Along comes a relatively new ratio – the Debt Yield Ratio [ DYR ] to allow banks to access risk / reward from an additional perspective . This DYR effectively shows the bank what rate of return [ ROR ] it would earn if it had to foreclose . In our example above , the annual NOI for the apartment building was $ 60,000 . Since the loan request was $ 650,000 , the DYR was a healthy 9.23 %. also ignores the interest rate the bank charges as well as the amortization of the loan .
The DYR is vital in today ’ s low interest rate environment . As interest rates dropped over the previous 10 years , values substantially increased . Lenders do not want to get caught up in situations where the FMV plummets due to increased interest rates [ all other factors staying the
areas may command a lower DYR . Of course , these same areas also command lower CAP rates as well . Just as rates may vary when considering higher vs lower LTVs , rates quoted by banks may vary based on higher vs lower DYR . This makes sense when considering that banks price their products based on risk .
From a borrower ’ s perspective , negotiations will now have to be looked at from not only the CAP rate and the DSCR rate , but the DYR as well . Borrowers who have the ability to put down a larger down payment should take into account all three ratios , as a little extra down payment may go a long way in receiving attractive terms from the bank .
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" Borrowers who have the ability to put down a larger down payment should take into account all three ratios , as a little extra down payment may go a long way in receiving attractive terms from the bank ."
Although no bank wants to foreclose [ as they have minimum reserve requirements that affect their lending ability when loans go into default ], the bank still has to face the fact that there are times when it will need to go down the foreclosure path . When CAP rates are in the 46 % range , a DYR above 8 % gives the bank some leeway should it need to sell the property at less than fair market value [ FMV ] and recoup its entire loan with no loss . You can see that , although most real estate investors focus on CAP rates , the DYR zeroes in on what the ROR the bank will earn upon foreclosure . The DYR same ]. Thus , the DYR focuses in on the ROR the lender would receive if it were to receive the property upon foreclosure . Of course , if interest rates rise , the bank would have liked to had a larger DYR , but it is similar to an investor being happy with a bond that is locked in at 10 %, even if interest rates rise were to 12 %.
By requesting a high DYR , the bank will automatically limit its LTV . As banks get skittish , they will raise their DYR . One large bank has already increased its DYR to 11 %. Other factors that may lower the bank ’ s DYR may be the location of the real estate . Desirable and stable
Edward Brown currently hosts two radio shows , The Best of Investing and Sports Econ 101 . He is also in the Investor Relations department for Pacific Private Money , a private real estate lending company . Edward has published many articles in various financial magazines as well as been an expert on CNN , in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns
Edward Brown , Host The Best of Investing on KDOW AM1220 on Saturdays at noon 21 Pepper Way San Rafael , CA 94901 4152990330
ebrown1111 @ aol . com
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