When it comes to real estate lending, understanding the concept of debt yield is crucial for both lenders and borrowers.

Debt yield is a financial metric used to evaluate the profitability and risk associated with a loan. It measures the annual net operating income of a property relative to the loan amount, expressed as a percentage. This metric helps us determine whether a loan is likely to perform well over time, making it a key component in our underwriting process. Whether you’re a seasoned investor or new to the real estate game, knowing how to assess debt yield can significantly impact your project’s success.

In this blog post, we’ll explore why debt yield is important, when it’s used, and how we determine it at our firm.

Why Debt Yield is Important:

Debt yield is a critical metric for private lending firms because it provides insight into the profitability and risk associated with a loan.

By evaluating the debt yield, lenders can assess whether a property will generate sufficient income to cover debt payments and provide a cushion for unforeseen expenses. It helps us make informed decisions about loan approval, terms, and pricing, ensuring that the investment aligns with our financial objectives and risk tolerance. Essentially, debt yield helps us maintain a healthy portfolio by identifying loans that are likely to perform well over time.

When Debt Yield is Used:

We use debt yield when underwriting loans for real estate projects, whether they involve commercial, residential, or mixed-use properties. It’s particularly useful for determining the financial viability of a project, especially when dealing with distressed assets or projects in emerging markets where traditional credit analysis might fall short.

By focusing on debt yield, we can evaluate the long-term sustainability of a loan, taking into account the property’s net operating income relative to the loan amount. This metric is used alongside other criteria to make sure that loans are profitable and have a high likelihood of repayment.

How We Determine Debt Yield:

When underwriting a loan, we primarily focus on achieving an annualized debt yield of 16-17% on performing loans. This metric is a key benchmark in our underwriting process.

To attain this target, we employ a combination of interest rates and points. For instance, a six-month loan might carry a 12% interest rate with 2 points, while a twelve-month loan could be structured with a 12% interest rate and 4 points.

It's important to note that our loan terms typically range from six to twelve months, with longer durations considered only for projects demonstrating substantial value. While market conditions ultimately dictate our pricing, our willingness to underwrite loans that others might decline allows us to maintain a consistent debt yield within our desired range.

Interested in learning more? Contact our team today and let’s talk about your specific project in Utah, Washington, or Hawaii and see if we can help.