Yield on Cost

Yield on cost (also "return on cost" or "development yield") is stabilized NOI divided by total project cost — purchase plus renovation/construction, closing, and carry. It's the cap rate you manufacture rather than buy.

How it's used: on value-add and development deals, the gap between yield on cost and the market exit cap rate is the development spread — the margin of value created. A deal that stabilizes to a 7% yield on cost in a 5.5% exit-cap market has built 150 bps of spread, which is where the equity profit comes from.

Why it matters: a thin or negative spread (yield on cost at or below the exit cap) means you're taking construction and lease-up risk for no reward — you could have bought the finished product for the same yield. Underwriters stress the spread against cost overruns and cap-rate expansion before committing.

Formula: Yield on cost = Stabilized NOI ÷ Total project cost

Compare it to debt yield (which uses the loan, not the cost) and the going-in vs exit cap rate. See the multifamily underwriting guide.