Real Estate Amortization and How It Works

May 26, 20226 min read
Real Estate Amortization and How It Works
Share on facebookShare on TwitterShare on Linkedin

Key takeaways

• Understanding amortization can help real estate investors reduce project costs and realize tax advantages.

• An alternative investment, real estate can be used as another tool for portfolio diversification.

• Yieldstreet offers a number of real estate investing opportunities in some of the most attractive markets in the country.

Amortization of a real estate loan refers to the process by which the principal amount of a mortgage is reduced with each payment. Borrowers typically receive an amortization schedule showing how much of each monthly payment satisfies interest obligations and how much goes toward reducing the principal amount of the loan. 

However, amortization can also refer to the spreading of capital expenses related to intangible items over the useful life of an asset. While this form of amortization is like depreciation, there is one key difference, which we will discuss below. With those factors in mind, here is an overview of amortization in real estate and how it works. 

Loan Amortization

The process of writing down a loan is referred to as amortization. An amortization schedule is employed to lower a loan’s balance as installment payments are made. In most cases, early loan payments are weighted more toward covering interest payments than reducing the loan’s principal. As time goes on, the balance gradually shifts so that more of the payment is applied to reducing the principal than covering interest payments.

With a fixed mortgage, multiplying the interest rate by the outstanding balance and dividing the product by 12 determines the interest payment. The percentage of the principal due that month is the difference between the established monthly payment and the amount of interest to be paid that month. As the term of the loan progresses, the principal amount becomes smaller, which in turn reduces the amount of interest due. However, because the total monthly payment remains the same, a larger percentage of it goes to reducing the principal balance. This pattern repeats throughout the life of the loan until a zero balance is achieved. 

Amortization vs Depreciation

In the case of assets, amortization and depreciation are largely the same. The difference is amortization applies to intangible assets, while depreciation applies to tangible assets. 

For example, amortization can be applied to the costs of intangible assets needed for a real estate startup. To qualify as a startup cost, an expense must be one paid or incurred to operate a business prior to placing a property into service as a rental.

In other words, certain costs incurred prior to advertising the availability of a rental property can be tax deductible on an amortized basis. Startup costs over $5,000 can be amortized, as can costs associated with refinancing a mortgage loan and improvements made to the property. 

To illustrate this, consider a scenario in which real estate startup costs of $12,000 are incurred. An investor can deduct $5,000 of those costs in the year the rental is initially offered to tenants. The other $7,000 must be amortized over a 15-year period and gradually recovered. Alternatively, the entire $12,000 can be amortized over that 15-year period.

Depreciation largely refers to the same practice, however, it is applied to tangible assets such as building equipment, office furniture, machinery, and the like. Loan and acquisition costs can also be added to the cost basis of an asset and depreciated.

To calculate depreciation, the value of the object at the end of its useful life must be estimated. The difference between that value and the original cost of the asset can be claimed gradually over the number of years the asset is expected to be useful.  

Positive Amortization vs Negative Amortization

Getting back to mortgages, all of the amortization discussed until now has been positive in nature. A typical mortgage loan is structured such that the principal balance decreases with each monthly payment. This is positive amortization.

Negative amortization occurs when the principal balance grows because the minimum monthly payment does not cover interest costs. The unpaid portion gets added to the principal amount each month and, as a result, the amount of the obligation increases. 

This can come into play with payment option adjustable rate mortgages. These instruments are structured such that investors can determine how much of the monthly payment is applied to interest costs. If the rate is higher than they elect to pay, the difference is added to the loan’s principal balance. 

Graduated payment mortgages also entail negative amortization. Under this approach, early payments include partial interest payments, the balances of which are added to the principal. 

While these strategies do give investors added flexibility, they can also make the loans more costly in the long run. 

What Commercial Real Estate Investors Should Know About Amortization

Commercial property real estate investors have another consideration to make when it comes to mortgages and amortization. Generally speaking, most commercial real estate loans require balloon payments at the end of their terms. Properties are typically financed with 10-year fixed interest rate loans, amortized over 25 to 30 years. 

The loan comes due at the end of the tenth year, at which point the principal balance must be paid in full. Investors will either sell the building when the balance comes due or refinance it. The resulting smaller monthly payment keeps costs lower, which improves the return on equity (ROE). This is why most commercial real estate investments are predicated upon carrying debt.

How to Invest in Real Estate

There are a number of different ways to invest in real estate. Among the more common are owning commercial and/or residential rental properties, joining a real estate investment group or participating in a real estate investment trust. Some investors purchase houses, rehabilitate them and sell them. Investing in a real estate mutual fund is another way to include this asset class in a portfolio.

Direct investments in real estate can be very “hands-on” experiences, unless the properties are turned over to a management company. While this does have the potential to reduce an investor’s physical involvement, it also increases costs. REITs, investment groups and mutual funds eliminate the need for such direct involvement.

Real Estate and Alternative Investing

Real estate is among the asset classes designated “alternative investments.” While they are hard to define, broadly speaking, alternative investments tend to be less correlated with public equity, and thus offer greater potential for diversification. Moreover, private real estate investments have outperformed the S&P 500 for over two decades. These assets were traditionally accessible to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums – often between $500,000 and $1 million.

Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors. While traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation, a more balanced 60/20/20 or 50/30/20 split, incorporating alternatives, may make a portfolio less sensitive to public market short-term swings. Yieldstreet offers several attractive real estate investing opportunities of this nature in some of the most attractive real estate markets in the country.

Summary

Amortization plays a highly significant role for individual investors in real estate. Understanding its varied facets can help improve returns on equity, reveal tax benefits and reduce costs.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure