Definition: The debt yield ratio is a profitability measurement that calculates the amount the rate of return on a property by dividing the net operating income by the mortgage amount.
What Does Debt Yield Mean?
What is the definition of debt yield? Lenders use this ratio to determine the risk involved in loaning money to a property owner by evaluating the percentage return the lender can receive if the property owner defaults on the loan and the lender forecloses the property.
In other words, it measures how much the lender can make from a property if it forecloses on the owner. As the rate increases, the loan becomes less risky for the lender. The opposite is true as the rate decreases. This only makes sense because if the lender has a potential to make more money from a foreclosure, the loan become less risky for the lender to make. An ideal yield is around 10% and is commonly accepted as the minimal rate.
This ratio is popular when evaluating real estate and property but can be used to value the yield of any project or asset that earns income. You can use the figure to accurately illustrate how much of the loan is being advanced compared to the income generated by the debtor. It values both leverage and risk at the same time and it can be used over the life of loan while remaining consistent.
Let’s look at an example.
Example
Troy has a very successful smoothie store and he wants to get a loan based on the amount his business brings in each year. Currently, his shop brings in $350,000 per year and he is asking for a loan amount of $2,565,000. When he made the offer, the bank underwriter said she would need to calculate the yield before making a decision.
To do this she simply divided 350,000 by 2,565,000, which gave her a yield of 13.65 percent. This is well above their standard percent of 10 percent.
Summary Definition
Define Debt Yield: Debt yield ratio means the rate that a piece of property will make the lender if it is foreclosed on.
