Yield on cost measures a property's projected net operating income against its total project cost, including acquisition or land price, construction, and soft costs. Expressed as a percentage, it answers a simple question: for every dollar invested to build or reposition an asset, how much stabilized income does that dollar produce once the project is complete and leased. Because it uses total cost rather than current market value in the denominator, yield on cost is the standard metric for development and heavy value-add deals, where the property being valued does not yet exist in its finished form.
Sponsors typically compare yield on cost to prevailing market cap rates for stabilized, comparable assets, a concept explored in how cap rates work. A meaningful spread between yield on cost and market cap rate, often 100 to 200 basis points or more, compensates investors for taking on construction, leasing, and timing risk that a stabilized acquisition would not carry.
Further reading: Understanding Cap Rates: Context Cycles and the Real Measure of Value
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