The Return on Investment Quadrant™ is the amount, in dollars, of each of the four primary components of returns in a real estate investment divided by the initial investment (also known as the total cost to close).
The four primary components of return are:
- Cash Flow
- Cash Flow from Depreciation
- Debt Paydown
We typically display this graphically as:
Or, with actual numbers like this:
Check it out for yourself by editting one from your Properties page.
If we divide the amount of the return in dollars by the equity in the property (instead of the initial investment) for each quadrant, we get the Return on Equity Quadrant™.
You can see the Return on Investment Quadrant™ on The World's Greatest Real Estate Deal Analysis Spreadsheet™ along with the Return on Equity Quadrant™.
If you want more information about the Return on Investment Quadrant™ and Return on Equity Quadrant™, I have good news. I go into detail about both of them (and much more) in the book How to Achieve Financial Independence and Live Your Passion Regardless of Age or Income.
Additionally, I've taught several classes over the years that discuss the quadrants including my Deal Alchemy™: How to Create Deals in a Deal-Less Market and Beyond Cash Flow: The Return on Investment Quadrant™ classes.
Beyond Cash Flow: The Return on Investment Quadrant™
I taught the class below on October 23, 2019 for our local real estate investor group in Northern Colorado. In it I go over the Return on Investment Quadrant™ in detail including a discussion of each of the 4 primary component returns.
Then, I go over the following examples:
- Rolling upgrades into the purchase when buying new construction
- 3 types of private mortgage insurance (PMI) for Nomads™
- Buying down your mortgage interest rate with monthly PMI for Nomads™
- Putting 20% versus 25% down payment and buying down your interest rate when buying as a non-owner-occupant investor
- Getting a discount or paying a premium when buying a property with 25% down payment
- Getting a lower than expected or higher than expected rent when buying a property with 25% down payment
Watch the entire video of the class here:
I created some new charts for this new class to be able to compare the Return on Investment Quadrant™ for a couple situations. Here are some of the charts I cover in the class recording above as examples.
In the table above, I show the assumptions The World's Greatest Real Estate Deal Analysis Spreadsheet™ for each of the deals I am comparing. In this example, I am varying only rent from -3% to +3% with a step change of 1%.
In this chart, I show each of the 4 primary components of return for real estate investments broken out into their component parts (appreciation, cash flow, Cash Flow from Depreciation™, and Debt Paydown) and how they compare depending on each rent amount. Plus, the columns to the very right show the sum of the 4 primary components of return.
This is the same data, except presented in vertically stacked columns. Each column is a different rent amount. Each sub-section of the column is a different component of your return. They are color coded to match the standard coloring for the Return on Investment Quadrant™.
In the chart amount I stop showing the dollar amounts of the returns and show you the return on investment for each component compared.
And finally, in the chart above I show the return on investments in stacked columns.
Deal Alchemy™: How to Create Deals in a Deal-Less Market
I also covered the Return on Investment Quadrant™ in detail in an early class I taught about Deal Alchemy™. In that class I demonstrated how to manipulate the quadrant and force it to change which quadrant gives you better returns.