Cap Rate vs Debt Yield: How Lenders Size a Loan

Cap rate vs debt yield is a question about the denominator. Cap rate divides net operating income by the property’s value, and debt yield divides the same NOI by the loan amount. Cap rate measures what the asset earns. Debt yield measures what the lender’s money would earn if they ever had to take the property back.

So a lender can quote a 7.7% debt yield on a deal you priced at a 5.78% cap rate and nobody is wrong. The income is identical. Only the number underneath it changed.

If you also want the pricing side of the story, the guide on how interest rates affect cap rates covers it.

What debt yield is: NOI divided by the loan amount

Debt yield is annual NOI divided by the loan amount. A property with $28,892 of NOI and a $375,000 loan request has a debt yield of 7.7%.

Read it as the lender’s day-one cap rate on their own money. If the borrower stops paying and the lender ends up holding the keys, debt yield is the return the income throws off against the balance they are owed, before selling costs.

It contains no interest rate, no amortization term and no appraised value. That is the whole point of it.

Cap rate vs debt yield: value-based against loan-based

Question	Cap rate	Debt yield
Formula	NOI / value	NOI / loan amount
Whose return	the buyer’s	the lender’s
Moves when rates move	yes, over time	no
Moves when the appraisal moves	yes	no
Main job	pricing the asset	sizing the loan

Two shortcuts fall out of that. Debt yield equals cap rate divided by LTV, so at 75% loan-to-value a 5.78% cap rate is a 7.7% debt yield. Run it the other way and your maximum LTV equals the cap rate divided by the lender’s debt yield floor.

How lenders stack debt yield next to DSCR and LTV

Lenders run three tests and lend the smallest answer.

1. LTV caps the loan at a share of appraised value, usually 65% to 80% depending on the property type and the lender.
2. DSCR caps it at the payment the NOI can cover, commonly at 1.20x to 1.30x on stabilized income property.
3. Debt yield caps it at NOI divided by the lender’s floor.

The DSCR test rides on the mortgage constant, which is the annual payment as a percentage of the balance. Low rates and long amortization shrink that constant and let DSCR support a much larger loan. The table of loan constants by rate and term shows how far it moves.

Worked example: one deal through all three loan tests

Take the standard example on this site. A $500,000 house rents for $4,000 a month, so $48,000 gross. Allow 5% vacancy and collections fall to $45,600. Subtract $6,000 of property tax, $2,500 of insurance and 18% of collected income, or $8,208, for maintenance, reserves and management. NOI is $28,892 and the cap rate is 5.78%.

Now ask for a loan at 7.25% on a 30-year schedule. The constant is about 8.19% of the balance each year.

Test	Standard	Maximum loan	Share of value
LTV	75%	$375,000	75.0%
DSCR	1.25x	about $282,000	56.4%
Debt yield	10%	$288,920	57.8%

The DSCR test binds, so the offer is roughly $282,000. Debt yield sits just behind it. LTV never enters the conversation, which catches out borrowers who shopped the deal on LTV alone.

The DSCR arithmetic: $28,892 divided by 1.25 leaves $23,114 a year of allowable debt service, and $23,114 divided by the 8.19% constant is about $282,000.

What a 10% debt yield floor does to your maximum loan

Divide NOI by the floor. That is the entire calculation.

Debt yield floor	Maximum loan	Share of a $500,000 value
9%	$321,000	64.2%
10%	$288,920	57.8%
11%	$262,700	52.5%
12%	$240,800	48.2%

Floors are lender policy rather than a market rate. They commonly land between about 8% and 12% on stabilized income property, and they run higher where income is less predictable, so get the number in writing before you underwrite anything.

The simple tab works the same way. With $30,000 of NOI on a $500,000 property, the cap rate is 6% and a 10% floor caps the loan at $300,000, or 60% of value.

A floor that bites changes your cash, not just your paperwork. At $288,920 of debt you are putting in $211,080 plus closing costs, not the $125,000 a 75% loan implied. The consolation is a smaller loan and a lower break-even point, so the property survives a worse year.

Why debt yield held up when cap rates compressed

When rates fell and values rose, the other two tests loosened at the same time. Cheap debt shrank the constant, so DSCR approved more borrowing against unchanged income. Rising appraisals lifted the dollar ceiling a fixed LTV produced. Debt yield did not move, because neither rates nor appraisals appear in it.

Same deal, three rate worlds, and the same $28,892 of NOI:

• At 5.5% over 30 years the constant is about 6.81%, so 1.25x DSCR supports about $339,000. The 10% debt yield floor at $288,920 becomes the binding test.
• At 7.25% the constant is about 8.19% and DSCR allows about $282,000, which binds instead.
• At 8% the constant is about 8.81% and DSCR drops to about $262,500.

The debt yield answer is $288,920 in all three. That stability is why it became a standard test in commercial mortgage-backed security lending after the 2008 crisis, when loans sized on generous DSCR math stopped covering their balances. It is also the test to watch in a market where cap rates are compressing instead of going through cap rate expansion, because falling cap rates pull debt yield down with them at any given LTV.

Run the numbers on your own deal

The cap rate calculator on the home page turns rent, vacancy, taxes, insurance and an expense percentage into NOI and a cap rate. Take the NOI it gives you and divide by the loan you plan to request, and you know your debt yield before the lender says it out loud. Then divide that NOI by the floor they quote to see the loan they will actually fund.