What debt yield is
Debt yield = net operating income ÷ loan amount
It is the return a lender would earn on its loan if it took the property back on day one. A $240,000 NOI against a $2,500,000 loan is a 9.6% debt yield.
Why lenders use it
DSCR depends on the interest rate and amortization, so it can be improved by stretching the loan terms. LTV depends on an appraisal and on cap rates. Debt yield uses only income and the loan amount, which makes it hard to manipulate. CMBS lenders and many banks use a minimum of 8–10%, alongside LTV and DSCR. If debt yield is your binding test, a lender that doesn’t use it, such as many private, bridge and some agency lenders, may offer a bigger loan.