The Yield vs. Mortgage-Constant Test

The test

For any property:

1. Estimate NOI = gross annual rent × ~0.45 (because ~55% of gross is eaten by the cost stack — see Where the Rent Goes).
2. Unlevered yield = NOI ÷ price.
3. Mortgage constant ≈ 8.0% at a 7% 30-year rate. (Formula: payment-per-$1-of-loan × 12.)
4. Compare:
   • Yield ≥ constant → positive leverage. Rare on OBX. It can pencil at low down payments.
   • Yield < constant → negative leverage. Needs an equity cushion to reach neutral.

The exact down payment for cost-neutral

When you’re in negative leverage, here’s the equity it takes:

Supportable loan = NOI ÷ mortgage-constant Cost-neutral down payment = (price − supportable loan) ÷ price

Worked example — a $1.5M oceanfront, $120k gross:

• NOI ≈ $120k − $67.8k cost stack ≈ $52.2k
• Unlevered yield = 52.2 / 1,500 = 3.5% → well below 8% → deep negative leverage.
• Supportable loan = $52,200 ÷ 0.08 ≈ $653k
• Cost-neutral down = (1,500 − 653) / 1,500 ≈ 56% down. 😖

Now a $2.55M high-ERP Nags Head 8BR, $271k gross:

• NOI ≈ $271k − ~$107k ≈ $164k
• Yield = 164 / 2,550 = 6.4% → much closer to 8%.
• Supportable loan = $164k ÷ 0.08 ≈ $2.05M
• Cost-neutral down = (2,550 − 2,050) / 2,550 ≈ ~20% down. ✅

Same math, opposite outcome — the entire difference is the yield you bought.

Why the constant, not the rate?

People compare yield to the interest rate (7%). That’s wrong for an amortizing loan: your payment also includes principal, so the true annual cash cost per dollar of loan is the mortgage constant (~8%), not the rate. Using the rate flatters the deal by ~1 point and hides the gap. Always use the constant.

Ready for the number every OBX agent quotes: ERP →.