Calculate Yield on Cost

How to Calculate Yield on Cost

Calculating Yield on Cost (YOC) assesses the potential return on a property or stock investment relative to its initial cost. Here's a concise guide to performing this important calculation.

Yield on Cost for Stocks

To calculate YOC for stocks, divide the stock’s current annual dividend by the original purchase price. This formula YOC = \frac{Current Dividend}{Initial Purchase Price} helps investors understand dividend returns against their initial investment. Remember to account for all associated holding costs and any additional share purchases over time.

Yield on Cost for Real Estate

In real estate, YOC is calculated by dividing the Net Operating Income (NOI) by the Total Project Cost. The formula YOC = \frac{NOI}{Total Project Cost} mirrors the return on investment during the development phase. To perform this calculation, you first need to determine the NOI, which involves total revenue minus operational costs, and then consider the full scope of development expenditures.

Factors Influencing Yield on Cost

The property location, age, nearby property conditions, and local economic scenarios impact the YOC. Increases in NOI or reductions in project expenses improve YOC, while rising operational costs or project expenses decrease it.

Understanding YOC offers a forward-looking perspective on the capital efficiency of a property compared to the market-value-based capitalization rate (cap rate), highlighting both the potential returns and associated risks of the investment.

How to Calculate Yield on Cost

Yield on Cost (YOC) is an essential metric for both stock and real estate investments. It helps investors assess the efficiency of their investments relative to their initial costs.

YOC for Stock Investments

To calculate YOC for stocks, divide the current dividend of the stock by the price initially paid. This can be expressed with the formula: YOC = \frac{\text{Current Dividend}}{\text{Initial Price}}. Remember to include all associated investment costs to ensure accuracy.

YOC for Real Estate Investments

For real estate, YOC calculation involves different aspects. Use the formula: YOC = \frac{\text{Stabilized Net Operating Income (NOI)}}{\text{Total Cost}}. This calculation evaluates the potential returns against the total spent on property development.

Practical Example

Consider a property with an NOI of $2,104,000 and a total project cost of $29,600,000. The YOC would be calculated as: YOC = \frac{2,104,000}{29,600,000} \approx 7.1\%. Comparing this value against sub-market benchmarks provides insight into investment performance.

Focusing on YOC allows investors to gauge long-term value and growth potential of their investments, making it an indispensable tool in investment analysis.

Examples of Calculating Yield on Cost

Yield on cost (YOC) is a financial ratio that shows the percentage of investment income to the original cost of the investment. Knowing how to calculate yield on cost is crucial for investors aiming to understand the performance of their investment over time. Below, we provide three clear examples to help illustrate this calculation.

Example 1: Stock Dividend Investment

An investor buys 100 shares of a company at $20 each. Annually, the company pays a dividend of $1 per share. The calculation of YOC will be: YOC = (Annual Dividend per Share / Purchase Price per Share) * 100 = ($1 / $20) * 100 = 5%. Thus, the yield on cost for this investment is 5%.

Example 2: Real Estate Rental Property

Consider a property purchased for $200,000 that generates monthly rental income of $1,500. The annual income is $18,000. To find the YOC: YOC = (Annual Rental Income / Purchase Price) * 100 = ($18,000 / $200,000) * 100 = 9%. The yield on cost here is 9%.

Example 3: Bond Investments

When an investor buys a bond for $1,000 with an annual coupon rate of 5%, the annual coupon payment is $50. The yield on cost is computed as: YOC = (Annual Coupon Payment / Bond Purchase Price) * 100 = ($50 / $1000) * 100 = 5%. This results in a YOC of 5%.

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