Cash & working capital
Debt Yield
Formula reviewed by Tahir Asif, CMA
A lender’s ratio of a property’s net operating income to the loan amount: the yield the lender would earn on the loan if it took the property back.
Debt yield equals net operating income divided by the loan amount. A property with $420,000 of NOI and a $4.0 million loan has a debt yield of 10.5%. Unlike DSCR, it does not depend on the interest rate, the term or the amortization, so a lender can size a loan on it without those assumptions.
Lenders use debt yield with DSCR and LTV. The smallest loan allowed by the three tests is the one that binds. The metrics are linked: debt yield equals the cap rate divided by LTV, and equals DSCR multiplied by the mortgage constant.
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