How to use the debt yield and debt constant calculator
- Enter the yearly net operating income of the property and the loan amount.
- Enter the interest rate and the amortization in years for the monthly payment.
- Enter a debt yield you want to test, such as a lender's stated minimum.
- Read the debt yield, the debt constant, the coverage and the largest loan that meets your debt yield.
Formula
debt yield = net operating income / loan
monthly payment = loan x i / (1 - (1 + i)^-n), i = rate / 12, n = years x 12
debt constant = 12 x monthly payment / loan
largest loan at a target debt yield = net operating income / target debt yield
Debt yield ignores the rate and the amortization, which is why lenders like it: two loans on the same income and balance have the same debt yield whatever their terms. The debt constant shows the yearly cost of the loan as a share of the balance.
A $1,000,000 loan on $100,000 of income
Net operating income of $100,000 against a $1,000,000 loan gives a debt yield of 10.00%. At 6% over 30 years the monthly payment is $5,995.51, so yearly debt service is $71,946.12 and the debt constant is 7.19%.
Coverage is 100,000 / 71,946.12 = 1.39x. At a debt yield of 10%, the largest loan the income supports is 100,000 / 0.10 = $1,000,000, and a loan of that size needs exactly $100,000 of income. With a 0% rate over 10 years the payment would be $8,333.33.
Debt yield and coverage
Debt service coverage depends on the rate and the amortization, so it moves when rates move. Debt yield does not, which makes it a steadier measure of how much risk a loan carries for the lender. A lender often looks at both. The DSCR Calculator works from coverage, and the Cap Rate Calculator links income to the price.
For the full repayment schedule behind the payment, see the Mortgage Calculator. To value a property from rent, see the Gross Rent Multiplier Calculator.
Using the target
If a lender asks for a minimum debt yield, the largest loan is the income divided by that figure. If the loan you want is larger, the other lever is more income, and the tool also shows the income a loan of your size needs at the target.
Assumptions and limits
- Net operating income is a yearly figure after operating expenses and before debt service.
- The loan is fully amortizing with level monthly payments. Interest-only periods and balloon payments are not modeled.
- Fees, reserves and prepayment terms are not included.
- Lenders set their own minimums; use their figures for decisions.
- This is arithmetic, not lending advice.
Frequently asked questions
What is a debt constant?
It is the yearly payments on a loan as a share of the loan amount. A higher rate or a shorter amortization raises it.
Is debt yield the same as cap rate?
No. Debt yield divides income by the loan, and the cap rate divides income by the property value or price.
Why does debt yield not depend on the interest rate?
It only compares income with the balance. That is why it is used as a check that does not change when rates do.
What if the loan is interest-only?
The debt yield stays the same. The debt constant and coverage would use interest only, which this tool does not model.