Hey everyone,
I’ve seen some mixed approaches in different models and wanted to get your take:
When calculating Yield on Cost , do you include any kind of financing costs, specifically interest expense?
Appreciate any input – thanks!
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How is that possible?
If it is capitalizing or being paid out of pocket, then it's a cost.
Show it both ways. Levered YOC and Unlevered YOC. Seeing both is useful since you see both the fundamentals of the deal itself, apart from financing, and the actual returns with the specific form of financing you're assuming.
I use what I was taught is called yield on book value. NOI / (purchase price + closing costs + capex + TI + LC)
Is this correct? No clue. Everyone does it different. It’s just how I do it.
do you typically include capex, ti, lc only when it's capitalized up front?
I include any TI/LC/Capex even if it is not escrowed up front
most people use uyoc as a way to look at the spread vs current market cap rates. If thats the case then yes you should include interest expenses because that is part of your total cost
I use equity deployed as the denominator for both UL and L YoC. So for L YoC, yes debt service and financing costs would flow into the denominator to the extent there is no positive cash flow from another source covering these costs. Same goes for any other types of costs.
This seems like the correct and simplest way to calculate it. Why doesn't everyone do it this way?
How I see it (and you too I think), we're looking for our return on our out-of-pocket expense for the entire project. Whatever equity I've dumped into this project - I want to see the rate of return on that.
I look at the levered yield on cost. I think it’s more conservative to figure out your margin of safety with LYOC.
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