Formula
Yield on cost = Stabilised NOI / TDC
WhereStabilised NOI is the income the asset produces once it is fully let at market rents.
Why it matters
Yield on cost tells you the income return on every dollar of capital invested. Compared against the prevailing market cap rate, it tells you whether the project is worth building rather than buying. The spread between yield on cost and cap rate is the development premium.
Worked example
A BTR project with stabilised NOI of $1.6M and TDC of $28M:
Yield on cost = $1,600,000 / $28,000,000 = 5.7%.
If market cap rates for comparable assets are 4.5%, the project creates a 120bps yield-on-cost spread, the development premium.
Related terms
Connected ideas in the glossary.
- Net operating income (NOI)Gross rent less operating expenses, before debt service.
- Capitalisation rateThe market price for stabilised income, expressed as NOI over value.
- Stabilised valueValue of an income asset at steady-state occupancy.
- Total development cost (TDC)Every dollar spent to deliver the project.
- Profit on costThe headline ratio for a residential feasibility.
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