Yield on Cost

Yield on Cost is a real estate financial term that measures the annual net operating income (NOI) produced by a property as a percentage of the total cost to develop or acquire the property. It is often used by real estate developers and investors to evaluate the profitability of a real estate investment.

The formula to calculate Yield on Cost is as follows:

Yield on Cost = (Annual NOI / Total Development or Acquisition Cost) x 100%

For example, if a development project has an annual NOI of $500,000 and the total cost to develop the property was $5,000,000, the Yield on Cost would be 10% ($500,000 / $5,000,000 x 100%).

This metric is useful to compare the profitability of different investment opportunities or to track the performance of a property over time. However, Yield on Cost does not consider the time value of money, so it may not accurately reflect the returns of projects with different development timelines. It also does not account for the eventual sale of the property or changes in its market value. Therefore, it is often used in combination with other financial metrics, such as Internal Rate of Return (IRR) or Net Present Value (NPV), when evaluating real estate investments.