How to estimate what a property is worth:

* Taxable Income - this is your NOI less interest payments, allowable write-offs, and amortization plus any earned interest.

* Cash Flow Before Taxes - is your NOI less debt service and capital expenditures plus interest earned.

* Taxable Income creates income tax which is subtracted from cash flow before taxes to give you a cash flow after taxes.

* Cash Flow After Taxes is the income stream you are buying when you purchase a property. The value of the property is dictated by the desired income stream (or return).

* Amortization is the process of spreading the deduction of mortgage points paid at closing out over the life of the loan. For example, $10,000 in points for a 10 year loan would result in a $1,000 per year deduction.

* Cash-on-Cash Return = Cash Flow before Taxes/Cash Investment

* Gross Rent Multiplier = Market Value/Gross Income (Yearly)

* Market Value = GRM x Gross Income

* Debt Coverage Ratio = NOI/Annual Debt Payments

A DCR of 1.2 would mean that you have 20% more net income than required to make the mortgage payments. This is the typical minimum to obtain a loan.


This is a book that must be kept on the shelf as a reference. The author offers plenty of free downloads (such as Excel spreadsheets) on his website http://www.realdata.com/book


Biggest Takeaway: "Timing is everything. Cash you receive sooner is more valuable than cash you receive later because the sooner you have it, the sooner you can put it to work earning more cash."


Casey Richards

Rutland, Vermont



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