Net operating income divided by the loan amount, a value-independent measure of how hard the loan is working.
The longer version
Debt yield is net operating income divided by the loan amount, expressed as a percentage. It answers a blunt question: if the lender took the property on day one, what return would the income produce on the money lent?
Its value is what it leaves out. Debt service coverage depends on the interest rate and amortization, so it can be improved by a lower rate or a longer amortization. Loan to value depends on an appraised value, which depends on a cap rate. Debt yield depends on neither, so it cannot be inflated by cheap money or a generous valuation.
That makes it a sizing constraint as well as a test. A lender with a minimum debt yield can solve directly for the maximum loan: NOI divided by the minimum yield. For example, $800,000 of NOI at a 9 percent minimum supports a loan of about $8.9 million, regardless of what rates or cap rates are doing.
Lenders set their own minimums by property type, market and cycle, and they move them as risk appetite changes. It is also watched after closing, since a falling debt yield is an early signal of refinance risk at maturity.
Common questions
- What is debt yield?
- Net operating income divided by the loan amount, expressed as a percentage. It measures the return a lender would earn from the property's income if it had to take the property, independent of interest rate, amortization and cap rate.
- How do you calculate debt yield?
- Divide NOI by the loan amount and multiply by 100. A property with $600,000 of NOI and a $6,000,000 loan has a debt yield of 10 percent. To size a loan, divide NOI by the lender's minimum debt yield.
- What is a good debt yield?
- It depends on the lender, property type and market cycle, and lenders change their minimums as risk appetite moves. Commonly cited minimums for stabilized property fall in the high single digits to low double digits, with riskier asset types held to higher floors.
- Why do lenders use debt yield instead of DSCR?
- They use both. DSCR can be improved by a lower interest rate or longer amortization, and LTV depends on an appraised value. Debt yield depends on neither, so it shows how much income supports the loan regardless of financing terms or valuation.
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- What lenders should look for in a due diligence data roomA lender's room is not an M&A room.
- The commercial loan closing timelineThe stages and what sets the pace.
- Debt yield calculatorRun the ratio on your own numbers.