Debt yield is a measure used by lenders and investors to evaluate the potential risk and return of a real estate investment. It is used to determine the amount of debt that a property can support, and to assess the stability of the property's cash flows. The debt yield calculation helps determine the maximum loan amount that a lender will extend for a particular property. The debt yield calculation is determined by dividing the net operating income (NOI) of a property by the loan amount requested. The NOI is the amount of money the property generates from rent and other income sources, minus all operating expenses, such as property taxes, insurance, maintenance, and utilities. The formula for calculating debt yield is: Debt Yield = Net Operating Income / Loan Amount For example, if a property generates $100,000 in annual NOI and a lender is considering a loan amount of $1 million, the debt yield would be 10% (100,000 / 1,000,000). Debt yield is an important metric for both lenders and investors because it indicates the property's ability to repay the loan and generate income for the investor. A higher debt yield suggests that the property generates enough income to support the loan, making it a more attractive investment opportunity. On the other hand, a low debt yield indicates that the property is highly leveraged and may have difficulty repaying the loan. In general, lenders prefer a debt yield of between 8% and 12%. However, the desired debt yield can vary depending on the lender's risk tolerance and the specific property being considered. For example, a lender may require a higher debt yield for a property with a shorter lease term or lower rent rolls, while a lower debt yield may be acceptable for a well-established property with a long-term lease. Debt yield is an important calculation that helps determine the maximum loan amount a lender will extend for a real estate investment. It is used to assess the potential risk and return of the investment, and to determine the property's ability to repay the loan and generate income for the investor. Meet our team of experienced commercial real estate financial advisors.