Debt Yield
Debt yield is net operating income divided by the total loan amount, measuring the unlevered return a lender would earn if it foreclosed and took the property back on day one.
Debt yield is the lender's protection against the two variables it cannot control: interest rates and cap rates. Loan-to-value depends on an appraisal, and DSCR depends on the interest rate and amortization schedule. Both can be engineered. Debt yield depends only on income and loan size, so it cannot be flattered by cheap debt or an aggressive valuation.
This is why debt yield became the dominant sizing constraint in CMBS and increasingly in bank lending after 2008. In periods of very low rates, DSCR tests become easy to pass and debt yield is what actually caps proceeds.
How to calculate debt yield
Debt Yield = Net Operating Income / Loan AmountWorked example
A $4,200,000 loan on the same property:
- Net operating income
- $390,000
- Loan amount
- $4,200,000
Rules of thumb
- A minimum debt yield of 8% to 10% is a common multifamily requirement, varying by lender type and market.
- Debt yield and cap rate are directly comparable. If debt yield is below the market cap rate, the lender is lending above the property's unlevered yield.
Calculate debt yield
Related terms
- Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio is net operating income divided by total annual debt service, and it measures how many times a property's income covers its loan payments.
- Loan-to-Value (LTV)
Loan-to-value is the loan amount divided by the appraised value or purchase price of a property, expressed as a percentage, and it measures how much of the capital stack is debt.
- Net Operating Income (NOI)
Net operating income is a property's effective gross income minus all operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes.
- Capitalization Rate (Cap Rate)
A capitalization rate is a property's net operating income divided by its purchase price, expressed as a percentage, and it represents the unlevered annual yield the property produces at that price.