YOC vs Cap Rate?
What is the difference between yield on cost and cap rate? What are each of these metrics actually trying to show us based on the numbers?
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Cap rate = NOI / purchase price
yield on cost = purchase price + closing costs + all capex invested
YOC helps you determine profit. If you are at a 7% YOC and the market cap rate is 5%, you made money. For example, if your all in basis is $100 and you have $7 of NOI. Your YOC is 7% and value is $7/.05=$140. Your basis is $100. So you made $40 of appreciation.
Thanks for the response. When you say CapEx is that just year 1 capex?
Pudding’s got it spot on - and it’s total capex during the projected hold of the investment since you’re trying to understand the profit potential of the deal. The metrics are a shorthand way of understanding whether a deal is even worth considering given the rough numbers
Nerding out a bit but another shortcut to estimate the profit potential of a deal is (YoC/Exit cap - 1). This will give you the development/profit margin of the deal. Using Pudding’s figures, (7% YoC / 5% cap -1) yields 40%. If your total basis is 100m then you’ve made 40m in profit
Capex spent until that point in time. So if it’s a value add acquisition, you might only show the YOC against the capex to do your business plan. If it’s a ten year hold, you probably will show your basis growing each year as you spend more capex and calculating your YOC against a changing basis annually.
The sum of these 3 divided by NOI?
Don’t really know what “these 3” means. But if you google this, you’ll get all the info you need.
Cap Rate - YoC = The Spread
Cap Rate - The going market rate to purchase/sell a property
YoC - Net Rent Roll (or ERV) / (Purchase price + capex)
In basic terms;
High spread = Yay we are creating value
Low Spread = Why are we doing all this work when we could buy ready made stuff at the same levels?
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