I’m going to show you what I call the four quadrants. The four quadrants of investing and the four quadrants of real estate.
I used to use this in car deals to help people buy a car. They would always focus on one thing – the wrong thing. They would tell me, “I need the best price on a truck.” And I would say, “Of course. I can get you the best price on a truck. No problem. But there’s more things involved in a car deal than just the best price on the truck.”
In a car deal, there’s the price you paid for the truck. There’s also the down payment you put on it. Then there’s a monthly payment and also the trade-in.
Those are the four parts of a car deal. And they’re the same in real estate. Price, down payment, cash-on-cash and NOI.
In real estate, you have price. You’ve got a down payment. And, by the way, there’s no such thing as no money down. Zero is money down because zero is enough. If you don’t respect zero, you don’t respect dollars.
Zero money down means there’s an obligation to something. And if he gives you or she gives you something for no money down, there was something paid in one of these other quadrants, okay?
When one of these numbers goes up or down, if it influences the rest of the quadrants of real estate.
All the quadrants matter. Don’t make the mistake that they don’t.
And speaking of mistakes, when people are starting to invest in real estate the first mistake they make is that they don’t know their market. And number two, they get fixated on one of the quadrants.
These investors say, “I can only buy so much. I only have so much money down. I must have this. And I have to have this cash-on-cash.”
In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. It is often used to evaluate the cash flow from income-producing assets.
Some of the best deals I bought had the lowest cash on cash. I’m looking at deals right now that might only pay me five percent, but there’s a reason I’m buying that deal. Trust me because I think somewhere down the line I’m going to make a lot of money off the property.
Why? Because I took less in a specific quadrant. When one quadrant goes down, something else has to be adjusted. That’s called the market. The market will adjust. Something goes down here. Something’s got to go up there. Unless everything’s terrible on the deal – then you wouldn’t do it anyway.
So first quadrant is price. I’m not going to negotiate the price. If you have to negotiate the price to buy the deal, it’s the wrong deal. I’ve said this over and over again.
Pay attention to the cash on cash quadrant. I call it the super box because even when the market pulls down, when there’s a recession that hits. The number of units are still the same. During a recession, no one is building anything. Those units become more valuable and are still paying you.
Another important factor is Net operating income. NOI is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses
You gotta know your market, know your market, know your market, know the comps, know what’s in the neighborhood. Know what a good deal is. Know what a bad deal is. Know your four quadrants. Keep it simple.