Complete deal analysis

Worked example: a rental with a cash constraint

Assume monthly rent of $1,500, less $75 vacancy, $120 management, $100 maintenance, $100 replacements and $210 taxes and insurance. That leaves $895 to cover principal and interest. At a 1.30 expense-adjusted coverage target, the maximum principal and interest is $895 ÷ 1.30 = about $688 per month. At an illustrative 8% fixed rate and 30-year amortization, that supports approximately $93,826 of debt.

If a hypothetical purchase loan is limited to 75% of the purchase price, $93,826 ÷ 0.75 suggests a price ceiling of about $125,100 under the coverage test alone. This is not an approved loan. Appraisal, lender terms, property condition and other limits may reduce the actual loan.

Now assume $70,000 cash is available after household reserves, of which $10,000 must remain as a property reserve. If closing costs are $5,000 and repairs are $30,000, only $25,000 remains for a 25% down payment: $25,000 ÷ 25% = $100,000 cash-based price ceiling. Under these simplified assumptions, the lower ceiling is $100,000. At that price, the initial loan is $75,000, down payment $25,000 and cash used $60,000, leaving the $10,000 property reserve. Verify rent, expenses, rate, repairs and lender terms.

At $75,000 debt, monthly principal and interest is approximately $550; expense-adjusted coverage is about 1.63 and monthly cash flow about $345 before income taxes and omitted expenses. This example assumes the initial loan and payment remain in place; a later refinance would require a separate new analysis.