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
Are you speculating what a spec house means? (sorry for the lousy pun) The textbook spec (or speculative) house definition is “one built on an experimental basis, without an order ...
As you’d expect, the rod has various meanings in everyday discourse. However, lesser-known is that surveyors use a rod as a land survey measurement for real estate. In a nutshell, a ...
The operating expenses definition is the sum of costs or expenses a company deals to operate as a business. The term operating expenses is used in any business field and is commonly ...
A lessee (tenant) subleases the apartment to a third party .The tenant is now sandwiched between the lessor and the sublessee. In other words, the tenant is acting as a lessee to the ...
Individual or entity who pays for the professional services of another person or business. ...
The practice of acquiring land for a future use. For example, a franchising company is projecting rapid nationwide expansion over the next five years. In order to prepare for the expansion, ...
A loan in which the entire charge is subtracted up front from the face value of a loan. The proceeds received are the face value of the loan less this deduction, which increases the ...
Term indicating a resemblance or analogous to a legal classification. For example, a quasi corporation, quasi contract, quasi possession, quasi offense. ...
land that is adjacent to water such as a stream. ...
Have a question or comment?
We're here to help.