There are several vital variables in helping calculate yield to maturity in real estate.
- The time (N) the investment will be or is held, typically shown in months.
- The interest rate/yield (I/YR) you want to achieve or the actual rate you are charging on the mortgage note. When solving for yield to maturity, the I/YR is the YTM.
- The present value (PV) in most cases, how much you invested (shown as a negative number on a 10bii calculator).
- Any payments (PMTS) received over the investment period.
- The future value (FV) which is the value of the investment is at maturity or payoff.
Real estate mortgage notes are depreciating assets. Regardless of whether you buy a pre-existing mortgage note at a discount or create one yourself using owner financing or private lending, every payment the borrower makes, the value of the mortgage note decreases. When it comes to analyzing your investment and return, this decreasing future value needs to be taken into consideration.
How to use yield to maturity in real estate
Let's think about this in a real example. Let’s say you created a mortgage note on a single-family property you are selling for $150,000. You found a great buyer that had a $20,000 down payment and you offered to carry the financing for the remaining $130,000 at an 8% interest rate for 30 years (360 months). This is a fixed-rate mortgage, so with each $953.89 principal and interest payment the borrower makes, the principal is reduced. Eventually, after 30 years have passed, the future value of the note will be zero and the loan will be paid in full. In this example, the yield to maturity is equal to the interest rate being charged (8%). If you held the note to its maturity, you would receive an 8% annualized rate of return over that 30 year period.