3 DYR: Debt Yield Ratio > 9 Question 7 (2 points) Given the following information, calculate the debt yield ratio of this commercial loan. Estimated net operating income (NOI) in the first year: $155,000 Debt service in the first year: $95,000 Loan amount: $900,000 Purchase price: $1,200,000 Note: enter answer as a decimal with three decimal points, for example: if the answer is 8.5%, you will enter 0.085
The Correct Answer and Explanation is :
To calculate the Debt Yield Ratio (DYR), we use the following formula:
[
\text{Debt Yield Ratio} = \frac{\text{Net Operating Income (NOI)}}{\text{Loan Amount}}
]
Given Information:
- Net Operating Income (NOI): $155,000
- Loan Amount: $900,000
Now, plugging these values into the formula:
[
\text{Debt Yield Ratio} = \frac{155,000}{900,000} = 0.172
]
Explanation:
The Debt Yield Ratio is a measure of the loan’s risk based on the property’s ability to generate income relative to the loan amount. It’s often used in commercial real estate lending to assess the risk of default. In general, the Debt Yield Ratio should be above a certain threshold, often around 9%, to ensure that the property generates enough income to cover the loan.
In this case, the Debt Yield Ratio is 0.172 or 17.2%. This is significantly above the typical threshold of 9%, which indicates that the property is generating a strong income relative to the loan amount. A higher DYR suggests lower risk for the lender because the property is able to generate a higher return relative to the debt.
While the Debt Yield Ratio is a valuable tool in assessing the viability of a loan, it is important to note that it is only one component in evaluating the overall risk of the loan. Lenders typically look at other factors, such as the Debt Service Coverage Ratio (DSCR) and the Loan-to-Value (LTV) ratio, to get a full picture of the financial health and risk of the property.
In conclusion, the Debt Yield Ratio helps lenders assess the risk of a loan by comparing the income generated by the property to the loan amount. A higher DYR indicates lower risk, making it a favorable situation for the lender.