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.