Return on Equity Quadrant™

When I help clients audit their portfolios, I rarely find bad properties.

I find bad denominators.

Most folks measure against what they put in on day one, not what their equity is worth today.

That’s how great deals quietly turn into average holds.

The Return on Equity Quadrant™ fixes that by showing where each dollar of return comes from compared to your current equity, not your original down payment.

And if you want the cleanest read, measure against True Net Equity™—what you could actually walk away with after selling costs and taxes.

ROEQ™ is the annual dollar return from each component divided by today’s equity.

Equity can mean simple equity (value minus loans), or better, True Net Equity™ (value minus loans minus selling costs and taxes).

Return on Investment tells you how your original cash performed.

Return on Equity tells you how your current equity is performing today.

As properties appreciate and loans amortize, the ROE typically drifts down unless you actively reposition capital.

That drift is your silent opportunity cost.

The Return on Equity Quadrant™ breaks performance into four streams.

Each shows up differently on your P&L, your tax return, and your balance sheet.

That’s why looking at only one is dangerous.

When I review a property, I model these in The World’s Greatest Real Estate Deal Analysis Spreadsheet™.

It calculates each quadrant automatically and uses live assumptions I can stress test.

Here’s the manual workflow you can mirror.

Example: Property value $400,000, loan $200,000, simple equity $200,000.

Last year: $16,000 appreciation, $18,000 cash flow, $3,500 depreciation tax savings, $7,500 principal reduction.

Appreciation ROE = 16,000 ÷ 200,000 = 8%. Cash Flow ROE = 9%. Depreciation ROE = 1.75%. Debt Paydown ROE = 3.75%. Total ROEQ™ = 22.5%.

If you use True Net Equity™ and it’s $180,000 after costs, the same dollars produce a 25% total ROEQ™.

Precision matters when you’re making six-figure moves.

Top quadrants are spendable and flexible.

You can sell, refi, or spend cash flow.

Bottom quadrants are wealth builders.

They’re steady, but less liquid without a transaction.

Left side depends on markets and tax law.

Right side depends on management and mortgage structure.

A balanced ROEQ™ gives you resilience and options.

When I rank a client’s portfolio by total ROEQ™, the story is obvious within minutes.

The darlings with big cash flow often sit on bloated equity and low total ROE.

Here’s the decision framework I coach.

Always compare against your next best alternative based on risk, not just headline percentages.

Cap rate tells you one thing about income relative to price.

It ignores appreciation, taxes, and amortization.

Cash-on-cash compares cash flow to what you invested, but becomes less relevant as equity balloons.

IRR blends everything, but hides the sources and assumes a timing for sale.

ROEQ™ stays dynamic, source-aware, and equity-aware.

It tells you what your money is doing right now and where to push for improvement.

The high cash flow trap: $20,000 of cash flow on $500,000 of equity is only 4% ROE.

That’s expensive comfort.

Appreciation obsession: betting on big left-side returns while feeding negative cash flow is a stress tax.

Balance matters.

Ignoring depreciation recapture: depreciation saves you every year.

Recapture is a one-time event you can defer with a 1031.

Forgetting reserves: ROEQ™ cash flow must be net of capital reserves, not just operating expenses.

Using stale values: update at least quarterly in flat markets and monthly in fast movers.

Use ROEQ™ to pick smarter 1031 replacements.

Target properties that complement your current quadrant profile, not just higher headline returns.

Track ROEQ™ through market cycles.

When appreciation dominates, consider harvesting. When it fades, lean on operations and debt structure.

Adjust for inflation.

Look at real ROEQ™ by subtracting inflation to understand purchasing power, and remember fixed-rate debt makes debt paydown more valuable in real terms.

Layer in the Nomad™ strategy if you’re still acquiring.

Owner-occupant financing can boost right-side returns and accelerate portfolio growth.

When I rebuilt my portfolio plan after a rough patch, I ran this cadence.

It’s simple and it works.

Small, consistent upgrades compound faster than hero moves.

The Return on Equity Quadrant™ gives you clarity, control, and a playbook for action.

Use it to stop tolerating low-yield equity and start compounding smarter.

Your future self will thank you for every quarterly recalculation you make today.