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
Method of finishing edges of walls, window jams, doors, or projections with decorative strips of wood to give a better appearance as well as providing protection from jagged edges and ...
Rental agreement directly between the landlord and tenant. If the tenant then rents it out to another, it is referred to as a sublease. The relationship takes the following form: ...
Administrator of estate is a term used in common-law jurisdiction for a person assigned a particular responsibility. The administrator of estate definition describes a court-appointed ...
As the term “servient” comes from the root word “serve” and to serve means to perform a duty or a service for another entity, its meaning is easy to define. The term ...
Metal hardware within the construction that is typically not visible, such as bolts, nails, and screws. ...
The external covering finish of a structure which protects it from the elements. Exterior finish materials, including shingles, siding, and paints, are design to resist severe weathering ...
Depth of land used as standard to appraise its value. An example is 100 feet used for residential land. ...
Horizontal wood siding commonly used on the exterior of buildings which overlap each other. ...
Potential homeowners buy land at a location they like and then build their house on it. ...
Have a question or comment?
We're here to help.