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
Involves more than one borrower being responsible for a mortgage, such as with a cooperative apartment. Involves more than one mortgagee lent on a real estate project, such as with a ...
A charge based on the asset value of a real estate security portfolio to manage it. For an open-end mutual fond, the management charge is included in the selling cost of the security. ...
The Latin term pro rata has a significant meaning in legal, real estate as well as job industries. To define pro rata, anyone can take a quick vocabulary lesson. Any element that is split ...
Everyone is aware of the perplexing complexities of a real estate transaction. Enter Opendoor, a company that aims to simplify this experience. If you're a house hunter, seller, real estate ...
Recurring obligation or assurance given. ...
Evaluating a locality to determine its value and appropriateness for designated objectives. ...
Waste matter carried off through a series of conduits to a waste disposal facility. ...
The term accusation refers to a declaration made by an individual about another individual or entity having behaved in an immoral, improper, or wrong manner. The two parts of an accusation ...
Same as term nonconforming use: Property use which is in violation of the current zoning ordinance, but had been in use prior to the zoning ordinance's enactment. A nonconforming use is ...
Have a question or comment?
We're here to help.