Let's assume that you can buy a $400,000 property for $34,286 down (including all closing expenses) and the balance on a first trust deed. You can rent the property and net out after payment of all expenses, including interest on the trust deed, $200 per month net. If you divide the annual net income of $2,400 by your down payment of $34,286, you will see you have an expected rate of return of 7%.

Therefore, if the 7% is your capitalization rate and your adjusted net earnings is $2,400, you should divide the adjusted net earnings ($2,400) by your capitalization rate (7%) to determine what your maximum down payment should be. On the schedule below, you can see that if your desired capitalization return rate is 9%, you would need a down payment of only $26,667. The issue is whether a seller will accept the lesser down payment.