Yield on cost is a development project's stabilized net operating income divided by its total cost to build. A building that will earn 1,050,000 a year and costs 15,000,000 all-in has a yield on cost of 7.0%. It tells a developer what return the project earns on what was actually spent.
The formula
Yield on cost = stabilized NOI ÷ total development cost.
Total cost includes land, hard cost, soft cost, contingency and financing during construction and lease-up. "Stabilized" means the income of the finished building at normal occupancy, not the first months of lease-up.
Yield on cost versus cap rate
A cap rate divides income by value. Yield on cost divides income by cost. For a finished building the same income is on top of both, so the difference between the two is the developer's profit margin, expressed as a rate.
A worked example (hypothetical numbers)
A project is expected to produce stabilized NOI of 1,050,000 and costs 15,000,000 to build.
- Yield on cost: 1,050,000 ÷ 15,000,000 = 7.0%.
- A buyer of comparable finished buildings accepts a cap rate of 5.5%.
- Development spread: 7.0% minus 5.5% = about 150 basis points.
- Value at that cap rate: 1,050,000 ÷ 0.055 = about 19,090,909, which is 4,090,909 above cost.
These figures are invented to show the arithmetic.
Why developers watch the spread
Cost, rents and cap rates all move before a building is finished. A wide spread leaves room for a cost overrun or a weaker exit. A narrow spread leaves little. This is why feasibility work tests yield on cost against several rents and costs, not one.
What yield on cost does not tell you
- Timing. It ignores how long the project takes. Two projects with the same yield can differ a lot in IRR.
- Leverage. It is an unlevered measure.
- Risk. It does not say how likely the rent assumption is.
- The exit. The cap rate a buyer pays is a judgment, and it can change.
It does not replace a full feasibility study or an investor's own return targets. Titleman's feasibility run shows cost and return for each scheme in a live Excel with sources; it does not give a final price or a go decision. See the feasibility study template for a full worked case.
Common questions
How do you calculate yield on cost? Divide the stabilized net operating income of the finished project by its total cost, including land, hard and soft costs, and financing during construction. Stabilized means the building is leased up and running at normal occupancy.
What is the difference between yield on cost and cap rate? Yield on cost divides income by what it cost to build. A cap rate divides income by what the property is worth or sold for. The gap between them is the profit a developer hopes to earn by building.
What is a good yield on cost? It depends on the market and the property type. Developers compare it with the cap rate a buyer would pay for the finished building. The gap, called the development spread, is what pays for risk, and the target is set by each investor.
Which costs are included? All of them: land, hard cost, soft cost, contingency, developer fee if charged, and interest and fees during construction and lease-up. Leaving one out flatters the yield.
Published by Titleman, which makes the AI engine mentioned on this page. Written by the Titleman team with AI assistance. Updated 19 October 2026.