Debt Yield

Debt yield shows the return a lender would earn on its loan if it had to take over the property, based on the property’s current income. It is a simple measure of how much income supports the loan.

For example, a property with net operating income of 650,000 and a loan of 8,000,000 has a debt yield of 650,000 divided by 8,000,000, or about 8.1%.

Unlike loan-to-value and the debt service coverage ratio, debt yield does not depend on the property’s valuation, the interest rate or the length of the loan. This makes it harder to inflate through optimistic valuations or low interest rates, which is why lenders began using it more widely after the 2008 financial crisis.

Lenders often set a minimum debt yield, such as 8% to 10%, depending on the property type and market conditions. A higher debt yield means less risk for the lender. Debt yield is used alongside other measures, such as loan-to-value and debt service coverage, when deciding how much to lend.