What debt yield measures
Debt yield is net operating income divided by the loan amount. It tells a lender the annual return it would earn on the loan balance if it took the property back on day 1. Because it ignores the interest rate, amortization, and cap rate, it cannot be improved with a lower rate or a longer amortization.
Debt yield = net operating income / loan amount. Maximum loan = net operating income / minimum debt yield.
Worked example
A property with $650,000 of net operating income and a $6,500,000 loan has a debt yield of 10.00%. At a 9.0% minimum debt yield, the largest loan the same income supports is $7,222,222.
Why lenders use it
Low interest rates and low cap rates can make DSCR and loan-to-value look safe on a loan that carries real risk. Debt yield strips those out and looks only at income against the loan. CMBS lenders and many balance-sheet lenders apply it beside loan-to-value and DSCR, and it often becomes the binding constraint when rates are low or values are high.
Common questions
What is a good debt yield?
Minimum debt yields vary by lender, property type, market, and loan program. Higher-risk property and transitional business plans usually require a higher debt yield.
How is debt yield different from DSCR?
DSCR uses the loan payment, so it changes with the rate and amortization. Debt yield uses only the loan amount, so rate and amortization do not affect it.
How do I increase the loan amount under a debt yield test?
Only higher net operating income or a lender with a lower minimum debt yield raises proceeds. A lower rate or longer amortization does not help.