Debt yield is net operating income divided by the loan amount. It measures what the lender would earn if it took the property back tomorrow, and because it ignores the interest rate and the amortization schedule, it is the one loan test that cannot be improved by restructuring the loan.
Debt yield=NOILoan amount
- NOI
- The property's net operating income, on the lender's underwriting rather than the seller's page.
- Loan amount
- The proposed loan, before any rate or amortization is applied to it.
- It cannot be engineered. Stretching amortization or buying down the rate improves coverage and leaves debt yield exactly where it was.
- It is the test that binds in a low-rate market, when coverage is easy and lenders still need a floor under proceeds.
- Whose NOI is used decides everything. A lender's underwritten NOI is usually below the seller's, sometimes well below.
- Ask for it early. It is the fastest way to know what a property will actually finance before an application is written.
The same $1,012,000 loan, against a lender that will not go below a 10% debt yield.
The rate did not change and neither did the schedule. A single ratio took $52,300 off the table, and the buyer funds it in cash.
Related terms
All termsDSCR (Debt Service Coverage Ratio)
The debt service coverage ratio is net operating income divided by the annual loan payment.
FinanceLTV (Loan-to-Value)
Loan-to-value is the loan amount divided by the property's value.
FinanceLoan Constant
The loan constant is annual debt service divided by the loan amount, expressed as a percentage.
Terms arrive with the writing.
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