A Deal That Passes DSCR and Fails Debt Yield, and Why Lenders Care

Debt yield is a property's net operating income (NOI) divided by the total loan amount, it measures how much income a property generates relative to the debt against it, independent of interest rate, loan term, or cap rate. Lenders adopted it after the 2008 crash as a backstop metric that can't be manipulated by favorable financing assumptions.

Here's why it matters in practice, not just in theory.

The Deal That Almost Closed

12-unit apartment building in Indianapolis. Listed at $1,400,000. Seller's pro forma shows $163,000 NOI. You negotiate to $1,375,000 and apply for a $1,100,000 loan (80% LTV).

Your loan officer runs DSCR first.

At 6.5% on a 30-year amortization, annual debt service is $83,400. DSCR = $163,000 / $83,400 = 1.95x. Phenomenal. Lenders want 1.25x minimum. You're nearly double that. Green light, right?

Then the underwriter checks debt yield.

Debt yield = $163,000 / $1,100,000 = 14.8%. Also strong. Above the 10% minimum. No issues.

But here's where it falls apart. The underwriter doesn't use the seller's pro forma. They pull trailing 12-month actuals, adjust vacancy from the seller's 3% to a realistic 6%, add property management at 8% even though you plan to self-manage, and normalize insurance. The adjusted NOI: $103,935.

New debt yield: $103,935 / $1,100,000 = 9.4%.

New DSCR: $103,935 / $83,400 = 1.25x.

Both metrics just went from comfortable to borderline. The CMBS lender you were working with requires 10% minimum debt yield. They won't fund at $1,100,000. Your max loan at 10% debt yield: $103,935 / 0.10 = $1,039,350: roughly $60,000 less than you applied for.

That $60,000 gap comes out of your pocket as additional equity. Or you renegotiate the purchase price. Or you find a lender with a lower threshold.

This is what debt yield does. It catches the gap between what a seller says a property earns and what a lender believes it earns, and it sizes your loan accordingly.

The Formula

Debt Yield = (Net Operating Income / Loan Amount) x 100

A 12% debt yield means the property generates 12 cents of NOI for every dollar of debt. If the borrower defaults, the lender could theoretically recover their principal in about 8.3 years from property income alone (100 / 12 = 8.3 years). That's the lender's question: "If I have to take this building back, how long does the income stream take to make me whole?"

Why Debt Yield Exists (and Why DSCR Alone Isn't Enough)

DSCR depends on interest rate. The same property shows 1.40x DSCR at 5% and 1.10x DSCR at 7%. The property didn't change. Only the financing terms did.

Debt yield strips financing out entirely. It answers one question: how does the property's income compare to the loan amount?

After 2008, lenders watched properties with strong DSCRs go underwater when values collapsed. A 1.3x DSCR meant nothing when the property could only sell for 60% of the loan balance. Debt yield emerged as the metric that measures lender risk regardless of market conditions, interest rates, or cap rate assumptions. This is why CMBS lenders and life insurance companies now use it as a primary loan-sizing constraint, not a secondary check.

Lender Minimums

Below 8%, most institutional lenders walk away. You're in hard money territory, or you're putting in significantly more equity.

How All Three Metrics Size Your Loan

LTV, DSCR, and debt yield work together. Your loan is sized by whichever constraint bites first.

$2,000,000 property, $150,000 NOI, 7% rate, 30-year amort:

All three align near $1,500,000. Clean deal.

Now drop NOI to $130,000:

LTV says $1,500,000. But debt yield and DSCR both cap you at ~$1,300,000. That $20,000 NOI shortfall costs you $200,000 in loan proceeds. This is why every dollar of NOI matters in commercial deals, it directly moves your borrowing capacity.

Operator calculates NOI from live market rent data. When you're underwriting a deal, you need accurate income projections, not the seller's optimistic pro forma. $25/mo.

Improving Debt Yield on a Marginal Deal

Three levers. Same three levers as always.

Increase NOI. Raise rents to market using a comparable market analysis (the most common source of "hidden" NOI, we've seen Operator users discover $50-150/month gaps on individual units that nobody noticed). Reduce vacancy. Add ancillary income: laundry, parking, storage, pet fees. Cut operating expenses. A $10,000 NOI increase on a $1,100,000 loan improves debt yield by 0.91 percentage points. That can be the difference between "approved" and "declined."

Reduce the loan amount. More equity = lower loan = higher debt yield on the same NOI. If you're 0.5% short of the lender's threshold, the math often works out to $50,000-100,000 in additional equity. Painful but straightforward.

Negotiate purchase price. Lower price → lower loan (at same LTV) → higher debt yield. In deals where debt yield is the binding constraint, this is your leverage with the seller. "Your building doesn't support the debt at your asking price" is a legitimate negotiating position.

Debt Yield Ranges and What They Mean

Every percentage point matters. A property with 11% debt yield gets 3-4 competing term sheets. The same property at 9% gets one, maybe two. At 8%, you're making phone calls.

Does Debt Yield Matter for Small Investors?

Debt yield is primarily a commercial lending metric, 5+ unit buildings, retail, office, industrial. Residential lenders (Fannie, Freddie, conventional banks) focus on DSCR and LTV for 1-4 unit investment properties.

But it still matters, even at smaller scale.

Some DSCR loan programs for 1-4 unit properties now reference debt yield minimums alongside DSCR requirements, especially at higher loan amounts. And even when your residential lender doesn't quote a debt yield number, they're implicitly asking the same question: does this property's income justify the loan I'm extending?

More practically: when you jump from 4 units to 5, you move from residential to commercial lending overnight. Suddenly debt yield, amortization constraints, and reserve requirements all change. Understanding the metric before you cross that threshold saves you from the surprise of a $200,000 equity gap at the closing table.

It's also a useful personal screening metric. Even on a duplex, calculating debt yield tells you how much income cushion exists relative to your mortgage. A 15% debt yield on a residential property means robust coverage. An 8% debt yield means you're running thin and one rent increase from your lender's comfort zone.

Whether you own 2 units or 20, Operator tracks NOI, DSCR, and portfolio-level performance against live market data. Know your numbers before your lender asks. $25/mo.

Mistakes That Kill Debt Yield Numbers

Using pro forma NOI. Lenders underwrite on trailing 12-month actuals, not projections. A seller's pro forma showing $150,000 NOI might include above-market rents, zero vacancy, and excluded expenses. The T-12 might show $120,000. That's a 2+ point debt yield swing, enough to kill a deal.

Including mortgage payments in NOI. NOI equals revenue minus operating expenses. Mortgage payments are not operating expenses. This is the most common calculation error, and it produces an artificially low debt yield that makes you think a deal is worse than it is. (Or, worse: including mortgage in "expenses" on one deal and not another, making comparisons meaningless.)

Ignoring lender adjustments. Lenders don't use seller numbers at face value. They normalize management to market rate (even if you self-manage), adjust vacancy upward, and add reserves. Your debt yield on lender-adjusted numbers will almost always be 1-3 points lower than on seller-provided numbers. Run the adjusted version yourself before you apply, better to know now than at the underwriting desk.

FAQ

What is a good debt yield for commercial real estate?

9-10% passes most lenders. 10-11% gets you competitive terms from life insurance companies. 12%+ is strong and will attract multiple offers. Below 8%, institutional lenders decline.

How do you calculate debt yield?

NOI divided by loan amount, times 100. A property with $100,000 NOI and an $800,000 loan has a 12.5% debt yield. Use trailing 12-month actual income, not pro forma projections. NOI excludes mortgage payments, depreciation, and capital expenditures. For the full NOI breakdown, see our cash flow analysis guide.

What is the difference between debt yield and DSCR?

DSCR compares income to annual debt payments and changes with interest rate, the same property shows different DSCRs at 5% versus 7%. Debt yield compares income to total loan amount and stays constant regardless of rate or terms. Lenders use both: DSCR checks whether you can make monthly payments, debt yield checks whether the loan amount is justified by the income stream. After 2008, debt yield became the metric lenders trust most because it can't be gamed by favorable financing assumptions.

Why did debt yield become important after 2008?

Before 2008, lenders relied on LTV and DSCR. Both metrics could look strong on properties that were fundamentally overleveraged, low interest rates produced flattering DSCRs, and rising appraisals produced flattering LTVs. When both collapsed, lenders needed a metric that measured income against debt independent of market conditions. Debt yield was the answer.

How does Operator help with debt yield analysis?

Operator calculates NOI from live market rent data rather than seller pro formas. When your rents are below market, Operator shows the exact gap, which translates directly to suppressed NOI and lower debt yield. Fixing below-market rents before approaching a lender can improve debt yield by 1-2 percentage points. $25/month.