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?
Dolorum nostrum ea qui rem dicta tempora perspiciatis itaque. Est eos non ab sint eum.
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