Debt Yield v. DSCR

Debt yield and debt service coverage ratio (DSCR) are two metrics that are commonly used by lenders to evaluate the creditworthiness of a borrower. While both metrics provide information about a borrower's ability to repay a loan, they are calculated differently and provide different types of information.

Debt yield is a measure of the return on investment that a lender can expect from a loan. It is calculated by dividing the annual cash flow from a property by the amount of the loan. For example, if a property has an annual cash flow of $100,000 and a loan of $1 million, the debt yield would be 10% ($100,000 / $1 million). A higher debt yield indicates that the property is generating more income relative to the size of the loan, which may make it a safer investment for the lender.

Debt service coverage ratio (DSCR) is a measure of a borrower's ability to repay a loan. It is calculated by dividing the property's net operating income by the total annual debt service (i.e. the annual loan payments). For example, if a property has a net operating income of $100,000 and annual debt service of $80,000, the DSCR would be 1.25 ($100,000 / $80,000). A DSCR of 1.25 or higher indicates that the borrower has enough income to cover their loan payments, while a DSCR below 1.25 may indicate that the borrower may have difficulty repaying the loan.

Overall, debt yield and DSCR are two important metrics that lenders use to evaluate the creditworthiness of a borrower and the potential risk of a loan. While both metrics provide information about a borrower's ability to repay a loan, they are calculated differently and provide different types of information.