Executive Summary: Banks have added a new ratio when deciding how to size your investment property loan – the Debt Yield Ratio.
I’ll make this super easy – think of it as the loan cap rate and you can’t go wrong.
For review, the traditional cap rate derived market value is calculated by dividing the Net Operating Income by the Cap Rate:
- Market Value = NOI / Cap Rate
The DYR is calculated by dividing the NOI by the Debt Principle:
- DYR = NOI / Debt
In practice, your bank loan officer will apply a pre defined DYR obtained by underwriting policy for the type of property and market. They then will divide the NOI by the DYR to obtain the maximum loan size for your project
- Debt = NOI / DYR
For additional reading and some numerical examples, visit:
Making Sense of Debt Yield Ratios.
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