You will typically purchase an investment property with the aid of one or more mortgage loans. You give the lender a lien against the property and the lender gives you a mortgage loan. The lender can be a bank, insurance company, the property seller, or even a private third party. You can have more than one mortgage, called first mortgage, second, etc.
The parties can structure a mortgage loan in any of several ways. For example, you might pay interest only for a period of time, then the entire balance; interest only followed by amortizing principal and interest payments; amortizing payments for a time followed by an early payoff or "balloon"; or fixed principal payments plus interest. By far the most common is the loan that fully amortizes using a fixed periodic payment (combining interest and principal) over a specified time. Your home mortgage is probably just such a loan. Let's work now with the typical loan, which is fully amortized through the use of monthly payments of principal and interest.
Note that Canadian mortgages use a different compounding than mortgages in the US. Find more in this article: Differences Between American and Canadian Mortgage Calculation
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How to Calculate Mortgage Payment of an Investment Property
- Determine the loan amount (PV) and total number of months for the mortgage (n).
- Calculate interest rate (i) per month by dividing annual interest rate by 12.
- Apply the formula below:
- You can also easily use Microsoft Excel to solve for the payment using the "PMT" function. See the sample file below.
Excel Spreadsheet Example
We prepared a simple example of mortgage payment calculation in an excel spreadsheet file. You can download the file, input your own numbers and calculate results in no time. The only thing we ask in return is for you to like our facebook page or follow us on twitter.