Variables in the 50% formula...

[Ed L.]

I purchased a nice older home that is located on the same street as one of my current rental homes.

My original intentions were to flip the home and re invest the profits...

I'm confident it will sell, but I've also contemplated keeping it as a rental due to the location, and the fact that it would be a low maintenance home.. Brick/vinyl, new roof, New HVAC, New hot water, new appliances, new windows, solid surface floors.

I'll have $68,000+/- invested.

Rent will bring $1,000 monthly x 50%= 500

$68,000-----15% down payment-----4.5% interest rate-----20yr loan= $365 P&I

Cashflow of $135 monthly= 1,620 annual or 15% cash on cash return...

My question is... When using the 50% to evaluate properties should I be using a 15, 20, or 30yr mortgage???

If the 15yr mortgage is used the property is just cashflowing $50 per month.

20yr Cash flows $135.00

30yr = $200.00

Finding cash flow properties with a 30yr mortgage seems should be easy if my math is correct. 15 yrs gets to be a bit harder.

[Nathan Emmert]

Purchase Price 100000 150000 100000 100000 100000
Down Payment (25%) 25000 37500 25000 25000 25000
Mortgaged Amount 75000 112500 75000 75000 75000
Mortgage ($5.37/$1,000) 402.75 604.125 402.75 402.75 402.75

Rent % to Purchase Price 1.45% 1.45% 1.40% 1.50% 2.00%
Rent 1450 2175 1400 1500 2000
NOI (Rent * 12/2) 8700 13050 8400 9000 12000
Cash Flow (NOI - Mort*12)3867 5800.5 3567 4167 7167
Cash on Cash (CF / P) 15.47% 15.47% 14.27% 16.67% 28.67%

1st Column to the 2nd shows that the calculation holds true regardless of Purchase price. Your CoC return, given a set DP % is solely dependent on the % rent to purchase price. Last 3 columns shows how the CoC varies as % rent varies.

Here's the equation if you want it:
NOI - Mortgage / DP = 15%
[50%*(PP * % Rent * 12) - (75%*PP * $5.37/$1,000 * 12)] / 25%*PP = 15%

This reduces to:
[6 * PP * % Rent - .04833 * PP] / 25% * PP = 15%

PP cancels out, multiply the top by 4 (or divide by 25%) gives you
24 * % Rent - .19332 = 15%

Move the constant and divide by 24 gives
% Rent = (.15 + .19332) / 24 = .34332/24 = .014332 = 1.43%

Given a 25% down payment (ignoring closing costs and reno), if rents are 1.43% of purchase price, you achieve a 15% cash on cash return assuming the 50% expense rule.