Capitalization Rate
Definition of "Capitalization rate"
Also known as “cap rate” or “income yield”, Capitalization Rate is a useful way to compute the rate of return on a real estate investment. It is commonly used in the Income approach to determine the Market Value of a property.
Say you want to buy a property just to rent it and make a profit. You will be advised to discover the cap rate of that property in order to calculate what you will approximately earn renting that property to a Tenant.
To discover the capitalization rate of a property, divide the Net Operating Income (NOI) by the amount you’ll pay to acquire that property. In short, the capitalization rate is the value that one property produces divided by the value that property costs.
Here’s an example to better visualize it:
A building is for sale. It cost $100,000 when it was built 20 years ago. And it produces - between residential and commercial rent - $50,000 a year. The capitalization rate is 50,000/100,000, which equals 0.5%.
An important thing to realize regarding the cap rate is that it does not take into consideration the depreciation of a property. That’s why, when valuing a house, it’s crucial for an Appraiser to use all methods of evaluation appropriate to the case.
Real Estate Tips:
Maybe just learning a new term won't be enough to solve your situation. Check out our real estate questions; perhaps someone else has gone through what you're going through!
Or just head to The OFFICIAL Real Estate Agent Directory® and leave it to the pros.
Popular Real Estate Terms
The profit or loss from selling an investment that is held one year or less. Short-term gains are ordinary income, while short-term losses are deducted from current income. Short-term gains ...
An anticipatory breach of contract is the action that occurs when one party in the contract shows their intention to not fulfill their contractual obligations to the other party. The ...
Money and nonmonetary consideration given to employees for work performed. The reward will typically be increased the better the job is done. Salary and fringe benefits are a major cost of ...
The definition of involuntary alienation in real estate is the loss of property through attachment, condemnation, foreclosure, sale for taxes or other involuntary transfer of title. ...
Bank modifies the borrower's mortgage obligation, such as when the bank approves the homeowner's request for an extension of time to pay because of illness or loss of a job. One's ...
Transfer of title based on a preceding title transfer of conveyance. A derivative conveyance increases, ratifies, moderates, renews or transfers the stake created by the original ...
Homes with division of ownership or use of a resort unit on the basis of time periods. For example, a resort home may be divided into 25 time shares of two weeks each, with two weeks left ...
Any permanent development that has been made to a parcel of land. Improved land features include whether the land has fruit bearing trees or crops producer by labor, landscaping, or ...
Also known as “cap rate” or “income yield”, Capitalization Rate is a useful way to compute the rate of return on a real estate investment. It is commonly used in the ...
Have a question or comment?
We're here to help.