Rental property course · Lesson 3 of 6
Rent grows, but the payment does not.
Year 1 shows little about a rental. The rent and the costs grow each year, but the payment on a fixed loan stays the same. This lesson follows Example House for ten years.
Year by year
| Year | Rent collected | NOI | Payments | Cash flow | Principal repaid | Loan balance |
|---|---|---|---|---|---|---|
| 1 | 27,360 | 17,371 | (17,963) | (592) | 2,286 | 222,714 |
| 2 | 28,181 | 17,892 | (17,963) | (71) | 2,451 | 220,264 |
| 3 | 29,026 | 18,429 | (17,963) | 466 | 2,628 | 217,636 |
| 4 | 29,897 | 18,982 | (17,963) | 1,019 | 2,818 | 214,818 |
| 5 | 30,794 | 19,551 | (17,963) | 1,588 | 3,022 | 211,796 |
| 6 | 31,718 | 20,138 | (17,963) | 2,175 | 3,240 | 208,556 |
| 7 | 32,669 | 20,742 | (17,963) | 2,779 | 3,474 | 205,082 |
| 8 | 33,649 | 21,364 | (17,963) | 3,401 | 3,725 | 201,356 |
| 9 | 34,659 | 22,005 | (17,963) | 4,042 | 3,995 | 197,361 |
| 10 | 35,699 | 22,665 | (17,963) | 4,702 | 4,284 | 193,078 |
The rent and the costs both grow 3% a year. The payment stays at $17,963. So the cash flow improves each year, and it is positive from year 3.
Three parts of the return
- Cash flow. Over ten years, Example House gives $19,510 of cash before tax.
- Principal. Each payment repays part of the loan. Over ten years, the loan falls by $31,922.
- Growth in value. At 3% a year, the house is worth $403,175 after ten years.
After ten years, the value less the loan is $210,097 of equity. The owner put in $81,000. Lesson 5 shows how much of that equity remains after the costs and taxes of a sale.
What the table leaves out
The model spreads repairs evenly over the years. A real property has years with a new roof or a long vacancy. Keep a cash reserve for these years, so that one large bill does not force a sale.
The model also assumes that rent grows 3% each year. In some years and some towns, it does not. Test a lower figure before you buy.
Key points
- With a fixed-rate loan, the payment stays the same while the rent grows.
- The return has three parts: cash flow, principal repaid and growth in value.
- Keep a reserve for the large repairs that a model spreads evenly.