Mortgage rate = interest rate + sinking fund factor. Can someone explain the sinking fund factor to me Direct Capitalization Approach —> NOI/Ro Does Ro = r-g or is is just r?
This is called the band of investments method. SFF = i/([(1+i)^n] - 1 ) where i = monthly interest n = no. of months Cap rate = mortage weight * mortgage cost + equity weight * equity cost = MW * ( annual interest + SFF ) + EW * EC MV = NOI / cap rate
Yeh alternatively, use direct cap approach where R = r - g.
Thanks bobsters. Can someone explain the sinking fund factor conceptually? I don’t understand why you dont just use the mortgage rate
Sure MT327, think of the sinking fund factor as follows: Your cost of the mortgage is 2 parts: 1) interest 2)sinking fund factor , both expressed in percentages. In real estate investments (or other capital investments), you borrow money (the mortgage) so you must pay regular interest. In addition, you as a smart businessman who loves to plan his future payments must savet aside a certain amount of money to budget for paying off the borrowed money (mortgage) eventually. So this amount, calculated in terms of amount/each 1 (that is, equivalent to a percentage), is your additional practical cost because you are forgoeing this amount regularly (you could have bought some falafel sandwiches with it maybe, but u can;t coz it is being saved and you shouldn;t touch it, so it is a cost!) Now the question is how much do you need to regularly put aside and compound that amount in your bank account so that one day you pay off the mortgage? (theoretically of course because practically u make regular principal payments along with the interest payments)? The answer is to use the annuity model (PMT=?? if i=7/12, N=12x20, FV=1, PV=0) which gives an amount which, if injected monthly into a bank account that pays compound interest of 7/12 % monthly and regularly, will grow over 20 years to reach 1$ (your FV) and pay off your mortgage. Remember, the amount resulting from the annuity model is in (actually cents) to pay off 1 in the future, so cents$/1$ is the same thing as a percentage. (ex 0.03$/1$ is equivalent to 3%). Your mortgage cost is Interest (%) + Sinking fund (%). Damn that was lonmg…I didn;t proof read so I hope there are no errors 
Thanks iblees. Makes perfect sense. Not that its that difficult but do you think we might have to calculate a sinking fund factor on the exam? If I can just remember to add it to the mortgage rate, I want to leave it that. Already enough other things to try and cram into my small brain
Well probably the Alternative Assets’ combined number of questions will be between 6-12, more like 6 i’d say (5%). So out of 6 questions or 9 or 12 , i doubt that there will be more than 1 question involving sinking fund calculation…so 1/120 = 0.83% of a grade lost. So instead of scoring a 100, u might score 99.17 
Just remember, Band of Investments method of calculating Capitalization Rate ==> weighted cost of deb (which includes both INT AND SFF) + weighted cost of equity. Good luck!
thanks iblees82 for the explanation