What is Yield on Cost in Real Estate?
The yield on cost (YOC) is a metric used by investors to evaluate potential real estate investments. It measures the current return on investment, taking into account the initial purchase price of the property and any subsequent capital improvements made to the property. YOC is typically expressed as a percentage and can be used to compare different real estate investments.
Factors Affecting YOC
Several factors can impact YOC, including the property’s location, age, condition, and rent price. The initial purchase price of the property is the most important factor in determining YOC. For example, a property purchased for $100,000 with an annual rental income of $10,000 would have a YOC of 10%. However, if the same property was purchased for $200,000, the YOC would decrease to 5%.
YOC can also be affected by capital improvements made to the property. For example, if an investor spends $50,000 to renovate a property, the YOC would increase to 11.1% ($10,000/$50,000+$200,000).
The YOC metric is a helpful tool for investors to compare different real estate investments. However, it is important to remember that YOC is just one factor to consider when evaluating an investment. Other factors, such as the property’s location and condition, can also impact the overall return on investment.