“This deal looks solid… until you add the debt and all in cost.”
I have heard this line countless times in deal reviews – and more often than not, it comes down to one overlooked metric: Yield on Cost (YOC).
While many investors obsess over cap rates, YOC is quietly doing the heavy lifting behind the scenes. It does not just tell you what the property might be worth – it tells you whether your all-in investment makes financial sense, and how it will behave once you layer in debt.
It is particularly relevant for value-add deals (and often used when evaluating new construction deals).
What Is Yield on Cost, Really?
At its core, Yield on Cost is the unlevered rate of return based on your TOTAL cost into the project – not just the purchase price.
📊 Formula:
Stabilized NOI / All-In Cost
(All-in cost = Purchase Price + CapEx + Closing Costs)
📌 Example:
- Purchase Price = $2,500,000
- CapEx = $500,000
- Closing Costs = $75,000
- In-Place NOI = $120,000
👉 YOC = 3.9% = $120,000 / $3,075,000
This is your baseline return before considering leverage, which makes it a great proxy for what kind of cushion (or lack thereof) you’re working with.
Where It Gets Powerful: Positive vs. Negative Leverage
Once you understand your unlevered yield, the next question is:
Does this deal improve with debt or get riskier?
✅ Positive Leverage = YOC (or Cap Rate discussed in prior articles) > Interest Rate
This means your cost of capital is lower than your asset’s unlevered return. Debt amplifies your returns.
📌 Example: Yield On Cost = 6.5%, Interest Rate = 6% → Positive Leverage
❌ Negative Leverage = YOC or Cap Rate < Interest Rate
Your cost of capital is higher than the deal’s base return. This erodes cash flow and adds risk.
📌 Example: Yield On Cost = 5%, Interest Rate = 6% → Negative Leverage
Why This Matters for Passive Investors & Deal Reviewers
- Positive leverage = potential for cash flow.
If your deal shows positive leverage early on, you’ve got a signal that the numbers might work even after financing. - Negative leverage? Be cautious.
This does not mean the deal is dead – but you might need to consider buying all-cash or renegotiating terms to make it viable (or ensure and vet that it has a HUGE value add potential). - YOC does not lie.
It cuts through rosy projections and tells you whether the deal stands on its own.
Actionable Takeaways
Before your next deal review, ask:
- ✅ What is the stabilized NOI based on real, defensible assumptions?
- ✅ What is the true all-in cost, including CapEx and closing?
- ✅ Does the YOC exceed the actual interest rate (not just quoted)?
- ✅ What does leverage do to this deal – help or hurt?
If the math does not work before financing, it won’t magically work after you add debt.
Final Thought: YOC Is a Reality Check
Yield on Cost won’t be the flashiest number in your deck but it will be one of the most honest. It quietly shows you whether your investment thesis holds water, or whether you’re forcing the numbers to work with financing that’s too expensive.
And in today’s rate environment, that insight is priceless.
Vessi Kapoulian,
Breaking down multifmaily underwriting one step at a time to create educated and empowered investors
PS: Need help evaluating a multifamily deal? Send me a message for a Deal Review.
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