Calculations

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Posted by Grasshopper on October 07, 2009 at 21:47:31:

I'm trying to determine if a building I'm looking at (9 units; 0 down, 100% financing, $650,000) is a good buy. It throws off $1,083 per month net (at least according to the broker). My partner said to me, "How much would you have to put in the bank to earn $1,083 per month?". An interesting and easy question I said, and puffed out my chest and sat down with my TI BA II Plus to figure it out.

I went to bankrate.com and found that the average 3 year CD is paying 2.83% per annum, and dutifully plugged that in as I/Y. I chose 3 years because the seller is offering financing for 3 years. I figured that's as good a number as any, no?

Then I said to myself, I only want to know the answer for one month, since all months will be the same $1,083, so I plugged in 1 for N.

2 out of 4 variables filled in, I'm halfway home says I to me.

Well, $1,083 is my monthly income, so that's got to be the PMT and down goes another variable.

Compute PV and I'm done, right? Bzzzt. -1,080 That couldn't possibly be right.

I futzed around for awhile thinking that perhaps I've mixed up my months and years and divided and multipled until I finally admitted to myself that once again I'm stuck on my age old mental block of translating a verbal problem into a mathematical one. In other words, I don't know what I'm doing.

So I thought to myself.... self, maybe try it a different way to see if you can get a handle on this thing. Assume for a moment you're putting $100,000 (random round easy number) in the bank at 2.3% interest. What would the monthly payments be? More futzing and numbers that didn't make a whole lotta sense to me.

A loan, I can calculate. A discount, I can calculate. The above, I just can't translate into something that makes sense in my head.

Can someone tell me where I've gone wrong and show me the proper way to set this up? Ideally a memorable way to remember why which numbers go where?

Thank you in advance.

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