Accounting enables businessmen and women to manage and budget the total capital spent in an investment. It plays a vital role in the maintenance and helps monitor the return on investment “ROI” as well as the investment’s annual profits. Cost accounting is the accumulation of the costs that take place over time, which are then subtracted from the total earnings to make up the final profit or free cash flow for an investment.
The benefits of cost accounting have not evaded real estate expert and CEO Chris Martin. Free cash flow is what every investor searches for and seeks to either acquire or sell. Free cash flow can be increased by reducing cost and increasing earnings. Both cost and earnings are equally important. With his enterprise, GlenMartin, he has introduced his passion project, Ketsali, and has utilized cost accounting strategies for this alternative investment.
Staying true to his mission, Martin offers high-quality investment plans to his investors. Finding efficient opportunities to reduce operating expenditures over time can result in significant improvement in free cash flow.. When looking at a deal you must always hunt for ways to improve the asset and appreciable value creation. Ideally if this can be done while reducing ongoing cost your investment will pay a greater return at exit. When building Ketsali, Chris made it his mission to extensively analyze the property’s ongoing operating cost and track its ongoing valuation.
Here are a few reasons why cost accounting is essential for alternative real estate investments.
- Provides a clear indication on how the asset operates incorporating both fixed and variable cost.
- Cost accounting varies significantly by the asset thus a clear picture must be obtained. Generally through a trailing twelve month or T-12 one can gain a clear picture of an assets performance.
- Accurate cost accounting enables net operating income NOI or free cash flow to be calculated. NOI allows capital rate to be calculated. You cannot establish a cap rate without NOI. Growth in cap rate is the name of the game in real estate.
- Analyzing market cap rates allows buyers and sellers to measure and set the sales price of a property.
Cost accounting is an important element to understand in real estate investments. Great investments are made when you clearly understand the current state of cost, its level of accuracy, possible discrepancies and ultimately your ability to find opportunities for improvement in cost. Great investors make great decisions when they can visually see opportunities for improvement. With more than 25 years of experience, Chris is educating people on cost accounting and linking it with real estate investment. Follow his investment journey, missions, and opportunities by visiting GlenMartin.