The debt yield is a metric used by lenders to determine the risk of a loan and how much they would be able to recover if the loan defaults expressed as a percentage. This is one of the key metrics lenders use in determining how much they are willing to lend to projects.
Debt Yield Formula
Debt Yield = Net Operating Income / Loan Amount
Debt Yield Calculation
In order to calculate the debt yield ratio, only two variables are required, the NOI and the loan amount. This makes the debt yield ratio a much more static measure in evaluating the risk associated with a loan compared to other leverage risk metrics like LTV and DSCR. This is since the debt yield metric doesn’t factor in changing interest rates or an extensive amortization period in its calculation.
What is a Good Debt Yield Ratio?
Usually, a good debt yield ratio is thought to be at least a 10% but varies depends on the overall risk of the project and the property type. A lower debt yield ratio results in lower leverage, while a higher debt yield ratio results in higher leverage. The debt yield formula can be rearranged to instead calculate the total loan amount a lender might be comfortable issuing.
Loan Amount = Net Operating Income/ Debt Yield
Example: If a lender requires a debt yield of at least 10%, a property with a NOI of $250,000 would only be able to receive a loan amount of $2.5M from that lender.
Loan Amount= $250,000 / 10%
Loan Amount = $2,500,000
About the Author
Brittany Martin is TSM’s Vice President who has developed real estate financial models for an extensive range of property types. She specializes in hotel, land, and storage models. Please reach out to her if you have any questions about Debt Yield Ratio or if she can help you with your modeling needs.
