Two different questions hide inside this one. How much house will your cash reach, and how much house should you actually buy. The first is arithmetic. The second depends on the rent.
Start with the arithmetic, because it is short. On a one-unit rental, Freddie Mac’s purchase table caps the loan at 85% of the price, so 15% down is the floor on a conforming loan, and 20% is what avoids mortgage insurance (Freddie Mac, maximum LTV ratios). At 20% down with closing costs near 3% of the price, you need 23% of the price in cash. Divide your cash by 0.23 and you have your ceiling.
What price does your cash reach?
$50,000 reaches about $217,000. $100,000 reaches about $435,000. Those are the prices where the down payment and the closing costs use the cash up exactly, with nothing left over.
| Monthly | |
|---|---|
| Rent | +$2,387 |
| Vacancy (5%) | −$119 |
| Mortgage | −$1,155 |
| Property tax | −$217 |
| Insurance | −$101 |
| Maintenance (5%) | −$119 |
| CapEx reserve (5%) | −$119 |
| Property management (8%) | −$192 |
| Cash flow | +$365 |
These are example figures, not a forecast for any market.
That house takes $49,910 of cash: $43,400 down and $6,510 of closing costs. It returns 8.8% on that cash and covers its loan payment 1.32 times over. The rent, $2,387, is 1.1% of the price, which is the ratio the calculator’s default house uses. Property tax here is 1.2% of the price a year and insurance 0.56%, both scaled from that default.
What if the rent is lower?
Then the same cash buys the same house and the house costs you money every month. Rent is the input your cash cannot change.
| Your cash | Price | Rent at 1.1% | Cash flow | Rent at 0.8% | Cash flow | |
|---|---|---|---|---|---|---|
| $49,910 | $217,000 | $2,387 | +$365 | $1,736 | −$136 | |
| $100,050 | $435,000 | $4,785 | +$731 | $3,480 | −$274 |
At 0.8% both houses lose money, and the bigger one loses twice as much. Debt coverage falls to 0.88, below the 1.00 where rent stops covering the loan payment, and the return on cash is negative 3.3%. Doubling your cash in a market where rents sit at 0.8% of price doubles the monthly loss.
So the ceiling your cash sets is not a target. In a market with weak rent-to-price ratios, buying at your ceiling is the worst version of the trade: the largest possible monthly loss for the whole of your savings. The 1% rule post covers what that ratio does and does not tell you, including two houses that both pass it and finish $450 a month apart.
Does the down payment change the ceiling much?
It changes it more than most people expect, in both directions. At 15% down plus 3% closing costs you need 18% of the price in cash, so $50,000 reaches about $278,000 instead of $217,000. At 25% down it needs 28%, and $50,000 reaches about $179,000.
The catch on the low end is mortgage insurance. The CFPB says a conventional loan may require it with “a down payment of less than 20 percent of the purchase price,” that it “protects the lender” rather than you, and that the premium “is added to your mortgage payment” (CFPB, what is private mortgage insurance). The calculator treats it the same way, beside the mortgage, so it lowers the cash flow and the debt coverage without touching the operating income or the cap rate. The 15%-down route buys a bigger house with the same cash and keeps less of its rent.
There is a second catch, and it is specific to rentals. The federal law that ends the premium automatically defines a residential mortgage as one secured against “a single-family dwelling that is the principal residence of the mortgagor,” and defines a single-family dwelling as “a residence consisting of 1 family dwelling unit” (12 U.S.C. 4901). A house you rent to someone else is not your principal residence, so on a rental the date the premium stops is the lender’s or servicer’s rule, not one the statute guarantees.
What else does the cash have to cover?
Reserves, and they are not small. Fannie Mae’s underwriting system requires six months of the qualifying payment in reserves on an investment property transaction, measured as “the number of months of the qualifying payment amount,” which is based on principal, interest, taxes, insurance and association dues (Fannie Mae, B3-4.1-01).
On the $217,000 house that payment is about $1,473 a month, so six months is roughly $8,839 that has to still be in your account after closing. The same section adds more when you already have other financed properties: 2% of their combined unpaid balances for one to four properties, 4% for five or six, and 6% for seven to ten.
Work that backwards and the $50,000 buyer is not a $217,000 buyer. Take $8,839 off the top and $41,000 of usable cash reaches about $178,000. Rehab, furnishing, a vacant first month and a lender’s own reserve rule all come out of the same pile.
How should you set the number?
Three figures, in this order. First, your cash less the reserve the lender will ask for and the money you want left after closing. Second, the price that cash reaches at the down payment you plan to make. Third, what houses at that price actually rent for in the market you are buying in, from real listings rather than a ratio.
If step three gives a rent below roughly 1% of the price, the answer to how much you can afford is probably less than your ceiling, or a different market. The first rental post covers the order of operations from pre-approval to offer, and the cash needed post breaks the closing figure into its parts.
Then run the price and the real rent through the buy and hold calculator and look at the debt coverage line before the cash flow line. A deal at 1.32 has room for a bad year. One at 1.00 does not.