Yield on cost is how you know whether a value-add or development deal is worth the work, and this free calculator gives you the number. Enter your stabilized net operating income and your total project cost, and you get the yield on cost.
The whole point of a value-add deal is to create a return higher than what you could just buy in the market. Yield on cost versus the market cap rate is exactly how you measure that spread. Here is the tool, then how to use it.
Yield on cost, in one line: it is your stabilized NOI divided by your total project cost, including purchase and all the money you put in to stabilize it.
The development spread: compare yield on cost to the market cap rate. The gap between them is the value you are creating. A 150 to 200 basis point spread is a common target.
The Yield on Cost Formula
The formula is yield on cost = stabilized NOI ÷ total project cost. Total project cost is everything: the purchase price or land, plus construction or renovation, plus soft costs and carrying costs. If you are all in for $2,000,000 and the stabilized NOI is $160,000, your yield on cost is 8%.
Now compare that 8% to what stabilized properties like it sell for. If the market cap rate is 6.5%, you built to an 8% yield on cost, and that 1.5 point spread is the value you created, because the finished property is worth far more than it cost you to create.
Yield on Cost vs. Cap Rate
This is the metric that separates buying a deal from creating one. If your yield on cost is no better than the market cap rate, you took on all the risk and work of a value-add or development project for no extra reward. The spread between yield on cost and the market cap rate is your compensation for that risk, and it is what turns forced appreciation into real value. This is the core idea behind value-add investing.
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Yield on Cost FAQ
How do you calculate yield on cost?
Divide the stabilized net operating income by the total project cost, including purchase, construction or renovation, and soft costs. A $160,000 stabilized NOI on a $2,000,000 all-in cost is an 8% yield on cost.
What is the difference between yield on cost and cap rate?
Cap rate is based on the current price or value, while yield on cost is based on your total cost to acquire and stabilize the property. The spread between them is the value a value-add or development deal creates.
What is a good yield on cost?
A good result is a yield on cost meaningfully above the market cap rate for the finished product, often a spread of 150 to 200 basis points or more, which reflects the risk you took to create it.
Why does yield on cost matter for value-add deals?
Because it measures the return you build, not the return you buy. If yield on cost is not above the market cap rate, the extra risk and effort of the project did not pay off.
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Explore CRE CentralSee how the spread drives returns in my guide to value-add investing, or browse all the commercial calculators.