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
Permits oral evidence to augment a written contract in certain cases. ...
An Act, passed by congress in order to prevent the practice of redlining and disinvestments in central city areas. Redlining is a practice in which lenders refuse to make loans in certain ...
Illegally keeping or holding on to someone else's property. An example is a tenant staying in the apartment after the lease has expired. A court order may be sought to evict the tenant. ...
Study of real estate activities including demand, price, location influence, and current trends. ...
Amount charged for each unit of rental property. An example of a unit might be square footage of space or an apartment. ...
Light weight masonry block using cinders with a high metallic content as the major component. Cinder blocks are widely used in interior partitions. ...
A free-standing building having four dwelling units under one roof. Normally a quadriplex is a two-story complex with one dwelling unit located on top of and adjacent to another. Other ...
An opening that lets the outside air come in or out of a structure. A ventilation fan lets the structure have access to outside air when the switch is in open position. ...
Flat irregularly shaped stones, ranging from 1 to 4 inches thick, used for terrace or loan walkways. ...
Have a question or comment?
We're here to help.