Visit a commercial real estate developer’s office and you are likely to see a mortgage constant chart pinned to the wall or in the top desk drawer; many of us also have a link to a web page or a PDF with a chart on our smart phones. At the Crown Group (www.crowngroup.com), we use mortgage constants on a regular basis to determine how much rent to charge for a property based on our investment costs. Easy Constant was developed to replace paper charts, saving us time and ensuring accuracy. With Easy Constant, mortgage constant information and amortization schedules are always available. You can even create and save a custom mortgage constant chart with values you frequently use and easily perform mortgage constant “what if” analyses.
Easy Constant is an indispensable tool for commercial real estate developers/practitioners as well as anyone with a business that borrows or lends money as part of its investment strategy. Easy Constant works on all common devices: smart phones, tablets, laptops, or desktop computers. Easy Constant is a web-based program, but it will continue to work even if you don’t have access to wireless or an internet connection. For quick access, make Easy Constant a favorite in your web browser or add a quicklink to it on your home screen or desktop.
We have found many programs, websites, and apps that will solve for mortgage payments but only the more powerful (also more expensive and complicated) desk top programs will typically allow you to create an amortization schedule. With Easy Constant, you can enter your loan amount, interest rate and years of amortization and instantly get an accurate amortization schedule.
Easy Constant also provides a Quick Analysis section which provides key ratios related to your rent and mortgage assumptions. These include yearly return on equity, debt coverage ratio, and debt yield ratio.
Let’s consider an investment opportunity requiring a $1,000,000 investment. If we can secure a loan with an interest rate of 5% over a 25 year amortization period on a 30/360 interest calculation basis, the mortgage constant is 7.02%. Our return needs to be greater than 7.02% to yield positive leverage. If our goal is an 8% return on the $1,000,000 total cost, our base rent needs to be $80,000. If we borrow 75% or $750,000, our annual mortgage payment would be 7.02% times $750,000 = $54,000. After borrowing $750,000, our equity investment is $250,000 and the return on our $250,000 is equal to ($80,000 – $54,000) divided by $250,000 or 10.4%, thus positive leverage. If our rent yields a return equal to 7.02%, we have neutral leverage after borrowing. If our rent yields a return of less than 7.02%, we would have negative leverage.
30/360 or Actual/360
There are many ways lenders calculate interest, but the two most commonly used in commercial real estate are 30/360 and actual/360. Simple mortgage calculators usually calculate only 30/360. Easy Constant allows you to freely choose and alternate between 30/360 and actual/360. Click the link below for more information about the difference between calculating at 30/360 and actual/360:
Please read #’s 3 & 4 in the Easy Constant Index for an explanation of how Easy Constant calculates output under the actual/360 interest calculation method.
Click “Contact Us” to reach out to us with any issues, questions, or suggestions. I would be pleased to hear from you.
Mark Lambert, CCIM, SIOR, CPM, CRX