In one sentence
The annual debt service on a loan divided by the loan amount, expressing the total cost of debt as a single rate.
The longer version
The debt constant, or mortgage constant, combines interest and amortization into one figure: annual debt service as a percentage of the loan. It lets lenders and investors compare the true annual cost of loans with different rates and amortization.
Comparing the debt constant to a property's cap rate reveals whether leverage is accretive: positive leverage exists when the cap rate exceeds the debt constant.
Common questions
- How is the debt constant calculated?
- Divide annual debt service by the loan amount. A loan of $10,000,000 with $720,000 of annual debt service has a 7.2 percent debt constant.
- Why does the debt constant matter?
- It captures both interest and amortization in one rate. Comparing it with the cap rate shows whether leverage adds to or reduces the equity return.
- What is positive leverage?
- When the property's cap rate exceeds the debt constant, so borrowing increases the return on equity.
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