Debt yield asks a blunt question on the lender’s behalf: if we foreclosed tomorrow and ran this building ourselves, what would it earn on the money we lent?
Net operating income divided by the loan amount. That is the whole formula, and what it leaves out is the point of it.
How do you calculate debt yield?
Take the fourplex the multifamily calculator opens on: $499,000 for four units at $1,575 a month, with 20% down and a $399,200 loan. Its net operating income is $42,056 a year.
$42,056 divided by $399,200 is 10.5%. That is the debt yield.
Net operating income, or NOI, is what the building earns after every running cost and before any lender is paid. It is the same figure whoever owns the building, which is exactly why a lender starts there.
| A year | |
|---|---|
| Rent, four units at $1,575 | $75,600 |
| Vacancy (6%) | −$4,536 |
| Property taxes | −$6,400 |
| Insurance | −$3,600 |
| Common-area water, trash and lighting | −$5,400 |
| Maintenance and big replacements (10% of rent) | −$7,560 |
| Management (8% of rent) | −$6,048 |
| Net operating income (NOI) | $42,056 |
These are example figures, not a forecast for any market.
The mortgage is not on that list, and neither is the interest rate or the length of the loan. Where $33,000 of rent becomes $21,010 of NOI runs the same lines on a single house.
What does a debt yield minimum do to the loan?
Run the formula backwards. NOI divided by the minimum the lender wants is the largest loan that clears it.
| Largest loan | Share of the $499,000 price | |
|---|---|---|
| A 9% minimum | $467,289 | 94% |
| A 10% minimum | $420,560 | 84% |
| An 11% minimum | $382,327 | 77% |
| A 12% minimum | $350,467 | 70% |
The $399,200 loan in the example clears a 10% minimum with room to spare. An 11% minimum caps it at $382,327, which is $16,873 less, so you would bring that much more cash to closing or negotiate the price down. A 12% minimum takes $48,733 off the loan.
Read the right-hand column and something else shows up. A debt yield minimum sets a loan-to-value ceiling without anyone mentioning loan-to-value, and the ceiling moves with the building’s income rather than with an appraisal. On a building bought at a low cap rate, a debt yield test bites long before an 80% loan-to-value test does.
Debt yield vs DSCR: what does each one see?
Debt coverage, or DSCR, divides the same NOI by the annual loan payment instead of by the loan balance. That one change lets the rate and the term into the answer.
| Loan payments a year | DSCR | Debt yield | |
|---|---|---|---|
| At 6% | $28,721 | 1.46 | 10.5% |
| At 7% | $31,871 | 1.32 | 10.5% |
| At 8% | $35,150 | 1.20 | 10.5% |
| At 9% | $38,545 | 1.09 | 10.5% |
Three points of rate move the DSCR from 1.46 to 1.09, which is the difference between a loan most lenders would write and one many would not. The debt yield does not move at all, because the rate was never in it.
Stretching the term does the same thing in reverse. The same loan over twenty years instead of thirty pays $37,140 a year and covers at 1.13, with the debt yield still 10.5%. What a good DSCR is covers how differently lenders count the income side of that ratio.
Why would a lender use a measure that ignores the rate?
Because a soft rate and a long term can make a weak building look safe.
DSCR is a payment test, and a payment can be engineered. Interest-only for three years, forty-year amortization, or a rate bought down with points all raise the DSCR without adding a dollar of income to the building. Debt yield cannot be moved that way. The only way to raise it is to raise NOI or borrow less.
It also survives the loan going wrong. If the borrower stops paying and the lender ends up owning a $499,000 building with a $399,200 balance, the payment schedule is gone and what remains is $42,056 of income against $399,200 of exposure. A 10.5% return on a foreclosed asset is the thing the test was measuring all along.
There is no published standard for what counts as enough on a two-to-four-unit building, so treat any figure you are quoted as that lender’s own policy and ask what it is. The useful habit is knowing your number before the call.
How do you work out your own?
Two numbers and one division.
- NOI, from the rents you have verified. Gross rent, less vacancy, less taxes, insurance, utilities the building pays, maintenance, reserves and management. No mortgage.
- The loan amount you are asking for, not the price and not your equity.
Divide the first by the second. Then do it again with the loan you would need if the appraisal came in 5% light, because that is the version the lender will be looking at.
Run both through the multifamily calculator, which gives you the NOI line and the loan amount on the same screen, and divide. If the debt yield is thin, the fix is on the income side: the fourplex example shows what one empty unit does to NOI, and negative leverage shows what happens when you borrow against income that was never there.