Investing in revenue property can be a rewarding venture, offering both immediate income and long-term appreciation. Whether you’re a seasoned investor or new to the market, understanding the financials involved is crucial to making informed decisions. In this blog post, we’ll walk through the process of buying a fourplex, providing a detailed example of the calculations involved.

The Property: A Fourplex

Let’s consider a fourplex with the following details:

• Purchase Price: $700,000
• Gross Annual Income: $40,000
• Annual Rent Increase: 5%
• Mortgage Term: 25 years
• Interest Rate: 5.29%
• Property Appreciation: We’ll assume an annual appreciation rate of 3%.

Mortgage Payment Calculation

First, we need to calculate the monthly mortgage payment. We’ll use the following formula for a fixed-rate mortgage:

M=Pr(1+r)n(1+r)n−1M=P(1+r)n−1r(1+r)n​

Where:

• $M$ = Monthly mortgage payment
• $P$ = Principal loan amount ($700,000)
• $r$ = Monthly interest rate (annual rate divided by 12) = 0.0529 / 12
• $n$ = Total number of payments (loan term in years multiplied by 12) = 25 * 12

Plugging in the numbers:

r=0.052912=0.004408r=120.0529​=0.004408 $n=25\times 12=300$

M=700,0000.004408(1+0.004408)300(1+0.004408)300−1M=700,000(1+0.004408)300−10.004408(1+0.004408)300​

We’ll use a calculator for this step.

M≈700,0000.004408×3.52583.5258−1≈700,0000.0155282.5258≈700,000×0.006145=4,301.50M≈700,0003.5258−10.004408×3.5258​≈700,0002.52580.015528​≈700,000×0.006145=4,301.50

So, the monthly mortgage payment is approximately $4,301.50.

Annual Rent Revenue Over 25 Years

The initial gross income is $40,000, and it increases by 5% each year. We can calculate the total gross income over 25 years using the formula for the sum of a geometric series:

S=A(1+r)n−1rS=Ar(1+r)n−1​

Where:

• $S$ = Total income over 25 years
• $A$ = Initial annual income ($40,000)
• $r$ = Annual rent increase rate (5% or 0.05)
• $n$ = Number of years (25)

S=40,000(1+0.05)25−10.05S=40,0000.05(1+0.05)25−1​

Using a calculator:

S=40,000(3.386)−10.05≈40,0002.3860.05≈40,000×47.72=1,908,800S=40,0000.05(3.386)−1​≈40,0000.052.386​≈40,000×47.72=1,908,800

So, the total gross income over 25 years is approximately $1,908,800.

Property Appreciation Over 25 Years

Assuming an annual appreciation rate of 3%, the future value of the property can be calculated using the formula:

FV=PV×(1+r)nFV=PV×(1+r)n

Where:

• $FV$ = Future value
• $PV$ = Present value ($700,000)
• $r$ = Annual appreciation rate (3% or 0.03)
• $n$ = Number of years (25)

FV=700,000×(1+0.03)25FV=700,000×(1+0.03)25

Using a calculator:

$FV\approx 700,000\times 2.0938=1,465,660$

So, the property value after 25 years is approximately $1,465,660.

Out-of-Pocket Expenses

To determine the out-of-pocket expenses over 25 years, we need to calculate the total mortgage payments and compare them to the total rental income.

• Total Mortgage Payments: $4,301.50\times 12\times 25=1,290,450$
• Total Rental Income: $1,908,800$

If we assume that other expenses (maintenance, property taxes, insurance, etc.) balance out with tax benefits and inflation adjustments, we can approximate the out-of-pocket expenses as the difference between mortgage payments and rental income:

$1,290,450-1,908,800=-618,350$

This negative value indicates that the rental income more than covers the mortgage payments, leaving a surplus.

Conclusion: Net Profit After 25 Years

After 25 years, the total rental income exceeds the mortgage payments by approximately $618,350. Additionally, the property’s value will have appreciated to about $1,465,660. Therefore, your net profit after 25 years, considering both rental income surplus and property appreciation, is:

$618,350+(1,465,660-700,000)=1,384,010$

So, after 25 years, not only will your property be fully paid off, but you will also have gained approximately $1,384,010 in net profit. This calculation demonstrates the powerful combination of rental income and property appreciation in building long-term wealth through real estate investment.

Investing in a revenue property like a fourplex can be a smart financial move, providing steady income and significant long-term gains. By understanding the financials and carefully planning your investment, you can achieve substantial returns and build a solid foundation for your financial future.