PITI: An Easy Way To Figure Out Cash Flow

Some people wonder how they can calculate cashflow when they’re buying a home ‘subject-to’ the existing loan. It’s actually easier than you might think. We take a look at what we call PITI – Principal, Interest, Taxes, and Insurance. Finding out what those numbers are monthly, along with any HOA fees, and subtracting them from your monthly rent will give you a pretty good idea of your monthly cashflow.

Example:

Let’s say your PITI is $1,000 and your tenants will pay you $1,300 in rent every month. That means your cash flow is $300. That’s a positive cashflow you’ll receive month after month.

Keep in mind that you’ll have to subtract any maintenance or repair costs from that $300. So, your cash flow could potentially be less than $300 some months. There’s really no way of knowing what your maintenance fees will be, but you can estimate. You can also state in your leasing agreement that your tenant is responsible for the majority of the home’s upkeep or repairs. Be specific in the terms, so you know what you’re responsible for and your tenant does too.

There’s a great mortgage calculator with taxes and insurance over at Bankrate. Just plug the numbers in and let the calculator generate a report for you. Now, if you’re purchasing the home ‘subject-to’ the existing mortgage, you won’t have to plug in new loan information. You can plug in the current owner’s loan information to get your PITI results.

Principle

The principle of a home is what money is borrowed from the bank. The principal portion of a mortgage decreases when you make payments. When you want to pay down a loan faster, you can send in additional money that goes toward the principle.

Interest

Interest is the money the bank charges you for their service of lending money. This rate fluctuates, going up and down consistently. You can check the latest interest rates at sites like Bankrate. To see how interest rates affect your monthly payments or cashflow, use a PITI loan calculator and plug in different rates to see the difference.

Taxes

Taxes are to be paid on property, as they tend to go toward positive niches in your community, like schools, libraries, and the fire and police departments. Check with the current homeowner to view the latest tax assessment or search for it online at your local county tax office.

Insurance

You’ll want your home covered by insurance, so you’re protected in the case of fire, flood, and so on. Get yourself a great insurance agent and be sure the home is fully insured.

Calculating PITI is rather easy and the more you do it, the more confident you’ll become in doing so. Cashflow is important, so you’ll want to spend the time plugging in the numbers to see if a particular property will indeed bring you good cashflow.