A Better Library Pick Than Outright Purchase
On the whole, the book is not so much bad as not as good as it could be. For those new to commercial real estate investment, it contains a lot of useful information. The novice will learn about the different types of commercial real estate plays, the ins and outs of commercial real estate transactions, and how to go about valuing potential commercial real estate investments. The novice will even be told which types of commercial real estate investment are best to pursue, and how best to pursue them. Most important, the novice will be exposed to several key concepts, such as carrying cost and self-liquidating mortgages that if well understood, will keep her out of trouble when making any real estate purchase. However, for those with some background in personal finance and real estate investing (be it residential, commercial or industrial), there are what appear to be obvious errors in the text. Below are just a few, with some of my insights over the years added to provide a little context.
The presentation basis is flawed. Any investment must be judged either by its return on equity or its return on invested capital. Masters presents very high investment returns- often in excess of thirty and forty percent, to the reader. These must be discounted because the presentation basis is the down payment, and not the accumulated equity, or better yet, the total invested capital, which includes debt and equity (usually ignoring transaction costs). A more reasonable rate of return using these measures would be far less- about five to ten percent on a long-run average equity basis and about one to three percent on an invested capital basis. It is unreasonable to do any better than this using the techniques outlined in the book. Only then can a fair apples-to-apples comparison with other securities, such as stocks, be made with any confidence.
The investment terminology is often mis-used, or worse, mis-leading. He often refers to net income when he actually is referring to operating income, and he often mixes up balance sheet and cash flow statement terminology, which left me very confused in places. A significant improvement to the book would be to develop a complete balance sheet, cash flow statement and income statement for each property under consideration. That way, key performance measures, such as return on initial investment, return on equity and return on invested capital can be readily calculated with ease using the appropriate statement.
The general development of the book is good, with the author emphasizing the importance of a good savings and investment plan as well as getting established in a chosen line of work that will allow one to accumulate income with which to (possibly) purchase a home and more importantly, save and invest- ultimately with an eye to participation in commercial real estate investment. However, he neglected to discuss sound and active management of PERSONAL credit and debt. Credit management is critical to real estate investing because without good credit, the investor can not obtain financing on reasonable terms. Other than the independently wealthy, most all small investors in real estate will have to rely on debt to finance their real estate deals. Again, obtaining debt financing at all, let alone on reasonable terms, depends heavily on your personal credit standing. The author implicitly assumes that one has a good credit standing and has access to debt financing on reasonable terms, and this key oversight severely weakens the book. In passing, it should go without saying that the less debt one has, the more one can save and use towards building a capital base with which to launch a real estate investing career.
The author neglects to perform a full cost analysis of each property under consideration. He also neglects to make a careful distinction between paper profit, cash flow and liquidity. Most real estate investors fail because they do not consider the total cost of the property; nor do they know the key difference between paper profit, cash flow and liquidity. On paper, the investor may register a profit, or net income, but from day to day they may be cash flow positive or negative, depending upon the circumstances. Liquidity is tied more closely to cash flow than net income, and liquidity is greatly affected by the type of investment (in this case, real estate) and the amount of leverage employed (here we mean the amount of debt financing). Although the author does concede that real estate is a fairly ill-liquid investment, thereby elliptically pointing out a key inherent risk in the activity, he never discusses the relationship between debt-financing, liquidity and profit and how they can contribute to a real estate investment going horribly wrong.
A straightforward example demonstrates the latter: A home purchase accrues certain tax breaks and in most markets some capital appreciation- however much (which is by no means guaranteed), that can be deducted from the mortgage. Note that the mortgage is part of the carrying cost of the home (a topic in need of further development in the text). On paper, you may actually rack up a small profit, or rather- a savings (usually as measured against paying rent); however, that is not the same as the month to month outlay, or cash flow, which is always larger than any after-tax benefit (which, of course, diminishes over time). Your liquidity is your ability to raise cash- from all sources, to meet monthly cash flow (not necessarily the ability to sell the asset, in this case, the home, for cash). Failure to secure adequate liquidity to meet the cash flow will mean that a foreclosure is somewhere in your immediate future.
With a little extra effort, this text could be a fine addition to one's real estate library, but for now, I would advise potential readers to pick up a library copy.
Bridges the Gap Between Hype and Highly Technical
Nicholas Masters is a CPA and has a MBA. That's good for financial analysis of commercial deals, but is it good for the small investor without a degree in finance? Yes, not only is Masters strong on financial analysis, he is also a professor who knows how to teach (and write). I'm not great at math, but I was able to follow all the formulas and numerical examples. It is critical to do a full analysis of a potential commercial real estate deal because of the high dollars involved, the illiquidity, and the need to secure financing in today's market (much more difficult). Masters takes us through each critical area of financial analysis with step by step explanations, examples, and my personal favorite; real life case studies of deals he's done.
The real life examples include garden, walk up and high rise apartment complexes, retail strips, anchored retail, office, and redevelopment projects. Through creative and far sighted strategies, he shows us how he's made out-sized ROI again and again. He gives enough detail that you should be able to emulate his investments.
Is the book dated? Most of the examples are from the 1970's and 80's. Things have changed since then, especially related to financing, inflation, and cap rates. (By the way, fully understanding capitalization rates is critical to the commercial real estate investor and cap rates are explained more clearly here than anywhere else I have seen, along with numerous examples.) He explains real estate cycles and that you should acquire in weak markets and sell into strong markets. This, with a bias towards holding long term and paying down debt. When you make your own adjustments for your market and interest rates, the out of date elements do not detract much.
How to Make Money in Commercial Real Estate for the Small Investor is a book I will keep on my shelf and refer back to often, It was well worth the time to read and study. It is an excellent book for someone with some understanding of real estate investment but wants to go to the next level of financial analysis.
Good Book For Small Investor!
* Real estate is a good business and keep on improving all the time. If you think only rich people can succeed in this real estate business, than think again.
* A proper plan has been laid out properly inside this book for small investor to take action right away.
* There is no excuse for normal people like us not to make money in this business anymore. This book is full of information and guidance. I love it so much.
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