Debt yield calculator

A $6.0 million building earns $420,000 of net operating income. The owner asks for a $4.2 million loan, 70% of value, at 6.5% over 30 years. Debt service coverage is 1.32 and the loan to value is 70%, and both pass. The debt yield is 10.0% against a lender minimum of 10.5%, and it fails. The debt yield test alone caps the loan at $4.0 million, though the DSCR test would allow $4.43 million and the LTV test $4.2 million.

The calculator runs all three lender tests together, shows the largest loan under each, and names the one that binds. It then shows what a change in rate does to the answer, the NOI the lender needs to see, and the cash out or cash in of a refinance.

Who reaches for this

You enter net operating income, the property’s value, the loan you want, the rate and amortization, and the minimums your lender applies: debt yield, DSCR and loan to value. The calculator computes the three ratios on the loan you asked for and marks each pass or fail. It then solves for the largest loan each test allows, takes the smallest, and shows the metrics and the equity required at that loan.

The individual ratios are covered elsewhere. The DSCR calculator explains coverage and how lenders stress it, and the cap rate calculator covers value. This page is about how the three fit together in one loan sizing, and which one limits you.

Debt yield is net operating income divided by the loan amount. On $420,000 of NOI and a $4.2 million loan it is 10.0%. The interpretation is the lender’s: if the borrower defaulted and the lender took the property, the income would give it a 10.0% annual yield on the money it lent. The higher the number, the more cushion the lender has.

What makes it useful is what it leaves out. It uses no interest rate, no term and no amortization schedule. Two loans of the same size on the same property have the same debt yield whether one is at 4% and the other at 8%, and whether one is interest-only and the other amortizes. A lender can therefore compare loans and borrowers on one basis, without relying on the assumptions that make DSCR flexible.

That is also why lenders like it. DSCR can be improved by a lower rate, a longer amortization or an interest-only period, and loan to value depends on an appraisal that may be optimistic. Debt yield is only income and loan size. It is popularly said to have become a standard test after the 2008 financial crisis, when the other two proved easy to flatter, though I could not trace that account to a primary source.

A commercial lender sizes a loan against several limits and lends the smallest. Each test has its own formula for the largest loan it allows.

The smallest is $4.0 million, set by debt yield. At that loan the property has a debt yield of 10.5%, a DSCR of 1.38 and a loan to value of 66.7%. The borrower needs $2.0 million of equity, 33.3% of the value, rather than the $1.8 million the 70% loan would have needed. The $200,000 gap comes from a test the borrower may not have considered, since the DSCR and LTV both allowed more.

Why the order matters

Knowing which test binds tells you what to fix. If debt yield binds, a lower rate or a longer amortization will not raise your proceeds, because debt yield ignores them. Only more NOI or a lower minimum will. If DSCR binds, a lower rate or a longer amortization help. If LTV binds, a higher appraisal or a higher allowed percentage helps. Working on the wrong constraint is a common way to spend weeks improving a number that does not matter.

The tests also interact with the requested loan. In the example the borrower asked for $4.2 million, and it fails on debt yield alone. The needed NOI for that loan at a 10.5% minimum is $441,000, which is $21,000 more than the property earns. That gives the borrower two ways to close the gap: a smaller loan, or $21,000 of additional NOI.

The three tests are not independent. Two identities connect them, and they are worth knowing because they turn a lender’s minimums into each other.

Use the first to see what a debt yield floor means for leverage. At a 7.0% cap rate, a 10.5% minimum debt yield allows a loan to value of at most 7.0% ÷ 10.5% = 66.7%. If the cap rate were 6.0%, it would be 57.1%. Lower cap rates, meaning higher values relative to income, mean that a debt yield floor cuts the loan to value harder, whatever the LTV limit says.

Use the second to see how the rate feeds in. A 10.5% debt yield with a 1.25 DSCR floor is consistent only if the mortgage constant is 8.4% or lower, because 1.25 × 8.4% = 10.5%. At a lower constant, the debt yield test is stricter than the DSCR test, and at a higher constant the DSCR test is stricter. That constant is what determines the crossover between the two, which the next section turns into a rate.

The table shows how much depends on a lender’s minimum. Moving from 8% to 12% cuts the largest loan by $1.75 million, and at 8% the loan to value would exceed most LTV limits, so the LTV test would bind instead. Asking a lender for its minimum debt yield early is worth more than shopping for a lower rate.

In an acquisition, the price does not move the loan

A buyer paying more for the same income gets no more debt. With $420,000 of NOI and a 10.5% floor, the debt yield loan is $4.0 million whether the price is $6.0 million or $6.5 million. At $6.5 million the LTV test would allow $4.55 million, so debt yield still binds, and the buyer’s equity rises from $2.0 million to $2.5 million, 38.5% of the price. Every extra dollar of price is a dollar of equity. It is one reason a seller’s asking price can be out of reach even when the LTV arithmetic seems to work.

Debt yield does not move with the interest rate, and the DSCR loan does. That means the binding test changes with the rate, and there is a point where it switches. At a 4% rate, DSCR would allow a $5.86 million loan and debt yield holds it at $4.0 million. As the rate rises, the DSCR loan falls, and once it drops below the debt yield loan, DSCR takes over.

On a 30-year amortization, the crossover is a rate of about 7.5%. Below it, debt yield sets the loan at $4.0 million, and the borrower’s proceeds do not improve however low the rate goes. Above it, every point of rate costs loan proceeds, roughly $184,000 for the step from 7.5% to 8.0% here. On an interest-only loan the crossover is 8.4%, which is the 10.5% minimum debt yield divided by the 1.25 DSCR floor.

The lesson runs both ways. In a low-rate market, debt yield is often the binding test, and cheap debt does not buy more of it. In a high-rate market, DSCR binds, and every increase in the rate lowers what the property can borrow. Knowing where you are relative to the crossover tells you whether to spend effort on the rate or on the income.

Every one of these calculations starts with NOI, and the lender’s NOI is not always yours. A lender underwrites the income it can verify, from leases and operating statements, and adjusts it. It may use trailing twelve months instead of a forecast, apply a minimum vacancy even to a full building, add a management fee even if you self-manage, and deduct a capital reserve. The result is often below the borrower’s number.

The difference is amplified by the minimum debt yield. At a 10.5% floor, each $10,000 of NOI is worth $95,238 of loan. If your NOI is $420,000 and the lender underwrites $400,000 after a management fee and reserves, the largest loan falls from $4,000,000 to $3,809,524, a loss of $190,476 from a $20,000 difference in the income. It is the reason to ask early which NOI the lender will use, and to reconcile the two before applying.

Income that is hard to count

Income from a lease that has not started, a rent increase not yet in place, or a stabilized projection for a building still leasing up is often excluded or discounted. A lender sizing a transitional property may lend on in-place income and offer a second, later advance if the income arrives. If your deal depends on stabilized NOI, find out whether the lender will use it, and on what conditions.

For a refinance, the largest loan is compared with what you owe. In the example the largest loan that passes all three tests is $4.0 million and the existing balance is $3.6 million. The difference, $400,000, is the cash the borrower could take out, before fees and costs.

Turn it around and the picture is less comfortable. If the existing balance were $4.3 million, the largest new loan would fall $300,000 short of paying it off, and the borrower would have to bring $300,000 of cash to the closing. This is the situation that catches owners who bought or refinanced at low rates, when the debt yield or DSCR test was easy. When the loan matures at a higher rate, or with a lower NOI, the new loan may not cover the old one.

Test a refinance early. Enter the maturing balance, the current NOI and the rate you expect, and see which test binds and whether the proceeds cover the payoff. If they do not, the options are to raise NOI, reduce the balance before maturity, bring in equity, or look for a lender with a lower minimum debt yield or a different structure.

Only two things raise a debt yield: more income, or less loan. Everything else, including the rate and the term, leaves it unchanged.

A caution about raising NOI by cutting costs. A lender adds back the costs it thinks a property really carries, such as maintenance and reserves, so a cut that does not last is not counted. And raising NOI by increasing rents helps only if the rents are supported by the leases. The most reliable improvement is the one that appears in the operating statements over several quarters.

What extra income does to the binding test

Raising NOI does more than lift the debt yield loan: it can change which test binds. Suppose the example property’s NOI rises by $30,000 to $450,000. The debt yield loan becomes $450,000 ÷ 0.105 = $4,285,714, and the DSCR loan rises to about $4.75 million. But the LTV test still allows only $4.2 million, so LTV now binds. The extra income bought $200,000 of loan and then ran into the next limit. Beyond that point only a higher value moves the loan, and the $30,000 of NOI would be better spent on the appraisal case than on more coverage.

Structure changes DSCR and leaves debt yield alone. Take the same $4.2 million loan at 6.5%. Amortized over 30 years, the payment is $318,562 a year and the DSCR is 1.32. Interest-only, the payment is $273,000, the mortgage constant is 6.5% and the DSCR is 1.54. The DSCR test on an interest-only loan would allow a loan of $5.17 million, and the debt yield test still caps it at $4.0 million.

This is why lenders reach for debt yield when structures get aggressive. A borrower can use interest-only periods and long amortizations to pass a DSCR test on a loan that leaves little income cushion. Debt yield does not see the structure, so it cannot be gamed that way. For the borrower, the practical point is that structure will not move the debt yield limit, and that a loan sized to a DSCR that depends on interest-only payments will face a higher payment, and a lower DSCR, when amortization starts.

Guides give minimum debt yields, and they do not agree. One table puts conduit lenders at 10% to 12%, agency multifamily lenders at 8% to 10%, life insurance companies at 9% to 11%, and bridge lenders at 7% to 9%. Another says most institutional lenders want 8% to 10%, with conduit loans at 9% to 10%. A third calls 10% the industry standard, with 8% possible for top-quality properties in major markets, and a fourth gives 9% to 11% for stabilized multifamily and 10% to 12% for value-add. I could not trace any of them to a primary source.

Treat them as a rough sense of the range and not as a rule. A lender’s minimum depends on the property type, the market, the borrower, the loan program and the state of the credit market when the loan is made. The only figure that matters for your deal is the one in your lender’s term sheet, and the calculator lets you enter it. The table on this page for minimums from 8% to 12% shows what each would mean for proceeds, so you can see how much depends on the number.

What to ask a lender before you apply

A short list saves weeks. Ask what minimum debt yield they apply and whether it differs for your property type. Ask which NOI they underwrite, trailing or stabilized, and what vacancy, management fee and reserves they assume. Ask at what rate they test DSCR and whether they stress it, what maximum LTV they use and on whose appraisal, and whether the loan is recourse. With those answers you can run all three tests yourself and know the largest loan before anyone quotes it.

See how the income carries the loan with the DSCR calculator, or what the deal returns to you with the cash on cash return calculator.