Cap rate, DSCR and debt yield for an apartment deal

A year of net operating income divided by the price. A building bought for $10 million that has $600,000 of net operating income has a 6% cap rate. It compares what a building earns with what it costs before any loan, so it is a starting point for comparing similar buildings, not a verdict on a price.

Debt service coverage ratio: a year of net operating income divided by a year of loan payments. At 1.0 the income exactly covers the payments. Many lenders look for about 1.25 or more, so there is room if income dips. Lenders set their own minimums.

A year of net operating income divided by the loan, as a percentage. Lenders use it because, unlike DSCR, it does not depend on the interest rate or how long the payments run.

Rent and other income, less the costs of running the building (taxes, insurance, repairs, payroll, utilities, management). It is before the loan payment, major repairs, reserves and fees. Use a number you trust: the seller’s figure and a realistic one can differ.

It is the number of years the payments are spread over, for a loan with level monthly payments. Enter 0 for an interest-only loan, where the payment is only the interest.

No. It does the math on the numbers you type and nothing else. It does not say whether a price is good or what any deal will earn, and it leaves out repairs, reserves, fees, taxes and anything else that changes what is left.