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
Conversion of real property into money. The breaking up and selling of a real estate company for cash distribution to its creditors and then owners. Chapter 7 of the Federal Bankruptcy ...
Loose combination of small rocks and pebbles used for a gutter, driveway, landscaping, or roadbed. ...
Decline in the credit status of a prospective homebuyer. ...
An increase in land occurring from the withdrawal of a body of water. Normally, when reliction occurs, the increase in land area belongs to the individual having water rights in the area. ...
What’s the definition of real estate collateral? Could we say it’s like keeping a hostage? No, that would be relatively insensitive. But the idea is similar. In real estate, ...
Structure have two dwelling units under the same roof. Two-story apartment unit. ...
Region or locality that assesses real estate taxes on the properties located within its borders. Frequently, the local county or city is the property taxing jurisdiction which is empowered, ...
Primary horizontal support for a structure such as a house. It may be a large piece of wood, stone, iron, or other material that lies across the walls, and serves as support of the ...
Wondering what is a quitclaim deed? Well, the best quitclaim deed definition is something like a legal document used when someone is transferring a real estate property to another person. ...
Have a question or comment?
We're here to help.