How to calculate rental income on a sub 2?

Question

Hi BP,

I am trying to help a homeowner out and I was wondering how to calculate the yearly ROI on a sub 2 property. The owner will keep the mortgage in place for the duration of the loan (26 years with interest on mortgage being 3.25% ).

20k purchase price with a 588.97 mortgage payment (taxes are included). House would rent for $1150.

Total payoff is 146K which the house ARV is 152k

If these numbers do not make sense, then maybe a short sale would be the next option. I've only done a sub 2 for a flip, but not a rental property so any advice you can give would be appreciated. Thanks!

Mitch Messer · Answer

Hi @Rosalyn Reidt! I can help you think this through, but first I have a few questions:

• When you say "total payoff is $146K," are you referring to just the underlying mortgage, or are you including the $20K you're offering the seller? I just want to be 100% clear.
• What is the exact breakdown of that $588.97 monthly payment (principal, interest, taxes, insurance)?
• What kind of repairs are needed to achieve that $152K ARV?
• Is the seller current?

The short answer to your question about ROI is that you'd treat Sub2 financing like any other kind and deduct the principal and interest from NOI to get before-tax cash flow, which you'd then divide by total cash invested to get cash-on-cash return.