Buy a Rental: Loan Formula

said on August 24th, 2012 filed under: Market Trends, Negotiating, Real Estate Nuts and Bolts

This is the second of three formulas for buying a rental property.  In this version the rental is purchased with a down payment of 20% and a fixed rate loan of 80%.

Here are the assumptions:

  • You have $50,000 sitting in a non-productive instrument, perhaps a savings account, mutual fund, low-yield bond, or your funds are in a CD that is getting ready to mature, or the cash is buried in a coffee can in the back yard.
  • The tax benefits or liabilities are not computed (see your CPA or tax lawyer).
  • The purchase price and  rent are hypothetical and will vary by location.
  • The property will need some fixing prior to renting.
  • Property taxes are based on the California ad valorum 1% rate plus a bit of miscellaneous supplements.
  • Closing costs are customary for northern California for a loan-financed  purchase and include inspections.


Here are the Assumptions

Purchase a Rental with a Loan Formula
Purchase Price 150,000
Loan @80% 120,000
Down payment   @20% 30,000
Loan costs (1 point + $1500) 2,700
Closing costs   (escrow and title) 3,500
Fixup and holding costs 13,800
Total Cost to Purchase 50,000
Rent earned on the property 1,430
Monthly principal and interest @4% 30 year fixed 573
Monthly property taxes 150
Monthly property management 95
Monthly insurance 85
Monthly maintenance 100
Total monthly expenses 1,003
Monthly net 427
Annual Gross 17,160
Annual Net 5,124


Summary: If you can buy the property for $50,000, fix it up for $13,800, and get $1430 rent, you will net $427.00 per month.  (Remember, income taxes on the net are not computed in this formula, nor are the mortgage tax deduction and business expense deductions calculated).





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To find out more about real estate in the Golden Hills of the Sierras, just call Bob at (530-906-1023) or CJ at (530-9064715) or email us at or

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