Sinking fund- Real Estate Investment Analysis why, Investment, understand, investment

chandsingh

Does somebody have a good explanation of what, conceptually, the sinking fund component in the band of investment method of calculating capitalization rates represents? I understand the calculation but can’t really figure out why it is included.
Much appreciated,
Mike

Roflnadal

you need 1 $ in Principal and interest in the future at the end of the loan.
you need to save money every month - to accumulate to that 1$ at the end of the loan.
that’s what the Sinking Fund is calculating.
If you had the level Payment for the Mortgage - Level Payment * 12 / Loan Amount will give you the same number as
sinking Fund Factor * 12 (Monthly converted to Annual) + Interest rate on Loan