Mark Kohler breaks down PITI (principal, interest, taxes, insurance) and walks through a rental property example: $400,000 purchase with 20% down yields roughly $2,987 monthly in holding costs. At $3,500 rent, that's about $513 monthly cash flow, or 7.7% cash-on-cash return on the $80,000 invested.
Chapters
PITI is an important concept is principal, interest, taxes and insurance. So what is this property going to cost me cash flow wise? Direct costs and maybe some reserves. So that PITI and those direct costs are what we're going to subtract from our rent. So this deal, $400,000 property, 20% down
80 grand. What's our rent? 2,987 bucks. That's the total number. This is taking in principal and interest for your mortgage payment, property taxes, insurance on the property. And we've got about 4k in other contingency there, about 333amonth, which is may you have some repairs, some property management, no rent, one month. You might need to bump that up. But assume the 4000 in contingency.
Now we assumed 1.2% of the property value in property tax, 1500 in homeowners insurance and then that 4000 another cost. So when you add that up with a 30 year 7% fixed rate mortgage, you're at 2987. So I'm going to put in 80 grand and I'm going to be out 2987amonth to keep that property with no tenant in it. That's my direct cost. I'm off to the races. But I want to rent it, man.
So let's say you can get 3500 bucks a month rent. We're assuming you're going to make $513 a month in cash flow.
That's 6,150 a year annually. And here's the magic equation. What am I going to make? An annual cash flow divided by my cash investment, assuming I'm not going to put any more money in. So I put in my 80 and I'm going to walk away with 6156 at the end of the year, all things considered.
