Using The 4 Square Method To Analyze Investment Properties


Hey, what’s up my friend? Kris Krohn.
Welcome back. Listen, today we’re going to be talking about Robert Kiyosaki, Rich
Dad, Poor Dad. He wrote a book about the 4 quadrants and they’re all about how
you analyze business and how you analyze real estate. And so I thought for today, I
would be bringing in an expert member of my team,
acquisitions director, Tyler Bennett. And what he’s going to do is… Together,
we’re going to have a conversation about the 4 quadrants. We want to show you
how to actually do some basic math that will help you become a way more
sophisticated, way smarter real estate investor. Alright, check it out. What we’re going to
do right now is were actually going to break down this 4 quadrant method that’s
going to help you understand what money comes into the business, when money comes
into real estate, how should you be thinking about it? This is almost like
doing a mini balance sheet exercise. And there’s a lot of people that hate
accounting because they hate the math, right? They hate numbers. But in the end, one of
the things that makes Tyler so good, so successful in everything he does
personally, let alone business, let alone how he helps people in the world of real
estate is because he gets the math of this game. So, we’re going to break it down
for you to help you become far more intelligent today and understanding how
simple this math is and that of course you can do it. -And we’re really going to
simplify this. And the intent with this is to really help you analyze
a property really quickly. So you… -Because check it out. It can get freaking
complicated at first glance if you’re not trained on like, “Wow! There’s a
lot of numbers on here. Blah, blah, blah, bloobity bit.” -Correct. So, we’re just going to
dump it down. Really simplify it. So that you can go find a deal, you can look up
some easily accessible information and just analyze and… I call it sniff test, right?
You can do this and at the end you’ll know, “Oh, is this worth pursuing? Or
spending more time on? Or I just check it off the list and move on in the next one?
-Tyler passes the sniff test. -So, we’re going to start off and we’re really just going to break this
down into 4 sections. It’s like a profit and loss where we’re looking at
income, we’re looking at expenses and what does it spit out. And that’s what
we’re going to go through right now. I’m going to just draw this quadrant right here
at these 4 sections. And we’re going to start in the very top with income. Income.
It’s really simple. What’s coming in on investment property and it’s rental
income. So, we’re just going to collect rents. Now, there’s other types of properties
out there. You may have storage unit or you may charge for parking or there’s
all kinds of other rent that comes in. But we’re just going to focus on the actual
that a tenant pays on house. We’re going to start here. And we’re going to have a couple
substance. 1, we’re going to assume that we’re buying a house for $150,000. -By the
way, wherever you live in the world, where you live in this country, when we buy
real estate, if you’ve read my book, you know that we’re always going after
entry-level single family. Not because it’s the best investment for everyone,
it’s because it’s nearly the best investment for everyone. 100% is if
you’re brand new to the game, if you’re new to the game of Finance and real
estate. Your first investment should be single-family homes. That’s a really good
assumption on price point. -Yep. And super safe, right? So, we’re going to assume 150,000
purchase price and we’re going to assume $1,500 a month rent. Perfect. So, again,
you think of a profit and loss. You got your income. And then below it,
what do we have? We have expenses. Next, we’re going to look at expenses and this is
where a lot of people air in real estate. They forget about all the different
expenses. -Because they only take the big ones into account like this. -Yeah, oh… -My
mortgage is an expense, that’s it. Everything else, positive cash flow. -Yeah,
exactly. We’re going to list them all out here. So, we
have taxes, right? We have insurance. What are the expenses do we have, Kris?
-You got the mortgage. -Yeah. -You got the… -All that principle interest.
– Principle interest. If you have property management, there’s going to be vacancies. Meaning, what
percentage of the time will the house not be rented. -And if something going to
break eventually… -You’re going to have repairs. -So, we’re going to property
management, we’re gonna have vacancy/ repairs. Let’s start itemizing these out.
So, for taxes for example. We’re going to assume $150 per month. For insurance,
we’re going to assume $75 for a month. The principal and interest… And we’ll get
two down payment just a minute. Let’s assume we put a 20% down payment which
would be a $30,000 down payment. So our mortgage amount is 120,000. I’m going to
assume a 5.25% interest rate. Which is a… It’s a pretty
standard rate for an investment property. Usually your 3 quarters to a point
higher than you are on a primary residence, right? So, the actual mortgage
amount would be $663 per month. Now, property
management. This could be anywhere from 5% to 15% depend on the market, the type of product. You know, big multifamily.
You’re going to be lower. And so it’s important to know the type of house
you’re buying. What what the property management should be in the market that
you are for the product that you’re looking at. We’re going to assume here an 8% property management fee. Which puts us a $120,000 a month. And then they concede repairs. And again, this is where a lot of
people err. They forget about this. And I kind of put capital expenditures in here
as well. You’ve got your ongoing maintenance and
then you also have your roof replacement, your AC’s that go out, flooring that
needs to be replaced. And it’s important to get these right. And one of the
reasons we like these single-family residence is we rent to families
typically. And vacancies are very predictable in that type of market. Where
if you’re doing student housing or different types of properties vacancies,
may be much higher or much lower. For the sake of this example, we’re going to use
a 10% of rent number. So, if you remember our rents are 1,500. So, that’s
a $150. -You got to get the bottom line, right? -Yeah. -So, you
got to take all this to say, “Well, this is what the actual costs in my business…”
Please don’t refer real estate investing as this anomaly that isn’t business. It
is 100% a business. And when you add all this up, this comes to what? -Let’s
be more conservative. Let’s change this 10 to 12 percent. -Okay. I feel like
that’s a better number to use for this example. Let’s be a little bit more
conservative. Because we always like to err on that side of things. So, let’s
change that to 180 instead of $150 a month. So, the total expenses are
$1,188 a month. -Which means
that if you’re bringing in 1,500 a months you have 1,188 going out,
basically there’s left. Is that 312 bucks? -Yeah. Good math. Good
math. So, let’s put that in this quadrant number 3 right here. Again,
back to that fat profit and loss statement, right? You’ve got your income,
you got your expenses. And then what does that mean at the end of the day? Which is
our cash flow. So, this one right here is called cash flow. Okay? And that’s simply
taken the rent minus
the expenses. So, we have the 1,500 minus the 1,188. Which equals $312 per month. So now, we’ve got to determine what does that mean?
Right? If we did 100,000 dollar investment into this
house, that’s not a very good return. It’s a battle trap. -Right? If we did a 5-dollar
investment and be out-of-this-world return. And so we have to determine what
does this actually mean? And I think a lot of people get distracted again here
where they look, “Oh, this is positive cash flow, this is a good investment.” Well, it
depends on how much you put into it. -And guys, what we’re about to go right here. I
want to make sure you understand. I hope you’re following on because this is
pretty simple. I mean, taking the rents, taking the expenses, taking the cash flow,
moving this frontal quadrant. This is stuff you can do. You want to nod your
head. You actually want to pencil out some examples right along. Teach it to
somebody. Because when you get in the real world of investing, these are just
the basic principles that you need to understand to be a successful investor.
-Yep, absolutely. So last is again, what does this mean and
it’s cash-on-cash ROI? What does ROI mean, Kris? -Return On
Investment? -Yep. So, we want to know what is that? We need
to figure out what is this number (Annualized) to determine an annual return
on investment. So, we need to do 312 times 12 months. And then we also need to
figure out how much did we invest. What was our total property investment to get
into this house so that we can determine what that is? Let’s look at that.
So, our.. I’ll call it TPI –Total property investment. What do we have? We have a
down payment and what was it, Kris? 20% of that? -Dude, 30 grand?
-30,000. you probably some closing costs we have closing costs. Unfortunately
mortgages are not free. Lending fees, appraisals, inspections, title insurance.
There’s a lot of third party fees associated with buying real estate.
So, we have closing costs. I’m going to assume 4% to this particular
example. So, that’s $6,000. -And then did we have any other
expenses coming into this? Do we have any other repairs? Do we have to add a fridge?
You know, often when you buy a house, it might need a something because it may
not be entirely rent-ready. -Yep. -And I like what you said rent-ready because
that’s what I like to call it .Rent-ready repairs. And for this particular example,
I’m going to assume that there was $3,000. So, lipstick, right? Maybe we need to
touch up a little bit of paint, maybe we needed to change a ceiling fan out, maybe
we need to add some blinds. But the property is in pretty good condition, we
just need to do a few things. -Okay. If you had all that up, you’re sitting at
$39,000. -Yup. And let’s do one more and I’m going to
call it miscellaneous. And I’m going to put $1,000 in there because it typically
costs money to place a tenant. If we hire a property management company, they may
charge a $250 setup fee plus half of first month’s rent in order to place
them. So, during $50 plus 750, let’s call that $1,000. That’s total
out-of-pocket to get into this. -That brings us to a total of 40 grand. -Of
$40,000 even. So now, we need to take our investment. So that 312 times 12 is
3,744 per year, right? We just annualized that net monthly cash
flow. And got an annual number. And now we take the 3,744. We divide it by our total property investment. And in the end, we get 9.36% ROI. -Okay. So just pause for a second. What we’re talking
about is how do I know how much money I’m making on what I put out versus what
I’m gonna get in? This is not the total ROI of… You know, because that would be a
different balance sheet of what are you going to make this year or the second year
in the third year. Let’s say we’re going to sell in 5 years. And is the
property appreciating? And is it growing? Are there any other liabilities? This is just
first understanding, “Hey, if I take my money and I buy this asset, what am I
going to get back and return just as liquid cash?” Not future gains. Not
appreciation. What am I actually going to get? And Tyler, how would you feel if
you’re doing this deal and you were making
9.36% percent of the money. -I get super excited. But the way
that I think you should answer this is that good for you, right? If you’ve
been investing in the stock market for the last 5 years and you’ve been
averaging 4%, that’s a great return. You own a business and if
you put money into your business and you make 15%, it’s not that good,
right? So, it’s relative for everybody but 9% cash on cash return on a
single-family residence real estate deal is phenomenal. -And if we start adding
some other things on it. I’m in a market where we’re growing at 4% a year. -Yeah. -On
paying down a couple of percent each year value in my reducing my mortgage
balance that is basically deferred cash flow that’s going to be coming back to me.
If I start adding in some of these points… -Tax advantages. And really what
you’re talking about is an internal rate of return. Or an overall return. Which is
a whole other discussion. Unfortunately, the math isn’t easy to do,
right? On a whiteboard right here. But there’s 2 ways to analyze the deal.
First is this number right here. Cash-on-cash ROI. That’s what you get
right here. And then also… Okay now, what really can I make? And of course it only
goes up. -Yeah. -When you look at all the other benefits. -Yeah. -Yeah. So friends,
today what we want to do is we want to cover the cash flow quadrant. You know,
for those either to read Robert Kiyosaki Cash Flow Quadrant or out there
understanding, “How do I look at my income in relation to my expenses? And if I look
at my cash flow, my liabilities, what is my real overall ROI going to be?” And Tyler
dude, you did a great job doing it. You smash that in mark. -Yeah.
-Broke down what this whole thing looks like. And it’s time for you to go out and
just pencil out 5 deals just like this to show that you get it. Because
when I look at a deal and you’re saying, “What am I going to make each year on my
money cash in hand?” You now know how to do that math. Guys, thank you so much for
watching today. Tyler, dude. Thanks for busting out for us. And listen up
guys. If you’re enjoying this, make sure that you subscribe, watch the next video.
And you might be thinking, “My next step is to actually get with some smart
people that have lots of deals and configure the sell stuff with me for me.”
And that’s who we are. So, if you want to know what that looks like, get with a
member of my team. What we’re going to do is we’re going to do what we call a free game
plan analysis. They’ll put themselves in your shoes and say, “Wow, if we were you
starting with all this money or no money or tons of debt or no debt or a good
credit or bad credit, we can help everyone get in the game real estate.” The
question is how are you going to get in the game of real estate? And we’ll be
able to deliver that game plan to you. So, click that link if you want to know more
what that looks like. Subscribe and we will see you on tomorrow’s video.

14 thoughts on “Using The 4 Square Method To Analyze Investment Properties

Leave a Reply

Your email address will not be published. Required fields are marked *