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What Is a Debt Yield?
An important metric taken into consideration for the financing of an apartment property purchase is the property’s debt yield. The debt yield of a property is considered to be one of the most important metrics to lenders for determining the risk of an investment, as it helps them to understand how long it would take for them to recoup their investment in the event of having to take possession of a property after a loan default.
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Calculating Debt Yield
To determine a property’s debt yield, you take the property’s net operating income (NOI) and divide it by the total loan amount. The majority of apartment financing options available require a debt yield minimum in order to mitigate risk. This means it’s technically possible to calculate a potential maximum loan amount for any such financial vehicle, given you know the annual income of the property.
For example, using an example NOI of $500,000, for a loan with a minimum debt yield requirement of 15%, a borrower would be able to take a loan out of up to $3.3 million (as long as that amount was consistent with other factors, like LTV and DSCR).
$500,000 ÷ 15% = $3,333,333