Yield on cost (YOC) measures the return on total invested capital, including both acquisition price and the capex needed to bring the property to stabilized operation. Cap rate uses purchase price as the denominator; YOC uses the all-in cost. For value-add or development deals, YOC is the more meaningful underwriting metric.
The difference between YOC and exit cap rate is the 'development spread' — the value created by converting the property. A 7% YOC selling at a 5.5% exit cap rate creates 150bps of value-creation, which is the main driver of value-add coliving deal returns.
Formula
Yield on Cost = Stabilized NOI ÷ Total All-In Cost
Worked example: Property: €5M acquisition + €1M capex + €200k carrying = €6.2M all-in. Stabilized NOI €450k. YOC = €450k ÷ €6.2M = 7.26%. Exit cap rate 5.5% implies exit value = €450k ÷ 5.5% = €8.18M. Development spread = €8.18M - €6.2M = €1.98M (32% margin).
In the field
Institutional coliving development typically targets YOC 6.5–8.0% with exit cap rate 4.5–6.5%, creating 150–250bps development spread. Greystar and Round Hill underwrite to ~700bps YOC for new schemes. Boutique operator deals often higher (8–10% YOC) reflecting smaller-deal premium.
Common pitfalls
- ×Excluding carrying costs (interest during construction, marketing during lease-up) — flatters YOC.
- ×Using gross instead of stabilized NOI — capex doesn't fully utilize until lease-up completes.
- ×Comparing YOC across properties with different stabilization timelines — distorts deal-level economics.
- ×Underwriting at unrealistic exit caps — the development spread turns to zero if exit cap doesn't compress.