| Detail | Explanation |
|---|---|
| Formula | Net operating income divided by loan amount |
| Maximum loan | Net operating income divided by the minimum debt yield |
| Not affected by | Interest rate, amortization, or cap rate |
| Common with | CMBS lenders, debt funds, and many balance-sheet lenders |
| Related tests | DSCR and loan-to-value |
How is debt yield calculated?
Divide underwritten net operating income by the full loan amount. To find the largest loan a lender will make, divide net operating income by the lender's minimum debt yield. The debt yield calculator runs both.
Debt yield = net operating income / loan amount
Worked example
In this hypothetical example, a property earns $650,000 of net operating income and carries a $6,500,000 loan. Debt yield is 10.00%. The table holds the loan fixed and changes only the interest rate on a 30-year amortization.
| Interest rate | Annual debt service | DSCR | Debt yield |
|---|---|---|---|
| 6.00% | $467,649 | 1.39x | 10.00% |
| 7.00% | $518,936 | 1.25x | 10.00% |
| 8.00% | $572,336 | 1.14x | 10.00% |
Why lenders use debt yield
The table shows the point. Coverage swings with the rate while debt yield stays put. When rates are low, DSCR can look comfortable on a large loan, and when cap rates are low, loan-to-value can look safe on an inflated value. Debt yield strips both effects out and measures only income against dollars lent.
That makes it a favored test for lenders who may need to hold or sell the loan in a stressed market, including CMBS lenders and debt funds. It is usually applied beside DSCR and loan-to-value, and whichever test produces the smallest loan controls.
What debt yield do lenders require?
Minimums are set by each lender and move with the credit cycle, property type, market, and business plan. Stabilized property with durable income generally qualifies at a lower minimum than transitional, specialized, or single-tenant assets. Capital Partners does not publish a typical figure because no primary public source sets one for private lenders.
In the hypothetical, a lender requiring 9.00% would allow up to $7,222,222 on the same $650,000 of income. Raising net operating income to $700,000 lifts debt yield on the $6,500,000 loan to 10.77% and the 9.00% maximum to $7,777,778.
How to raise proceeds when debt yield is the limit
To see which lenders' debt yield tests fit your property, submit your deal to Capital Partners.
- Increase net operating income through lease-up or expense reductions before refinancing
- Target lenders whose debt yield minimum fits the property type
- Add mezzanine debt or preferred equity behind a smaller senior loan
- Use a bridge loan underwritten to the business plan, then refinance after stabilization
Common questions
Is a debt yield of 8% good?
It depends on the lender, property, and market. A lower debt yield means more loan per dollar of income and less cushion for the lender. Some lenders accept that level on strong stabilized assets, while others require more on the same deal.
Does a lower interest rate improve debt yield?
No. Debt yield ignores the payment entirely. Only higher net operating income or a smaller loan raises it.
How is debt yield different from a cap rate?
Cap rate divides net operating income by property value. Debt yield divides it by the loan amount, so it describes the lender's exposure rather than the owner's.
Can debt yield and DSCR give different answers?
Yes. At low rates DSCR may allow a larger loan than debt yield, and at high rates the reverse is common. Lenders size to the lower of the 2.
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