Debt yield, the honest metric.
Debt yield measures how hard a loan works, independent of value and interest rates. Enter the net operating income and the loan amount to see the unlevered return the property's income would produce at par.
Why debt yield resists optimism
Debt yield is NOI divided by the loan amount. Because it ignores appraised value and interest rates, it resists the optimism that inflates both. A 10% debt yield on an $8M loan means $800,000 of NOI backing it.
CMBS and institutional lenders lean on minimum debt yields precisely because cap rates compress in hot markets while debt yield stays honest.
How to use it alongside DSCR and LTV
Debt yield, DSCR, and LTV each constrain a loan differently, and the binding one sets the size. A deal can clear DSCR and LTV on optimistic assumptions but fail a debt yield floor, which is the point.
Many lenders set a minimum debt yield around 10%, adjusted for property type and risk.
A worked example and the sizing math
A property with $800,000 of NOI and a $9,000,000 loan has a debt yield of 8.9 percent. The same property with a $7,000,000 loan has a debt yield of 11.4 percent.
Run backwards, debt yield sizes a loan directly. Divide NOI by the lender's minimum debt yield: $800,000 at a 10 percent minimum supports an $8,000,000 loan, whatever interest rates or cap rates are doing. That is why lenders lean on it when rates are low or values look stretched.
Questions lenders ask
- What is a good debt yield?
- Many lenders use a floor around 10%, adjusted for property type and risk. Higher debt yields mean the loan is better covered by in-place income.
- How is debt yield different from DSCR?
- DSCR compares income to the actual debt payment, which depends on the interest rate and amortization. Debt yield compares income to the loan amount itself, ignoring rate and value, so it resists optimistic assumptions.
- How do you calculate the maximum loan from debt yield?
- Divide NOI by the minimum debt yield. $800,000 of NOI at a 10 percent minimum supports an $8,000,000 loan.
- Why does debt yield ignore the interest rate?
- Because it divides income by the loan amount only. That makes it a check that cheap financing or a generous appraisal cannot flatter.
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