Real Estate Interest Calcs on DebtCommercial real estate lenders commonly calculate loans in three ways: 30/360, Actual/365 (aka 365/365), and Actual/360 (aka 365/360). Real estate professionals should be aware of these methods if they want to understand the real interest rate as well as the total amount of interest being paid over the term of a loan. This post will go over how these calculations are commonly done.

Overview

If three different lenders are offering identical loans with identical loan amounts and interest rates, but each lender is using one of the three interest calculations, a borrower will pay the least interest with 30/360 and the most with Actual/360.

Looking for real estate debt models or tutorials for how to model construction interest, development draw schedules, simple and advanced amortization tables, and more? Check out the real estate debt section of A.CRE.

An example

To give an example, let say the three lenders are each offering a $1,000,000 loan at 4% for 10 years with no interest only period. Lender A is using 30/360, lender B is using Actual/365, and lender C is using Actual/360. The actual interest rate and total payments are shown for each lender below:

Debt Int Table 1.1b

As the table shows, lender A has the most favorable terms and lender C has the least favorable. The next section will explain these calculations using our example above. If you want to see excel amortization schedules using these three methods, scroll to the bottom to download the 3-tiered debt module and you can also click here to get a more thorough explanation of how the module works.

30/360

30/360 is calculated by taking the annual interest rate proposed in the loan (4%) and dividing it by 360 to get the daily interest rate (4%/360 = 0.0111%). Then, take the daily interest rate and multiply it by 30 to get the monthly interest rate (0.333%). This loan calculation assumes that there are 360 days a year and 30 days in each month. This interest calculation method returns a true 4% interest rate.

Actual 365 (aka 365/365)

Actual/365 is calculated by taking the annual interest rate and dividing it by 365 and then multiplying that number by the amount of days in the current month. For example, if we are in the month of February, we would take the 4% interest rate and divide it by 365 to get 0.0110%, then multiply it by 28 (29 on a leap year, hence why the word actual and the number 365 are interchangeable in the name) to get 0.307% (0.318% on a leap year). Take note that although dividing the annual interest rate by 365 results in a smaller daily interest rate, the fact that we multiply by the actual days in each month as opposed to 30, ultimately results in an overall slightly larger amount of interest paid when compared to the 30/360 method due to the extra day in a leap year.

 Actual/360 (aka 365/360)

This method has seen its day in court because borrowers challenged that this method is deceptive and hides from borrowers the true cost of borrowing. However, the lenders prevailed due to the fact that it was fully disclosed how they are calculating interest. Thus, Actual/360 is an interest calculating method that is here to stay.

When using the Actual/360 method, the annual interest rate is divided by 360 to get the daily interest rate and then multiplied by the days in the month. This creates a larger dollar amount in interest payments because dividing the annual rate by 360 creates a larger daily rate then dividing it by 365. So, essentially the annual interest rate is divided by 360 (larger than dividing by 365) then multiplied by 365 or 366 in a leap year. Both 365/360 and 365/365 interest calculation methods are shown side by side in the table below:

Debt Int Table 1.2

Note: in Table 1, the stated interest rates for 365/365 and 365/360 is 4.003% and 4.058%, respectively. This is because in Table 1, 3 years of interest payments are calculated by multiplying the daily rate by 365 and 1 year is calculated by multiplying the daily rate by 366. These four calculations are then divided by 4.

Again, if you would like to see amortization schedules for each of these methods, download the module below and please go to my post that will walk you through how to use it.

Download The Model

To make this model accessible to everyone, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you'd like) or maximum (your support helps keep the content coming - typical real estate models sell for $100 - $300 each). Just enter a price together with an email address to send the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our models on this basis, please reach out to either Mike or Spencer.

Note (especially for Gmail users): The model is sent via email and occasionally is blocked by spam filters. If you don't see the email arrive within five minutes, check your spam folder.

3-Tiered Debt Module

This module has lots of functionality and will allow the user to do the following:

  • Choose how many months of interest only payments, amortization period, and total term for each of the three tiers
  • Account for taking out additional capital to finance a portion of capital improvements during the hold period. The model will automatically reamortize the loans when additional capital is drawn.
  • Select how the lender will calculate interest on each loan – 30/360, actual/360, or actual/365.
I agree with the Terms & Conditions.
By providing your email address and clicking continue, you agree to the Adventures in CRE privacy policy and cookies policy . AdventuresinCRE.com will not sell or distribute your email address to third parties, but you understand AdventuresinCRE.com and/or its direct affiliates may email you from time to time including an initial email containing a link to download the aforementioned Excel file.

This Excel file (the "software") is distributed as is, completely without warranty or service support. www.AdventuresinCRE.com and its authors are not liable for the condition or performance of the software. www.AdventuresinCRE.com owns the copyright and grants users a perpetual, irrevocable, worldwide, non-exclusive, royalty-free license with respect to the software as set forth below.

www.AdventuresinCRE.com and its authors hereby disclaim all implied warranties. www.AdventuresinCRE.com grants the users the right to modify, copy, and redistribute the software and documentation, both within the user's organization and externally, subject to the following restrictions:

1. The users agree not to charge others for use of the software, regardless of whether users have altered and/or improved the software in anyway.
2. In any use of the software, the users agree to acknowledge the www.AdventuresinCRE.com authors that developed the software.
3. The users agree to obey all government restrictions governing redistribution or export of the software.
4. The users agree to reproduce any copyright notice which appears on the software and documentation on any copy or modification of such made available to others.

About the Author: Michael Belasco has over eight years of real estate and construction experience. He currently works for a global real estate investment, development, and asset management firm in San Francisco managing large scale development projects in the city. Michael has both an MBA and Master in Real Estate with a concentration in Real Estate Finance from Cornell University.