ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

What is a Sinking Fund Factor? It's Purpose and Formula!

Updated on December 16, 2017

Over the course of owning residential or commercial real estate property, real estate investors typically can expect to make some capital expenditure to the property if they hold it long enough.

In order to plan for this anticipated future capital expenditure, real estate investors will typically start setting aside money in a reserve account in order to insure that they have the suitable amount of money available to cover the expense when needed.

This reserve is known as a sinking fund.

Okay, but rather than setting aside a lump sum amount anticipated to replace say, a roof in five years, the real estate investor generally would prefer to create a sinking fund to which he or she can start depositing an annuity payment with compound interest at regular equal intervals.

The idea, of course, is straightforward.

The investor wants to avoid shelling out the money up front. Foremost, he or she might not have the funds readily available, and secondly because the investor has chosen not to heavily deplete the rental property’s cash flow for any given year to cover the capital expenditure.

As a result, the investor instead opts to set aside the future required funds gradually over the course of time until the time the funds for the expenditure are actually needed.

Sinking Fund Factor

The sinking fund factor is the calculation that tells the investor how much of an annuity payment that must be made each conversion period at a given rate of compound interest to have available that specified sum at some given future time period

For example, we’ll say that the real estate investor is anticipating a cost of $30,000 in five years to replace a roof on an office complex he or she owns. Moreover, the investor feels it reasonable that he or she could make regular payments at the end of every three months into an account yielding 7% annually.

The sinking fund factor would be used by the investor to calculate what each quarterly payment would have to be in order to accumulate the $30,000 required in five years.

The photo below illustrates one method how the investor make that determination very quickly without even knowing the formula.

Sample

Source: iCalculator by ProAPOD Real Estate Investment Software
Source: iCalculator by ProAPOD Real Estate Investment Software

Fair enough.

If the real estate investor starts making regular quarterly annuity payments of $1,243.97 into an account that yields an annual rate of 7% he or she will have the desired $30,000 required in five years to replace the roof on their office complex.

We have provided the formula for the sinking fund factor for your learning.

Be warned, however, that computing for a sinking fund is pretty complex because it involves time value of money computations. We certainly suggest you use a solution like iCalculator to make the calculation for you, but only throw that out so you know that there are resources.

Formula

About the Author

James Kobzeff is a real estate professional and the owner/developer of ProAPOD - leading real estate investment software solutions since 2000. Create cash flow, rates of return, and profitability analysis on rental property at your fingertips in minutes! Learn more at www.proapod.com

ProAPOD also provides iCalculator - an online real estate calculator that enables you to learn dozens of real estate definitions and formulas as you calculate. You save 64%. Learn more at real estate calculator

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      Modi Housing 

      20 months ago

      Search Commercial Office Space for lease or rent and get details of Office Space at ModiHousing which is one of the successful construction companies in Hyderabad.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)