What Is Loan Constant?
Loan constant = annual debt service ÷ loan amount. A $300,000 loan with $24,000 annual debt service has an 8% loan constant. It combines principal and interest into one number—useful for quick dscr and cash-flow checks. At 6.5% rate, 30-year amortization, the constant is about 7.6%. Higher rate or shorter term = higher constant. If noi ÷ loan constant ≥ loan amount, you have positive cash-flow (simplified).
The loan constant is the ratio of annual debt service (principal + interest) to the loan amount—expressed as a percentage. It represents the annual payment rate required to service the loan.
At a Glance
- What it is: Annual debt service ÷ loan amount
- Why it matters: Quick payment-rate check; relates to dscr
- Typical range: 6–9% for 30-year loans at current rates
- Use it for: Financing feasibility; break-even-occupancy
- Inverse of DSCR logic: Lower constant = easier to cover debt
Loan Constant = Annual Debt Service ÷ Loan Amount
How It Works
The math. Annual debt service = 12 × monthly P&I. Loan constant = that ÷ loan amount. A $250,000 loan at 6.5%, 30-year: monthly P&I ≈ $1,580. Annual = $18,960. Constant = $18,960 ÷ $250,000 = 7.58%.
Rate and term impact. Higher rate = higher constant. Shorter amortization = higher constant (more principal paydown per year). A 6% loan has a lower constant than a 7% loan. A 20-year term has a higher constant than a 30-year.
Relation to dscr. Dscr = noi ÷ debt service. If constant is 8%, you need noi of at least 8% of the loan to get dscr of 1.0. For dscr of 1.25, you need noi of 10% of the loan (8% × 1.25).
Break-even. Break-even-occupancy and minimum noi can be derived from the loan constant. If your constant is 8%, noi must be at least 8% of the loan to cover debt.
Real-World Example
Jacob in Kansas City. Jacob had a $380,000 loan at 6.75%, 25-year amortization. Monthly P&I: $2,580. Annual: $30,960. Loan constant = $30,960 ÷ $380,000 = 8.15%. His noi was $35,200. $35,200 ÷ $30,960 = 1.14 dscr. His lender required 1.20. He needed more noi or less debt. He put an extra $15,000 down to reduce the loan; that brought dscr to 1.22.
Pros & Cons
- Single number for debt burden
- Quick dscr and cash-flow checks
- Varies with rate and term—useful for sensitivity
- Less intuitive than monthly payment
- Doesn't separate principal and interest
Watch Out
- Interest-only: Interest-only loans have a constant equal to the rate (no principal)
- Balloon: Balloon loans have a lower constant until the balloon—model the balloon payment
Ask an Investor
The Takeaway
The loan constant is annual debt service as a percentage of the loan. Use it for quick dscr and break-even-occupancy checks. Know your constant when structuring debt.