How a Sinking Fund Covers Future Rental Property Expenditures
Sinking Fund is a factor by which uniform deposits must be contributed each period at a given rate of compound interest in order to have a specified sum available at some given future time period.
In other words, rather than putting aside a single lump sum of cash into an account as reserve to cover a future expense, one could opt instead to to meet that objective with a sinking fund that can be "feed" with periodic payments.
A real estate investor, for instance, could create a sinking fund as a reserve to cover the future cost of some capital expenditure like a roof, siding, or replacement of windows that he or she has scheduled for their rental property. But rather than have to part with the full cash amount today (which may not even be available), the investor simply makes periodic deposits over time that would ensure that the full amount is available when needed.
Here's how it works.
Based upon the number of equal deposits planned for each year, the type and amount of interest each deposit yields and the desired full amount to collect and when, the sinking fund factor computes the amount of each uniform deposit you must start making to collect that sum.
Let's say you want to have $10,000 available in four years to replace the roof on a rental income property you own. If you start making uniform monthly deposits into an account that yields 2.25% annual interest compounded monthly, you want to know how much each deposit should be. The answer is $198.92.
P = 1 / Sn
P = Cash flow payments of equal size at equal intervals
Sn = Future value of a series of annuity cash flows
So You Know
The sinking fund factor is one of sixty real estate calculations provided in my iCalculator online real estate calculator.
Here's to your real estate investing success.