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
In regards to , in the matter of. Formal judicial method of entitling a matter before it. ...
System of interconnected pipes, radiators, and/or ducts designed to heat a building utilizing a main heating unit. The system is controlled through a thermostat that regulates the ...
What is the meaning of a story, and what is it good for? The story definition is a floor, level, or deck in a construction or building. What does story mean in real estate? A real ...
Before getting a loan to buy a property, you must know the definition of foreclosure. A foreclosure is the process of making a loan due immediately. Technically, a loan becomes due way ...
A lien is a legal instrument by which one party – usually lenders and creditors - guarantees the obligation of a real estate owner to do something – generally repays the money. ...
The right and duties of using and holding property. ...
The willingness of a lender to give a mortgage to a mortgagor. A mortgage commitment will give a time period the mortgage will be given and an indication of the interest rate to be charged ...
Same as term REIT: Type of investment company that invests money in mortgages and various types of investment in real estate, in order to earn profits for shareholders. Shareholders receive ...
Provision of the Internal Revenue Code applying to gains from the sale of personal property subject to depreciation. In most cases, the gains are at the capital gains tax rate limited to ...
Have a question or comment?
We're here to help.