Annual debt service per dollar of loan principal.
The loan constant (sometimes called the mortgage constant or K factor) is annual debt service divided by loan amount, expressed as a percentage. A loan of $1,000,000 with $80,000 of annual debt service has a loan constant of 8.0%. Loan constants are a shortcut for sizing debt against NOI: NOI ÷ loan constant = maximum loan amount at break-even DSCR.
Loan constants are useful in commercial underwriting because they convert any combination of rate and amortization into a single number. A 7% rate / 30-year amortization produces a loan constant of ~7.98%. A 7% rate / 25-year amortization produces ~8.48%. A 6% rate / 30-year produces ~7.20%. The loan constant captures both the rate and the amortization effect in one figure.
The most common use is quick loan sizing. NOI ÷ loan constant = the maximum loan amount that produces a 1.0 DSCR. For target DSCR of 1.25, the formula becomes: NOI ÷ (loan constant × 1.25) = max loan. A property with $200k NOI at a 7.98% loan constant: maximum loan at 1.25 DSCR = $200k ÷ (7.98% × 1.25) = $2,005,000.
Loan constants are sometimes used for back-of-the-envelope LTV vs DSCR analysis. If the market loan constant is 8%, a property with a cap rate of 7% can't cover DSCR > 1.0 at any leverage — the cap rate is below the loan constant. The implication: leverage produces negative cash flow until the property's NOI grows or rates fall. This is the "negative leverage" trap many investors hit in 2023–2024 as rates rose above cap rates.
For investors, monitoring loan constants is a quick sanity check on financing feasibility. When loan constants exceed cap rates by 100+ bps, leverage actively works against the deal. When loan constants are 100+ bps below cap rates, leverage amplifies returns. The relationship between loan constant and cap rate is one of the most important macro factors in real estate at any given moment.
| Loan: $2,500,000 at 7.0% / 30-year amortization | |
| Annual debt service | $199,500 |
| Loan Constant = $199,500 ÷ $2,500,000 | 7.98% |
| Sizing test: | |
| Property NOI | $250,000 |
| Max loan at 1.0 DSCR ($250k ÷ 7.98%) | $3,133,000 |
| Max loan at 1.25 DSCR ($250k ÷ 9.98%) | $2,505,000 |
| Effective loan-sizing tool |
Annual debt service divided by loan amount, expressed as a percentage. A single number that combines the rate and amortization into a debt service intensity measure.
NOI ÷ loan constant = max loan at 1.0 DSCR. For target DSCR (e.g., 1.25), divide NOI by (loan constant × target DSCR). Useful for quick loan sizing without amortization tables.
When the loan constant exceeds the property's cap rate, adding leverage actually reduces returns instead of amplifying them. The cost of debt exceeds the property's income yield. Common in high-rate environments where rates have risen above cap rates.
On a fixed-rate fully-amortizing loan, no — the loan constant is fixed by rate and amortization at origination. On floating-rate loans, the constant changes as the rate changes.
Interest rate is just the rate. Loan constant is annual debt service (which includes principal amortization) divided by loan amount. On amortizing loans, the constant is always higher than the rate.
Matrix sizes commercial loans using NOI, debt yield, DSCR, and loan constant analysis — finding the structure that maximizes proceeds at the right risk profile.
