Yield on cost
Stabilized net operating income divided by all-in project cost, meaning purchase plus rehab. Investors use it to check whether a value-add deal creates enough spread over the market cap rate to be worth the risk.
Get the steps of a home sale by email, in order, one short email at a time.
Eight short emails, free. Unsubscribe any time. What's in them
Part 1 of 4
Why a seller cares
Yield on cost is the return on a value-add project's total cost, purchase plus rehab, and the buyer compares it to the market cap rate. The spread between the two is why they will or will not pay your price.
Part 2 of 4
A simple example
A buyer pays $800,000 for your building, spends $200,000, and projects $85,000 of NOI. Yield on cost is 8.5% against a 6.5% market cap rate.
| The arithmetic | The number |
|---|---|
| All-in cost | $1,000,000 |
| Stabilized NOI | $85,000 |
| Yield on cost | 8.5%, two points over the market cap |
Yield on cost is the reward for doing the work. The spread over the cap rate is what pays for the risk.
Part 3 of 4
What people get wrong
That a high yield on cost means a high price paid. It usually means a low one; the yield is high because the purchase was cheap.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
In your Room, this word explains itself where it appears.
Your Room defines yield on cost in the step you meet it in, beside the document or the date it belongs to. Free to set up, with an agent or on your own.
Organize my saleFree to set up. Pay once when you list: $89 or $189. 7-day refund.