Commercial real estate investors compare a property’s cap rate against its loan’s constant to see whether financing helps or hurts returns.
How it works
The loan constant is the annual debt service (the amortizing payment, annualized) divided by the loan amount. Unlike a bare interest rate, it includes both interest and principal, so it’s always higher than the stated rate on an amortizing loan.
What this does not include
Financing at a loan constant below a property’s cap rate amplifies returns (“positive leverage”); above it, financing drags returns down — this calculator computes only the constant itself, not the full leverage comparison against a specific property’s cap rate.
How to use this calculator
- Enter the loan amount, rate, and amortization term.
- Compare the resulting loan constant against a property’s cap rate to gauge whether leverage helps.
Frequently asked questions
Why is the loan constant always higher than the interest rate?
Because it includes principal repayment along with interest — an interest-only loan’s constant would equal the rate exactly, but any amortizing loan pays down principal too, raising the constant above the bare rate.
What is “positive leverage”?
When a property’s cap rate is higher than the loan constant financing it — the borrowed money earns more than it costs, amplifying the investor’s return relative to paying all-cash.
Does this apply to adjustable-rate loans?
No — per the source, the loan constant applies only to fixed-rate loans, since it assumes one constant payment throughout.
