Today we are talking about how to calculate your mortgage and mortgage payments. The reason this is important is because you need to know if that property will cash flow for you before you buy it.
In the Columbus market, a typical property might cost $80,000. With a great 10b2 calculator, you can determine what your mortgage will be. You don’t need to go to an online calculator on Bankrate or Zillow. Get a 10b2 calculator so you can play with the numbers and see what different rates will mean for your payments. This will help you craft deals.
Lender 1: 65 percent LTV, Interest Only Loan
With the $80,000 property, there might be two lenders offering you different mortgages. The first lender might offer you a loan at 65 percent LTV, and that is loan to value. Enter in 80,000 to your calculator. Then multiply by .65, which gives you a loan amount of $52,000. Take that $52,000 and press the PV button on your calculator, which means present value. Perhaps the interest rate on that loan is 7 percent. The number of payments is 1 because we’re thinking about an interest only loan. The future value, meaning the amount the loan will be at the end of the term is the same as the present value, $52,000. Because it’s a payoff amount, it’s a negative number. So press the FV button, which is future value. Then, click the payment button and it will tell you that you have a payment of $303.33.
Here’s what you need to know. Take that amount and determine what the monthly rent needs to be in order to earn a 30 percent cash flow. Sometimes, investors are willing to go to 40 percent depending on expenses. So with 35 percent, you’ll divide by .35. After calculating, you’ll see you need a monthly rent of $866.66, or $900. This is very doable on a property that costs you $80.000. Now, you know you’re at 35 percent. That means you can pay for a car that has a $300 payment, and you won’t have to worry about it. That’s how you calculate the mortgage.
Lender 2: 75 percent LTV, 30-Year Loan
Let’s say the next lender offers you a 75 percent LTV, but it’s a fully amortizing loan so it’s not interest only. This loan will term out at 30 years and end amount will be zero. These loans are great if you want to cash flow a property and forget about it, without having to refinance. So 360 months is a 30 year loan and the interest rate will probably be lower, maybe at 6 percent. This lender offers 75 percent on an $80,000 property, so that’s $60,000. With the future value at 0, your payment will be $359.73. That’s a big difference from the first loan, as far as cash coming out of your pocket. So how much rent do you need to get 35 percent? Divide and you’ll get $1,027.80.
These examples are only calculating principle and interest. We’re not including taxes and insurance because those things should be included in your expenses.
We have analyzed two loans and both those loans will provide a nice cash flow. This is how you decide the deal. If you have a handful of lenders, you will need to know all the parameters so you can play with the variables. You might calculate a higher interest rate, a higher LTV, or a balloon payment at the end.
You can include all those variables with a 10b2 calculator. I strongly advise you to make this calculator 
your best friend if you want to invest in real estate.
If you have any questions about how we’re calculating mortgage payments and rents, please contact us at Bradstreet Proper, and we’d be happy to help you.