The yield on cost is a commonly used metric when evaluating real estate development and value-add projects. It is easy to calculate and is useful as a back of the envelope calculation. In this article we’ll take a closer look at the yield on cost in real estate. Here’s what you’ll learn:
What is the Yield on Cost?
The yield on cost is widely used by commercial real estate professionals to measure the return on a real estate development or value add project.
The yield on cost is also used to calculate the development spread, which is the difference between the yield on cost and the market based cap rate for similar but already existing buildings in the same market. The development spread tells you how much additional return you are earning in exchange for taking on all of the risk of construction and development.
Depending on the context, yield