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

chunty

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

ayodayo

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

CP

genuinecfa

Like I said, I understand the calculation, but conceptually I am not sure why a premium is added to the morgate rate.