Chapter 1 – PERSONAL FINANCIAL STATEMENT (PFS)

Net worth = Total value of assets − Total value of liabilities (debts)

1. asset: cash, retirement, investment, business interest, primary home, cars, boats, arts, etc.
2. liabilities: mortgage, student loan, car loan, credit card balance, tax owed
3. saving rate: monthly income – monthly expense. positive rate enables you continue investing.

Chapter 2 – Balance Sheet

It basically looks the PFS from a company prospective. Company assets = company liability + owner equity

Chapter 3 – PROFIT AND LOSS STATEMENT (P&L)

Income – Expenses = Profit

Example: flip a house

Income: sale price + real estate agent commission income (LLC owner acts as listing/selling agent)
COGS (Cost of goods sold): any expense directly related to flipping this house, including purchase price, rehab material, rehab lab, closing cost, etc.
Expense: anything indirectly related to flipping this property, like LLC office cost, LLC employee & owner salary, LLC insr, office supplies, tools, utilities cost, etc.

A few numbers:

1. gross profit = income – COGS
2. operating income = gross profit – operating expenses
3. net income = operating income – tax – interest

Profit Margins:

1. Gross profit margins – Gross profit ÷ Revenue
2. Operating profit margins – Operating income ÷ Revenue
3. Net profit margins – Net income ÷ Revenue

Scaling with decline profit margin dilemma

1. smaller scale: management is simply, you do a lot of stuff yourself, profit margin is higher
2. larger scale: more works. You need hire more people (project manager, bookkeeper/accountant), real estate agent, office manager, and even a director to manager everyone), more time to communicate, more chance to make mistakes. The profit margin will suffer.

The goal is to scale and make more net profit (in total amount). If the profit (amount) is declining while scaling up, it might be a good idea to scale back and find a different way, as your extra effort is not paying off.

Chapter 4 – CASH-FLOWING

1. Gross operating income (GOI) = Gross potential rent – Rent loss + Other income (including laundry, storage fee, parking fee, ads, etc)
2. Gross potential rent is market max rent, not actual rent
3. Rent loss:
   1. vacancy – non-leasing during turnover period
   2. concessions: move-in special,
   3. Loss to lease: rent discount to entice new tenants or keep the existing tenants at renews, market rent growing pass the current rent during lease period
   4. Bad debt: non-paying tenant
   5. model unit: the unit kept unoccupied for showing, storage, leasing office, stuff housing
4. Operating expenses = tax, insurance, PM, turnover expense, R& M, Utilities, lawn, snow removal, trash, Ground maint’, office, legal, account/tax prep
5. Net operating income (NOI) = Gross operating income – Operating expenses
6. Cash flow = NOI – Debt service – CapEx