Long, long ago… we considered Cash Flow = Rent – Mortgage Payment. We all agree this was overly simplistic and WRONG.
Eventually, we began to account for all the income on the property (not just rent) and all the expenses on the property including principle, interest, taxes, insurance (collectively PITI), private mortgage insurance (PMI), landlord-paid utilities, maintenance, capital expenses and property management.
And this was better, but still WRONG.
Deal analysis evolved to discussions beyond Cash Flow to include Appreciation, Debt Paydown and the tax benefits of Depreciation.
And, I introduced you to my series of return quadrants:
It had three “flavors”:
That too was better, but even that fell short and was WRONG.
Deal Analysis Evolved
Introducing the latest step in the evolution of real estate deal analysis… RIDQ+R™, ROIQ+R™ and ROEQ+R™ and their derivatives.
Imagine you have two investors, each with $100,000 to invest (no more, no less).
James likes to invest in stocks. Brian likes to invest in privately held real estate.
How much of the $100,000 can James invest buying (non-margined) stocks? This is not a trick question: it is $100,000.
How much of the $100,000 can Brian invest buying single family homes, duplexes, triplexes, fourplexes, apartment buildings or any other real estate investment? This is (sort of) a trick question.
Brian must hold back some of the $100,000 in reserves. If he's getting a loan, the lender will require reserves and it would be stupid for him to buy rental property without reserves.
The problem occurs when… we calculate the return on investment (ROI) for each investment.
With the stock market investment, we'd tend to divide the return by the full $100,000 we had invested.
However, traditionally, for the real estate, we'd divide the return by the down payment and closing costs and ignored the fact that we needed the extra reserves to be able to buy the property. This is WRONG.
The World's Greatest Real Estate Deal Analysis Spreadsheet™
It turns out that Brian (who created The World's Greatest Real Estate Deal Analysis Spreadsheet™) has already provided us with the solution to this issue of reserves in his spreadsheet: the Initial Reserve Account field.
Use this field to correctly model the required reserves and… WHAMO! Then, it is mostly CORRECT!
Download the deal analysis spreadsheet to start doing your deal analysis correctly.
But, as you may have noticed, we only taught deal analysis to use this field in the real estate partnerships classes. We discuss why we think this is in the keynote video above.
This is not intended to be an entire class on reserves (it is about the new ROIQ+R™), but we do need to touch on reserves to explain ROIQ+R™.
We recommend 6 months of reserves per rental property.
- Operating Expenses
- Landlord Utilities
- Property Management
- Credit Partner Yearly Fee (to match spreadsheet)
- Mortgage Payments
- Private Mortgage Insurance (PMI)
NOTE: Mortgage Payments and PMI would not exist if you owned the property free and clear. Property management could be zero if you are self-managing.
The 6 months of reserved should be liquid, easily accessible and kept in something with low/no risk. Examples might be checking account, savings account or, to a much lesser degree, money market accounts.
IMPORTANT NOTE: We strongly discourage using lines of credit as reserves. See the Lines of Credit Magic class for more information.
Friend… meet RIDQ+R™. RIDQ+R™ meet our real estate investor friend.
RIDQ+R™ has several variations: RIDQ+R6™, RIDQ+R12™ and RIDQ+R™/RIDQ+RA™ (when we're talking about “actual”).
When you have 6 months of reserves invested in savings, we call this the RIDQ+R6™:
- RIDQ = Return in Dollars Quadrant™
- +R = + Reserves
- 6 = 6 Months of Reserves in Savings earning 1% per year (by definition)
When you have 12 months of reserves invested in an investment like the stock market, we call this the RIDQ+R12™:
- RIDQ = Return in Dollars Quadrant™
- +R = + Reserves
- 12 = 12 Months of Reserves in the Stock Market (or equivalent) earning 8% per year (by definition)
NOTE: We assume that you're earning 1% per year on the 6 months reserves in a savings account or equivalent and 8% per year on the 12 months of reserves in the stock market (or equivalent). These are estimates and defined using these numbers how we define the RIDQ+R6™ and RIDQ+R12™ (BY DEFINITION) so they are standardized for everyone. If you're using the RIDQ+R™ with your actual numbers, that would be RIDQ+R™ or, even more correct, RIDQ+RA™ (where the A is for actual).
Introducing ROIQ+R™ and ROEQ+R™
RIDQ+R6™ shows the raw dollar amount of return from each of the 5 areas and a total. ROIQ+R6™ shows you the return on investment. That's the raw dollar amount of return divided by the sum of the Total Cash To Close + 6 Months Reserves.
ROIQ+R12™ is the same except with 12 months of reserves.
ROEQ+R6™ shows the raw dollar amount of return divided by the sum of your Total Equity + 6 Months of Reserves.
As you may have guessed, ROEQ+R12™ is the same except with 12 months of reserves.
Free Real Estate Investor Classes
Check out some of our other free real estate investor classes on our website or on the Nomad™ Real Estate Investing Podcast.
- Should I Sell My Rental? ROTNEQ+R™
- An Alternative to Cash Flow - Saving Money With Rental Properties
- Wait! Before You Make That Offer...
- 8 Money Saving, Risk Reducing Real Estate Investor Insurance Tips
- 10 Things I Wish I Knew Before Starting to Invest in Real Estate
- 10 House Hacking Tips and Tricks for Real Estate Investors
- Nomad™ - Ask Me Almost Anything
- 10 Asset Protection Tips for Real Estate Investors
- Pros and Cons of Every Real Estate Investing Strategy Compared
- The Ultimate Guide to Rent Comps
- Download Free Log for Qualified Business Income Deduction with Rental Property
- Over-Simplified Financial Independence with Real Estate
- How to Improve Cash Flow Workshop
- Go to College or Skip It to Invest in Real Estate
- Rental Property Tax Deductions
- 9 Nastiest Nomad™ Mistakes
- Reducing Risk While Nomading™
- Nomad™ by Proxy
- The Ultimate Guide to Market Corrections
- The Ultimate Guide to VA Loans
- Northern Colorado Market Stats - Q3, 2020
- Cash Flow Power Meter™
- Peter Contemplates 5%, 20% and 25% Down Payments with Market Variability
- The Ultimate Guide to Earnest Money
- Peter Considers 20% Down Payments Amidst Variable Stock Market, Price, Rent and Mortgage Interest Rates
- Ask Me Almost Anything - 2020 Edition
- Should Peter Put 20%, 25% or Nomad™ with 5% Down Payments?
- Cap Ex – The Silent Killer – 2020 Edition
- Salesman Sam Achieves Financial Independence with Creative Real Estate
- Plain Jane Saves 15% Of Her Income In Stocks and Owns Her Home
- How to Get Down Payment – 2020 Edition
- What Happens If Values and Rents Don't Always Go Up As A Nomad™
- Working With Different Types of Real Estate Investors
- Seller’s Property Disclosure Case Studies – 2020 Edition
- How to Acquire 8 Rental Properties With Down Payments for Two
- Using Newsletters With Real Estate Investors
- How To Do A Deal Using Self-Directed 401Ks and Self-Directed IRAs
- Contract to Close – 2020 Edition
- Arguably the Best Class of the Year – Part 5
- Strategies to Get the Lowest Monthly Payment When Buying - 2020 Edition
- Analyzing Multi-Family Properties
- Closing Real Estate Deals - 2020 Edition
- Establishing Your Buying Criteria Workshop
- Paying Off Debt Optimization for Real Estate Investors
- Negotiating Win-Win Inspections for Maximum Benefit - 2020 Edition
- Crushing Your Real Estate Goals Using EV
- How to Acquire a Multi-Million Dollar Real Estate Portfolio Post-COVID-19 Starting with Just $3,000 - 2020 Edition
- Live Deal Analysis
- Deal Analysis Post-Coronavirus
- Coronavirus Real Estate Market Stats
- Financial Success Through Scary Times and Beyond
- Real Estate Investor Financing After Coronavirus
- How to Get Your Next Deal Done After Coronavirus
- Impact of Inflation on Financial Independence Portfolios
- One Crazy Night - Brian Solves All Your Real Estate Problems
- Cash Flow Versus Appreciation
- April 9, 2020 - Emergency Market Update
- Real Estate Investor Horror Stories - 2020 Edition
- How to Create a Real Estate Financial Plan™
- How to Go Broke Using the BRRRR Strategy
- Should I Wait for a Real Estate Dip to Invest in Real Estate?
- Solving Tenant Challenges - 2020 Edition
- How to Invest $100K - Detailed Financial Plans
- Converting Your Owner-Occupant Property To A Rental - 2020 Edition
- Managing Your Property Manager - 2020 Edition
- How to Achieve Financial Independence and Retire Early Starting with Nothing But Grit and Tenacity - 2020 Edition
- How to Manage Your Properties Like a Boss
- Tenant Screening Mastery - 2020 Edition
- Northern Colorado Market Stats - 2019 in Review
- The Ultimate Guide to Private Mortgage Insurance
- The Ultimate Guide to Should I Pay Off My Mortgage
- Insider's Secrets to Real Estate Investing Philosophies
- NCREIG Q and A Class
- Real Estate Appraisals for Real Estate Investors - 2019 Edition
- Evaluating Mortgages and Comparing Lenders
- Better Credit for Better Deals Improving Your Credit Score
- Beyond Cash Flow - The Return on Investment Quadrant™
- The Ultimate Guide to the BRRRR Strategy - 2019 Edition
- Line of Credit Magic - 2019 Edition
- Advanced Lease-Option Deal Analysis - 2019 Edition
- Rules of Thumb and the Sacred Numerology of Real Estate Investing - 2019 Edition
- Presenting a Deal to Potential Partners - 2019 Edition
- Cap Ex - The Silent Killer - 2019 Edition
- Financial Mindset and Overcoming Fear - 2019 Edition
- The Millionaire Real Estate Investor Class - 2019 Edition
- Bookkeeping and Accounting for Real Estate Investors - 2019 Edition
- House Hacking versus Nomad™ - 2019 Edition
- Nomad™ 101 - 2019 Edition
- 1031 Exchanges - 2019 Edition
- SDIRA and SD401k - 2019 Edition
- How to Acquire a Multi-Million Dollar Investment Portfolio while Earning Just $5K/month - 2019 Edition
- Protesting Your Assessment
- How to Get Your First Deal Done - 2019 Update
- World's Greatest Deal Analysis Spreadsheet Unleashed - 2019 Edition
- Creating Wealth
- Just One More Rental Property - Part 1
- How to Acquire a Multi-Million Dollar Real Estate Portfolio Starting with Just $3,000 - 2019 Edition