As yields on U.S. Treasury securities wilt—the 10-year bond is at 3.38%!—in response to a continuing flight to quality and liquidity, spreads on commercial mortgage-backed continue to widen and widen and widen .
What does this mean? If you need to finance a commercial property, your cheapest loans may now be from a bank!
Loan constant = annual debt service ÷ loan amount.
So for example, $100,000 annual debt service ÷ $1,000,000 loan = 10% loan constant.
Who cares?
If I’m buying a property at a 11% return before the debt, the debt is improving my return.
If I’m buying a property at a 9% return before the debt, the debt is worsening my return.
Use a loan constant to quickly evaluate the impact of a loan on your return.
We use this calculation more often on the commercial side of the real estate business because commercial loans are often locked out from prepayment or expensive to prepay.
