[First Post :) ] Given a known rent, how much can I borrow?

Question

Hi,

This is my very first post, so please excuse my ignorance.  I started reading BP, BP's books, and listening to all the amazing Podcasts a few weeks back. Finally have sometime to sit down and do some homework.  At this point, I am trying to figure out the price point of a property being a deal or not given a potential rent amount.

After researching the area of my interest, it appears that for a 2 bedroom, I can rent for about $2550.  And here is my math logic.

Assuming per month

• Tax = -420
• CapEx = -200
• Insurance = -30
• Vacancy = -425
• Management = -100
• Matainance & Repari = -42
• Cash Flow = -500

$2550 minus all of the above is $833. This would be the max of my mortgage can be.

Given $833 mortgage payment per month, assume 30 year fix with 4.75% rate, the max I should borrow is $159,750 if I want $500 cashflow.

I used the PV function in excel.  Assuming 75% LTV, the ARV will have to be at least $213,000.

Which means, the sum of my purchase price + closing + rehab + any additional cash I’d like to get (for next property) needs to be < $159,750 for the property to be a good deal, and that is also assuming I can get at least $213,000 ARV.

Is this logic reasonable?  Am I missing something?  Or am I way off?

Thank you!

Eric Kuo · Answer

Thank you @Ned Carey for your reply!

I am looking at Redmond , WA. The rent in this area indeed seems pretty high.  $500 is just hypothetical :) I am just trying to vet my logic and math. I feel like this logic seems to be reasonable to help me have a upper bound when assessing if a property is worth pursuing.  But obviously being a newbie I might highly likely have overlooked something. :)

Thanks!

Ned Carey · Answer

@Eric Kuo welcome to BP.  You lost me with the present value calculations but it doesn't matter. For a SFH the lender is going to go by a combination of your debt to income and the appraised value of the property.

You said

But all properties do not rent for $2550 a month. The condition and location will affect your rent. The cash flow of $500 a month seams high for most locations. Your rent to price ratio also seems like high for most areas of the country.