Debt Yield vs Cap Rate: The Lender Metric and the Investor Metric

Debt yield and cap rate look similar because both divide NOI by something. The difference is the denominator.

Cap Rate = NOI / Property Value
Debt Yield = NOI / Loan Amount

Cap rate is an investor and valuation metric. Debt yield is a lender and credit metric. They answer different questions.

Cap rate prices the asset

Cap rate tells you the unlevered return implied by the property's income and value. If a property has $800,000 of NOI and sells for $10,000,000, the cap rate is 8.00%.

Investors use cap rates to compare pricing, market risk, asset quality, and expected return before financing.

Debt yield sizes the loan

Debt yield tells the lender how much income supports the loan balance. If the same $800,000 NOI property carries an $8,000,000 loan, the debt yield is 10.00%.

Lenders use debt yield to judge whether the loan is reasonable even if the appraisal, rate, or amortization changes.

Why the ratios can diverge

A property can have a strong cap rate and a weak debt yield if the borrower asks for too much debt. It can also have a low cap rate and an acceptable debt yield if the loan is conservative.

For example, a $1,000,000 NOI property valued at $20,000,000 has a 5.00% cap rate. If the loan is $10,000,000, debt yield is 10.00%. The asset may look richly priced, but the loan can still be well protected.

The bridge between them is leverage

Cap rate and debt yield connect through leverage. If loan amount equals property value, cap rate and debt yield are the same. In real lending, the loan is usually below value, so debt yield is usually higher than cap rate.

At 75% LTV, debt yield is roughly cap rate divided by 75%. A 6.00% cap rate at 75% LTV implies about an 8.00% debt yield.

How to use both in underwriting

Use cap rate to understand valuation. Use debt yield to understand credit protection. Then check DSCR and LTV to see whether payment coverage or collateral leverage creates a tighter limit.

The cap rate calculator shows cap rate, implied values, LTV, and debt yield when you include a loan amount. To size the loan itself, use the debt yield calculator or the full CRE loan sizing calculator.

Cap rate tells you how the market prices the income. Debt yield tells you how much of that income protects the lender.