DSCR vs Debt Yield (With Example)
Two metrics that come up constantly in CRE debt interviews. The trick is explaining them clearly, sizing to both, and stating which one actually binds.
DSCR (Debt Service Coverage Ratio)
Measures cash flow coverage of debt service.
Formula
DSCR = NOI / Annual Debt Service
Debt Yield
Measures unlevered NOI as a percent of loan amount. Rate-independent.
Formula
Debt Yield = NOI / Loan Amount
How to say it in an interview
“I size to DSCR, debt yield, and LTV. Then I explain which constraint binds and why—rate sensitivity vs basis vs exit risk.”
The key difference (in plain English)
- DSCR changes when interest rates change (because debt service changes).
- Debt yield doesn’t care about the interest rate—only NOI vs loan basis.
- In volatile rate environments, debt yield is a quick way to avoid “loan too big for the cash flow.”
Worked example (numbers you can repeat in an interview)
Assumptions
- In-place NOI: $1,000,000
- Loan amount: $10,000,000
- Interest-only rate (scenario A): 8.0%
- Interest-only rate (scenario B): 10.0%
Results
Debt Yield
$1,000,000 / $10,000,000 = 10.0%
Same in both rate scenarios.
DSCR @ 8.0% IO
Debt service = $10,000,000 × 8.0% = $800,000 → DSCR = $1,000,000 / $800,000 = 1.25x
DSCR @ 10.0% IO
Debt service = $10,000,000 × 10.0% = $1,000,000 → DSCR = $1,000,000 / $1,000,000 = 1.00x
DSCR compresses as rates rise.
The “senior” takeaway to say out loud
Debt yield tells you whether the loan basis makes sense against in-place cash flow. DSCR tells you how rate-sensitive the deal is. If DSCR is tight at a stressed takeout rate, exit/refi risk is real even if the day-1 debt yield looks fine.
How lenders actually use them (interview framing)
Where DSCR shows up
- Permanent takeout / refinance underwriting
- Stressed rate sensitivity (can the deal refi?)
- Amortizing debt (agency / bank term debt)
Where debt yield shows up
- Bridge loan sizing (quick cash-flow-to-basis check)
- Downside check when cap rates back up
- Deals with uncertainty on exit timing
FAQ
Which matters more: DSCR or debt yield?
It depends on the lender and the deal. Many bridge lenders lean on debt yield for sizing because it’s rate-independent, while takeout/refi underwriting often stresses DSCR at a takeout rate. In interviews, say you size to both and explain which constraint binds and why.
Why do bridge lenders like debt yield?
Debt yield is less sensitive to interest rates. It’s basically an unlevered return to the lender on Day 1 NOI. It gives a quick check on basis and downside if the exit is delayed or cap rates back up.
What NOI should you use for debt yield?
Use a conservative, in-place NOI. In interviews, explicitly state whether you’re using in-place vs stabilized NOI and why—then show how sizing changes under each.
What’s a “good” debt yield?
There isn’t one universal number, but many lenders like to see a stronger debt yield on riskier deals and will accept lower debt yield for core, stable cash flow. Don’t quote a single number as gospel—explain how it tightens/loosens by asset type, risk, and market.
Related
Want weekly roles + prep?
Get top jobs and short technical prompts delivered weekly.
Subscribe to Alerts