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
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
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