Understanding unlevered yield for multifamily investments is crucial for accurate property analysis. As a broker, I’ve seen too many investors focus on IRR projections while overlooking this fundamental metric.
What Is Unlevered Yield?
Understanding unlevered yield for multifamily investments is crucial. Unlevered yield is one of the most important metrics in real estate investing, yet it’s often overlooked in favor of flashier numbers like IRR. As a broker who has worked with dozens of successful Los Angeles multifamily investors, I’ve seen firsthand how the most disciplined buyers focus on this fundamental metric.
The formula is straightforward:
Unlevered Yield = Net Operating Income (NOI) ÷ Total Project Cost
Total project cost includes the purchase price plus any renovation or capital expenditure needed to stabilize the property.
Why Sophisticated Investors Focus on Unlevered Yield
Working with experienced investors over the years, I’ve noticed a pattern: the most successful ones evaluate every deal as if they were paying all cash, even when they plan to use leverage. Here’s why:
1. It Reveals True Deal Quality
Leverage can make almost any deal look good on paper. A mediocre property with aggressive financing assumptions can show a 15%+ IRR. But strip away the debt, and you see the property’s actual income-generating power.
One investor I work with puts it simply: “If a deal doesn’t work without debt, it doesn’t work.”
2. It Protects Against Market Shifts
Interest rates change. Lending standards tighten. Refinancing doesn’t always go as planned. Investors who bought based on levered returns in 2021-2022 learned this lesson painfully when rates rose.
A strong unlevered yield means you can hold the property profitably regardless of what happens in the debt markets.
3. It Creates Optionality
When your deal works on an unlevered basis, you have options:
- Hold all-cash if debt terms are unfavorable
- Refinance when rates improve
- Sell without pressure if the market shifts
- Weather vacancies or unexpected expenses
The Problem with IRR-Focused Investing
IRR (Internal Rate of Return) is a useful metric, but it can be manipulated and misleading:
Leverage Amplification
A property with a 5% unlevered yield can show a 15%+ IRR with enough leverage. But that same leverage amplifies losses if things go wrong.
Exit Assumptions
IRR projections often assume aggressive exit cap rates or appreciation. In LA’s current market, assuming you’ll sell at a lower cap rate than you bought is risky.
Timing Manipulation
IRR is heavily influenced by when cash flows occur. Quick flips can show high IRRs even on modest profits, while long-term holds with strong cash flow can show lower IRRs despite building more wealth.
What Unlevered Yields Look Like in LA Today
Based on deals I’m seeing in the current market:
- Stabilized, well-located RSO buildings: 4.5-5.5% unlevered yield
- Value-add opportunities (pre-renovation): 3-4% going in, 6-7%+ stabilized
- Non-RSO buildings: Often trade at lower yields due to perceived upside
The investors I work with generally target a minimum 6% stabilized unlevered yield for value-add deals. This provides a cushion for unexpected costs and ensures the deal works even if the exit market is challenging.
How to Apply This to Your Investment Decisions
Step 1: Calculate True NOI
Use realistic expenses, including:
- Management (even if self-managing)
- Reserves for capital expenditures
- Realistic vacancy (not 0%)
- Actual property taxes (post-reassessment)
Step 2: Include All Costs
Total project cost should include:
- Purchase price
- Closing costs
- Renovation budget (with contingency)
- Carry costs during renovation
- Lease-up costs
Step 3: Compare to Alternatives
Ask yourself: Could I get a better risk-adjusted return elsewhere? If 10-year Treasuries yield 4.5% with zero risk, does a 5% unlevered yield on a value-add project with execution risk make sense?
A Real Example
I recently worked with a buyer evaluating two properties:
Property A:
- Price: $3,000,000
- Renovation: $500,000
- Stabilized NOI: $210,000
- Unlevered Yield: 6.0%
Property B:
- Price: $3,200,000
- Renovation: $200,000
- Stabilized NOI: $187,000
- Unlevered Yield: 5.5%
Property B had a higher IRR projection due to less renovation time and faster stabilization. But the investor chose Property A because the higher unlevered yield provided more margin for error and better long-term cash flow.
Quick FAQs
Q: Should I never use leverage?
A: No—leverage is a powerful tool when used wisely. The point is to ensure the deal works without it, then use debt to enhance returns.
Q: What’s a “good” unlevered yield in LA?
A: It depends on risk and your return requirements. Most sophisticated buyers I work with want 5.5%+ for stabilized assets and 6.5%+ for value-add.
Q: How does rent control affect unlevered yield?
A: RSO limits income growth, which can compress yields over time. Factor in realistic rent increase assumptions based on current regulations.
Want to understand the unlevered yield on a property you’re considering? Request a valuation and I can help you analyze the numbers.
Unlevered yield provides a clearer picture of multifamily investment performance than leverage-dependent metrics. Let’s discuss how to properly evaluate your building’s returns.