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
unfinished access space below the first floor having less height than a full story. An individual must crawl through the crawl hole to gain access. Any interior passage of limited ...
Another residence in addition to the main residence where a person or family resides. An example is a second home out of the city used on weekends and during vacations. Interest and real ...
Designation given to members of the American Society of Real Estate Counselors (ASREC). A prerequisite for membership is professional experience and ethical conduct. ...
Figure or value which is the starting point in computing gain or loss, depreciation, depletion, and amortization. ...
Appraisal by summation is an Alias for Replacement Cost A.K.A. Cost Approach, which is one of the approaches an Appraiser can go through in order to assign a Market Value to a ...
The direction in which a community is growing. Directional growth is measured over time, and its path strongly influences current and future market values of those properties clearly in ...
(1) Sudden and dramatic increase in activity or prices. (2) Rapid economic prosperity. ...
The right to possess, exclusively occupy, enjoy, control, and dispose of real estate. Ownership rights to realty are granted by the ownership of a title to real property. ...
The deposit given by a buyer of property is delivered to the escrow agent, who retains it for the seller. ...
Have a question or comment?
We're here to help.