Home / How I underwrite / Rent vs. notes
The math
A monthly check is only part of the math.
Rental income and mortgage note payments need different expense and return calculations.
I spent years as a landlord. Here's the math I wish someone had shown me sooner.
A rental example
| Input | Example |
|---|---|
| Total cash basis | $107,000 |
| Monthly rent | $1,250 |
| Annual gross rent | $15,000 |
| Assumed operating expenses | 35% of rent, or $5,250 |
| Illustrative annual net operating income | $9,750 |
| NOI divided by cash basis | About 9.1%, before debt service and taxes |
The expense allowance is an assumption. Actual vacancy, repairs, insurance, taxes, management, and other costs may differ. This simple ratio is not a full investment return calculation.
Why a note needs different math
A mortgage note payment can contain principal as well as interest. Dividing total payments by the purchase price does not establish yield, because some cash may be a return of capital.
For a note, I need the payment dates, remaining balance and term, purchase price, costs, any balloon, and assumptions about interruptions. I also need to understand collateral and recovery risks.
What changes when you own the mortgage
In an ordinary note arrangement, the homeowner handles the property's day-to-day ownership. The note holder still faces borrower default, document, tax, insurance, servicing, and recovery issues. Less property management does not mean no work or no risk.
Simplified example for illustration. Your numbers will differ.
See my note checklist