Debt Yield vs Cap Rate: Formula, Relationship & Calculator

Two hypothetical properties each generate $1 million of annual NOI and are valued at $20 million: both have a 5% cap rate. A $10 million loan produces a 10% debt yield; a $15 million loan produces 6.67%. The property income is unchanged, but the larger loan has less income supporting each dollar borrowed.

Debt yield vs cap rate at a glance

Use DSCR to evaluate debt payments and cash-on-cash return for a simplified equity cash yield. Keep the income period and definition consistent across comparisons.

Interactive cap rate and debt yield calculator

Enter annual NOI and property value. Add a loan amount to display debt yield and LTV alongside cap rate. For the example above, use $1,000,000, $20,000,000 and $15,000,000 respectively.

Cap rate describes pricing relative to income

Cap Rate = Annual NOI / Property Value

A property with $800,000 NOI and a $10 million price has an 8% cap rate. That is a one-period income-to-price ratio. It excludes financing, acquisition and sale costs, capital work and changes in value.

A lower cap rate means a higher price for the same NOI. It can reflect expectations about income growth or risk, but does not establish that a property is safer. Compare current sales, leases, location and income definitions rather than treating fixed percentage bands as market-wide benchmarks. See the cap rate guide.

Debt yield describes income relative to debt

Debt Yield = Annual Underwritten Income / Selected Loan Balance

The same $800,000 income divided by an $8 million loan gives 10%. With income and balance fixed, changing the rate, amortization or appraisal does not change debt yield. Those changes can still alter DSCR, LTV and financing feasibility.

Debt yield is an income cushion measure. It does not predict a lender's foreclosure return: collection costs, time, capital expenditure and changes in income or sale value can affect recovery. Confirm whether the lender requires operating NOI or adjusted NCF, and whether its denominator is the funded balance, commitment or a projected exit balance. To review line-by-line lender haircut adjustments, formulas, and worked examples, see our complete guide on how to calculate debt yield. In conduit financing where debt yield floors dictate maximum proceeds, consult current CMBS debt yield requirements.

Deriving debt yield = cap rate ÷ LTV

Using the same positive property value and the same annual income:

Debt Yield = NOI / Loan
= (NOI / Value) / (Loan / Value)
= Cap Rate / LTV

Express LTV as a decimal: a 5% cap rate divided by 0.75 gives a 6.67% debt yield. Equivalently, cap rate = debt yield × LTV.

For a selected debt-yield target, cap rate ÷ target gives the DY-only LTV ceiling. It is not the approved leverage: a separate LTV limit, DSCR test or other underwriting condition may be more restrictive.

Cap rate and LTV sensitivity matrix

Each cell is the calculated debt yield, using the same income basis. These are hypothetical combinations, not lender requirements or current market quotations.

For example, a 6% cap rate at 75% LTV produces 8% debt yield. It meets an assumed 8% target and fails an assumed 9% target. The matrix cannot identify a binding DSCR constraint without payment terms.

Cap rate vs. debt yield divergence under rising interest rates

When benchmark interest rates and debt constants shift, cap rate and debt yield behave fundamentally differently:

Macro Event: Benchmark SOFR / Treasury Yields Rise (+250 bps)
│
├─► Cap Rates React with Lag:
│   Asset values soften slowly; Cap Rate moves from 5.0% ──► 5.75%
│   Implied property valuation drops: $20,000,000 ──► $17,391,304
│   LTV on existing $15M debt surges: 75% ──► 86.2% (Collateral Risk Surges)
│
├─► Loan Constant Spikes Immediately:
│   Annual debt service rises from $758,500 ──► $1,010,000
│   DSCR collapses from 1.32x ──► 0.99x (Immediate Payment Default Risk)
│
└─► Debt Yield Remains Completely Unchanged:
NOI ($1,000,000) ÷ Loan ($15,000,000) = 6.67%
Debt yield provides lenders with an unmanipulated risk anchor
independent of market valuation lags or coupon volatility.

Because debt yield ignores mortgage rates, it acts as an unwavering underwriting anchor. When cap rates compress below market debt constants, lenders face "negative leverage," where borrowing money dilutes equity returns and debt yield binds proceeds long before LTV limits are reached.

Worked example: the low-cap-rate loan-sizing constraint

Assume a $20 million acquisition, $1.2 million annual income on the same basis for both ratios, a $15 million request, a 75% LTV ceiling and a 9% debt-yield target. All requirements in this example are assumptions.

Debt yield is more restrictive than the selected LTV ceiling. We have not supplied rate, amortization or minimum DSCR, so this is not a final loan approval or an all-constraints maximum. Run those additional inputs through the CRE loan sizing calculator.

When the identity needs an income adjustment

Suppose market cap rate uses $1.2 million operating NOI, while the lender deducts $100,000 for underwriting adjustments and uses $1.1 million NCF. At $20 million value and $15 million debt:

• Market cap rate = 6.00%.
• Market cap rate / 75% LTV = 8.00%, using operating NOI.
• Lender debt yield = $1.1m / $15m = 7.33%, using adjusted NCF.

The identity is not broken; the numerators differ. Either use the same income basis or reconcile the adjustments explicitly. See NOI versus underwritten cash flow and the editable sizing workbook.

Which constraint controls the loan?

The lowest modeled amount controls these three tests. A cap rate helps connect income and value; it is not a fourth independent loan limit unless the lender specifies a separate valuation rule. Fees, holdbacks and other conditions can reduce cash available at closing.

Frequently asked questions

Can debt yield be lower than cap rate? With identical positive income and value bases, debt yield is lower only when loan balance exceeds property value. Different income definitions can also produce a lower lender debt yield even below 100% LTV.

Does a cap rate above the debt-yield target mean the loan passes? Only that mathematical test, when income is positive, the same income basis is used and debt does not exceed value. Other underwriting tests and conditions remain separate.

Does a rising cap rate change an existing loan's debt yield? Not directly with income and debt held fixed. It lowers the value implied by that income, raising LTV. For new borrowing capped at a fixed LTV, lower value can reduce the loan amount and therefore increase debt yield.

Can mezzanine debt solve a low debt yield? Reducing the senior loan can improve senior debt yield, but adding another obligation increases combined debt and payment risk. It does not improve the debt yield on the combined balance. See senior versus combined-debt analysis.

Sources and assumptions

The OCC Commercial Real Estate Lending handbook discusses debt yield as an income-to-debt risk measure independent of interest rate and amortization, alongside other underwriting analysis. The table and worked cases above are independently calculated hypothetical examples, not OCC lending thresholds. See our methodology for formula limitations.