Identifying ‘Good’ Returns in CRE

We all know the common metrics to calculate for real estate financial modeling.

Yield on cost, cap rate, break even occupancy, etc.

But what is a ‘good’ yield on cost? What do most investors consider an acceptable break even occupancy rate?

Here are some general guidelines for what most investors would consider acceptable numbers:

Yield on Cost

This metric helps answer the question if the return on capital invested in the project is sufficient to overcome a project’s initial cost.

// What’s a good Y.O.C.? Generally speaking, most investors would agree anything above 6% (stabilized) is acceptable.


Breakeven Occupancy

B.E.O. shows how much physical vacancy the property can handle to break even, in a worst case scenario. So if the property went down to X% occupancy, the sponsor can still pay all of the expenses and pay the mortgage.

Most investors would agree anything between 60% and 80% is acceptable.


Development Spread

This shows exactly how much value is being added in the deal, compared to buying a stabilized asset. This is helpful on-value add and development deals.

Most investors would agree anything between 1.5% and 2% is a ‘good’ development spread.


IRR

IRR is the annualized, time-weighted return of your investment. Generally speaking, here are some guidelines for what most investors would consider an acceptable IRR:

  • Acquisition of stabilized asset – 10% IRR
  • Acquisition & repositioning of asset – 14% IRR
  • Development in established area – 20% IRR
  • Development in rural area – 30% IRR