# Loan constant - Posted by Jim S

Posted by Brent_IL on October 24, 2001 at 15:17:21:

The term Constant when referring to a loan means both the interest and principal parts of a periodic loan payment expressed as a percentage of the loan. The LTV is not relevant.

Using your example:

The annual interest-only payment on a 30-year, \$100,000 loan @ 6.625% is \$6,625.00 for the first year. This payment says the same for the next 28 years. When you make your 30th payment, you owe \$106,625.

Alternately, you could have a self-amortizing loan. The annual payment would be \$7,757.24, but the amounts allocated to interest and the loan pay-down varies each time you pay. The payment is higher than simple interest, but it remains the same for 30 years. No balloon.

The loan Constant in this case is 7.757232%.

Someone might say, “A 7.75 constant amortizes your loan in 30 years.”

For different loan amounts or p/yr, divide the appropriate fixed payment by the amount of the loan.

I don’t think the constant is very important when determining the value of a 9-unit apartment building. It comes into play when you are deciding how you are going to pay for it when you make an offer.

Loan constant - Posted by Jim S

Posted by Jim S on October 24, 2001 at 14:34:34:

I’m looking at a 9 unit apartment building in my area. I have been trying to figure out the value of the building and I need the loans constant. I read that the bank should be able to give you the loans constant so I called a lender and asked. The loan officer told me he hadn’t heard that term used in over twenty years and he couldn’t help me. I was suprised to hear that someone who’s job is issuing loans couldn’t tell me the loans constant. Do most investors use a loans constant in determining the value. I still would like to know the loans constant. The loan that is available has a 75% LTV, with a 25 yr. amortization @ 6.625% interest. Can someone help me figure what it would be. I read that you could get a book of tables that give you loan constants. Where can I find one?

Jim

Re: Loan constant - Posted by JT - IN

Posted by JT - IN on October 24, 2001 at 17:54:12:

Jim:

I agree with the other answers that you have received. With what you are looking for, you should be able to ascertain this info from a standard amortization chart, or a computerized version, and look at what the payment is for \$ 1000. That number is your constant. So,if you are borrowing 200K, then the monthly payment will be 200 times that number; \$300K, then 300 times that number, etc.

However, this number is not a real relevant number in determining multifamily values, as also previously indicated. Without knowing exactly what you are looking for, and the relevance of what you are looking for, you are at high risk of over-paying for a multifamily bldg.

Lastly, I doubt that you will be finding 6.625% interest rate, on a 9 unit bldg, without the application of major discount points, which is not a good idea. I think that you need more education, before delving into the multifamily business.

Just the way that I view things…

JT - IN

Re: Loan constant - Posted by Terry Heilman

Posted by Terry Heilman on October 24, 2001 at 17:10:12:

Jim,

Brent provided a good answer on how to calculate the loan constant. I used a financial calculator and came up with 7.68 percent which is similar to Brent’s answer (the difference is due to rounding and I used monthly compounding instead of annual). A financial calculator or computer is an easy way to find these numbers.

I think you are trying to use a band of investment to figure a cap rate in order to estimate the highest value you could pay. if this is true do not forget to calculate a return on your equity (25% X your target return) and sum the two answers. For example if your target return is 20%, the cap rate would be 7.68% + 5.00% or 12.68%.

Re: Loan constant - Posted by Dave T

Posted by Dave T on October 24, 2001 at 16:59:48:

I have never heard of a loan constant being used to determine the value of the property being purchased. Years ago, the rule of thumb for a single family residence loan was that the loan amount should not exceed 2.5 times the borrower’s gross annual income. This is the only frame of reference I have for a “loan constant”, and even this determinant has not been used in quite a few years.

While not a “loan constant”, there is a table of multipliers that lets you compute the monthly mortgage payment (PI) for a given loan term and fixed interest rate. Using the tables, you look up the multiplier for the interest rate you want and the loan term you want. Next you divide your loan amount by 1000, then multiply the quotient by the loan multiplier to estimate your monthly mortgage payment.

Neither of these gives you an estimate of the value of the property you wish to purchase. Could you, instead, be thinking about the CAPITALIZATION RATE, or perhaps even, the GROSS RENT MULTIPLIER?

Both may be used as estimators of the value of a property, in the absence of comparable values. For example, if the Gross Rents are \$60000 per year, and you set your Gross Rent Multiplier at 6, then you would not want to pay more that \$360000 for the property. If you have information that comparable multiunit properties in the area have a Gross Rent Multiplier of only 5, then you may say that the property you are considering is not worth more than \$300000.

Capitalization Rate is the ratio of Net Operating Income to the Purchase Price (Value). Let’s say that you can get the annual income and expense reports for the last couple of years. You can subtract the annual operating expenses from the actual annual rental income to compute the Net Operating Income (NOI).

Now with the NOI, you can determine the value of the property to you based upon the capitalization rate you need to make the purchase acceptable to you. Let’s say that you want a 10% capitalization rate. This means that the NOI divided by the value of the property (expressed as a percentage) equals 10%. Let’s say that the NOI for the property was \$28350 last year. Now a little arithmetic, tells you that a capitalization rate of 10% means that the value of this property (to you) is no more than \$283500.

Hope this helps.