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
model depicting on paper what a structure physically looks like. The dimensions are draw on a proportionate basis to the real thing. An example is a scale of an existing or proposed office ...
The unadjusted basis of assets is the actual price paid for purchasing an asset without any reductions from depreciation deductions. In order words, the unadjusted basis is an asset’s ...
Giving of a promise or guarantee to the receiver to instill confidence. ...
Deed used to transfer property rights to a governmental authority. ...
The definition of the term right of way is an easement or the right of another person to pass over land owned by someone else to reach a particular destination. An individual is typically ...
Market price pf all the property prior to a condemnation proceeding. ...
Action that is beyond that allowed legally. Examples are charging illegally high interest rate on mortgages and real estate exceeding the amount permissible by legal statute, and a real ...
The occupancy ratio is the ratio of rented or used space to the total amount of space available. An occupancy ratio or occupancy rate is used by analysts when hospitals, senior housing, ...
The term actual notice is used most often in connection with property law, but the concept can also be applied in other law areas. To define actual notice, we can look at the two major ...
Have a question or comment?
We're here to help.