Annual Mortgage Loan Constant

The following excerpt is from IREM’s publication, Practical Apartment Management, Sixth Edition (IREM © 2009): 

Before leaving the example of the “Cash Flow Projection” exhibit, we should discuss a concept called the annual mortgage loan constant, more commonly known as the loan constant, as the constant, or simply by its mathematical symbol, k. If you are sporting an advanced calculator, you may have been tempted to check to see if $11,085 is the actual monthly mortgage for a $1,500,000 mortgage with an annual interest rate of 7.25 percent amortized over a 25-year term. That payment is about $2,000 per month greater than 7.25 percent interest on the $1.5 million dollars being borrowed. This is because it includes not only the “rent” on the money, but also an amortization of the principal balance. (A strict translation of the Latin word “amortize” is to make toward dead). Your calculator executes a pretty sophisticated formula to calculate both the interest and the amount of principal and to present you with the total monthly payment.

It is essential to know the interest rate, but real estate investors will also need to know what percentage of the original loan amount they must pay back each year. And that is the annual mortgage constant (hence the name “constant”). With just a basic calculator, you can learn the annual constant with this formula:

  Annual Debt Service   = Annual Loan Constant (k)
Original Loan Amount

Using the numbers from our example produces a constant of 8.87%.

 $133,018   = 8.87% (k)
$1,500,000

When bankers and real estate investors evaluate the feasibility of a rental property, they pay particular attention to its ability to service the mortgage debt. Their reference to the cost of borrowing is typically the mortgage constant (mortgage constants are always expressed as an annual percentage) because it includes both the interest and the principal pay-down.